UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

 

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

 

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For transition period ___ to ____

 

Commission File Number 000-53976

HORIYOSHI WORLDWIDE INC.
(Exact name of registrant as specified in its charter)

Nevada	98-0513655
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
3113 S. Grand Avenue, Los Angeles, CA, USA	90007
(Address of principal executive offices)	(Zip Code)

(213) 741-1920
(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 ☐ NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☑ YES ☐ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act
☐ YES ☑ NO

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.
☐ YES ☐ NO

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
810,165 common shares issued and outstanding as of May 13, 2013

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	4
	Consolidated Balance Sheets (Unaudited) - March 31, 2013 and December 31, 2012	4
	Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - Three Months Ended March 31, 2013 and 2012	6
	Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2013 and 2012	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
	PART II
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
Signatures		22

 

Item 1. Financial Statements

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements as of December 31, 2012 and notes thereto contained in our Company's Form 10-K filed with the SEC on April 15, 2013. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.

HORIYOSHI WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
			March 31, 2013				December 31, 2012
Current assets:
Cash and cash equivalents		$	15,845			$	12,147
Accounts receivable (net) of allowance for doubtful accounts of $7,530 as of March 31, 2013 and December 31, 2012, respectively			121,006				73,145
Accounts receivable, related party			12,383				12,383
Prepaid expenses and other current assets			75,910				60,284
Inventory, net			691,103				712,955
Total current assets			916,247				870,914
Property and equipment, net			122,924				133,628
Total assets		$	1,039,171			$	1,004,542
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable		$	393,085			$	265,868
Deferred Revenue			91				21,518
Accrued expenses			301,264				212,691
Due to shareholder			104,002				108,514
Demand loan		$	150,000			$	165,000
Related party, demand loan			1,601,320				1,392,553
Total current liabilities			2,549,762				2,166,144
Total liabilities			2,549,762				2,166,144
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value per share; 100,000,000 shares authorized; 0 shares issued and outstanding			—				—
Common stock, $0.001 par value per share, 1,081,100 shares authorized, 810,16 and 529,333 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively			810				529
Additional paid in capital			5,646,135				5,603,416
Accumulated other comprehensive income (loss)			26,665				(18,101	)
Accumulated deficit			(7,184,201	)			(6,747,446	)
Total stockholders' equity			(1,510,591	)			(1,161,602	)
Total liabilities and stockholders' equity		$	1,039,171			$	1,004,542

 

The accompanying notes are an integral part of the consolidated financial statements. 

HORIYOSHI WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
			Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
Revenue, net		$	316,360				316,561
Cost of sales			149,463				176,111
Gross profit			166,897				140,450
Operating Expenses
Selling expenses			50,803				57,774
General and administrative expenses			482,501				651,890
Depreciation and amortization			7,637				25,428
Total operating expenses			540,941				735,092
Income (loss) from operations			(374,044	)			(594,642	)
Non-operating income (expenses)
Other income			—				83
Foreign currency transaction gain (loss)			(50,138	)			4,368
Net (loss) before interest and taxes			(424,182	)			(590,191	)
Interest expense			(12,573	)			—
Net (loss) before income taxes			(436,755	)			(590,191	)
Income taxes			—				—
Net (loss)		$	(436,755	)			(590,191	)
Foreign currency translation adjustments			44,766				(3,529	)
Comprehensive loss			(391,989	)			(593,720	)
Basic and diluted earnings (loss) per share		$	(0.52	)			(1.12	)
Weighted average shares of common stock outstanding – basic and diluted1			810,165				529,285

¹ Earnings (loss) per share of common stock and weighted average of shares of common stock outstanding have been retroactively restated to reflect a 12:1 reverse stock split on April 3, 2013. These transactions are more fully described in Notes to the Financial Statements.  

The accompanying notes are an integral part of the consolidated financial statements.

HORIYOSHI WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		Three Months Ended				Three Months Ended
		March 31,				March 31,
		2013				2012
Cash flows from operating activities
Net (loss)		$	(436,755	)		$	(590,191	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation			7,637				6,678
Amortization			—				18,750
Allowance for doubtful accounts			—				(898	)
Foreign currency remeasurement (loss)			50,138				(4,368	)
Changes in operating assets and liabilities:
Accounts receivable			(47,861	)			(28,392	)
Prepaid expenses and other assets			(15,626	)			(64,455	)
Inventory			21,852				89,373
Accounts payable			127,217				(133,209	)
Deferred revenue			(21,427	)			(47,979	)
Accrued expenses			88,573				18,566
Loss on disposal of assets			(4,071	)
Net cash (used) in operating activities			(230,323	)			(736,125	)
Cash flows from investing activities
Purchase of equipment			—				(14,222	)
Net cash (used) in investing activities			—				(14,222	)
Cash flows from financing activities
Proceeds (repayments) of loans from shareholders			(4,512	)			—
Repayment of demand loan			(15,000	)			—
Proceeds from related party demand loan			708,767				83,480
Net cash flows provided by (used in) financing activities:			189,255				83,480
Effect of foreign currency translation on cash and cash equivalents			44,766				419
Net increase (decrease) in cash		$	3,698			$	(666,448	)
Cash- beginning of period			12,147				1,117,750
Cash- end of period		$	15,845			$	451,302
Noncash Investing and Financing Activities: Conversion of related party demand loan into common stock		$	50,000				—

 

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Business

Horiyoshi Worldwide, Inc. (HHWW) is a clothing and accessories design and distribution company whose products are inspired by the artwork of Japanese master tattoo artist Yoshihito Nakano - better known as Horiyoshi III. The Horiyoshi name has been internationally recognized for decades and Horiyoshi III is considered by his peers and followers as a legend in his field. The business was established September 1, 2008 to capitalize on the multi-generational legacy of the Tattoo Masters by offering consumers a unique collection of knitwear, t-shirts and accessory items. The Company began selling its products from the “Horiyoshi” collection in 2009. The “Horiyoshi” collection retails at a suggested price point of approximately $140-160 for T-shirts, $480-945 for knits, $600-800 for hoodies, and $280-420 for scarves. In 2011, the Company launched the Heroes & Demons collection of men’s t-shirts which retails at a suggested price point of approximately $60-$75. In July 2012, the Company launched “The Thiiird” collection of men’s t-shirts, denims, sweats and hoodies. The Thiiird retails at a suggested price point of approximately $200 to $400 for denim, $115 to $140 for t-shirts, $270 to $365 for hoodies and sweats, $700 to $1000 for jackets. The rights to the design catalogue are exclusively licensed to Horiyoshi the Third, Inc. (HTT) a wholly owned subsidiary of HHWW (“the Company”). Horiyoshi Worldwide [U.K.] Limited, another subsidiary wholly owned by HHWW, was created in 2011 and operates the Company’s first branded retail outlet in London.

We were incorporated as Kranti Resources, Inc. (Kranti), in the State of Nevada on November 3, 2006 to engage in the acquisition, exploration, and development of mineral deposits and reserves. The company discontinued its planned mining activities and eventually adopted a new strategy to pursue opportunities in the fashion apparel industry. On May 18, 2010, Benny Gill and Rimpal Samra resigned as Directors of the company and Jaskarn Samra resigned as President. On May 18, 2010, Mitsuo Kojima was appointed as President of Kranti Resources, Inc.

On June 21, 2010, Kranti effected a 2.1622 for one (1) forward stock split of outstanding stock. As a result, the company’s outstanding share count increased from 365,625 shares of common stock to 790,554 shares of common stock, all with a par value of $0.01. In addition, on June 21, 2010, the company changed its name to Horiyoshi Worldwide Inc. to coincide with the redirection of its business toward fashion apparel. On September 1, 2010, the company entered into a share exchange agreement with Horiyoshi the Third Limited, a Hong Kong corporation, and the shareholders of Horiyoshi the Third Limited for purchase of the company.

On November 5, 2010, then President, Mitsuo Kojima affected a Share Cancellation Agreement with Kranti and surrendered for cancellation all 540,550 shares held by him in common stock which left a total of 250,004 shares outstanding.

 

The share exchange agreement with Horiyoshi the Third Limited was subsequently amended and on November 5, 2010 the acquisition of all of the issued and outstanding common shares of Horiyoshi the Third Limited occurred. In accordance with the closing, Horiyoshi Worldwide, Inc. issued 250,000 shares of common stock to the former shareholders of Horiyoshi the Third Limited in exchange for the acquisition of all 83 Horiyoshi the Third Limited shares issued and outstanding. Upon close of the acquisition Horiyoshi Worldwide, Inc. had a total of 500,004 shares issued and outstanding.

On June 15, 2011, Horiyoshi Worldwide [UK] Limited (HHWW UK) was incorporated. HHWW UK is a wholly owned subsidiary of HHWW, and is a United Kingdom Corporation. HHWW UK is the owner and operator of the Company’s first branded retail outlet.

On January 12, 2012, Horiyoshi Worldwide, Inc. enacted a 10 to 1 reverse stock split which decreased the number of shares issued and outstanding to 529,333.

On February 12, 2013, Mitsuo Kojima resigned from his positions as President, Chief Executive Officer, Treasurer and Director of the Company. Concurrently with Mitsuo Kojima’s resignation, Kerry Chung was appointed as President, Chief Executive Officer, and Treasurer to fill the ensuing vacancy.

In March 2013, the management and directors of Horiyoshi Worldwide, Inc. authorized the conversion of $50,000 of debt held by Lonestar Capital Limited, into restricted shares of HHWW common stock to be valued at $0.015. This transaction increased the number of shares issued and outstanding to 810,106.

In April 2013, Horiyoshi Worldwide, Inc. enacted a 12 to 1 reverse stock split which decreased the number of shares issued and outstanding to 810,106. All share and per share amounts have been retroactively restated to reflect the effects of this transaction.

Going Concern, Liquidity and Management's Plan

As of March 31, 2013 our Company has accumulated losses of $7,184,201 since inception and has earned no net income since inception. Our Company intends to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2013. In response to these problems, management intends to raise additional funds through public or private placement offerings. These factors, among others, raise substantial doubt about our company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The unaudited consolidated financial statements include the accounts of Horiyoshi Worldwide, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.

The accompanying unaudited Horiyoshi Worldwide, Inc. consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Article 8 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2012 included in the Company's Annual Report on Form 10-K. In the opinion of management, the interim unaudited consolidated financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company's financial position, the results of operations and cash flows for the periods presented.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include: revenue recognition; sales returns and other allowances; allowance for doubtful accounts; valuation of inventory; valuation and recoverability of long-lived assets; property and equipment; contingencies; and income taxes.

On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

Cash and cash equivalents

The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of their acquisition date. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value. The Company’s main banking relationship is with HSBC Bank at branches in Los Angeles, Hong Kong and London. For cash management purposes the company concentrates its cash holdings in accounts at HSBC Bank. The balances in these accounts may exceed the federally insured limit of $ 250,000 per account by the Federal Deposit Insurance Corporation (FDIC) in case of bank failure. This would have a significantly negative impact on the company’s ability to continue operations.

Revenue recognition

Our revenue recognition policy is in accordance with generally accepted accounting principles, which requires the recognition of sales when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectability of revenue is reasonably assured. We generally record sales upon shipment of product to customers and transfer of title under standard commercial terms. All sales at our branded retail outlet in London are recognized at the point of sale.

Deferred revenue as of March 31, 2013 and December 31, 2012 was $91 and $21,518, respectively. Deferred revenue represents prepayments and deposits required from certain customers before delivery of Horiyoshi the Third, The Thiiird, and Heroes & Demons products.

Return policy

Customers have the right to return merchandise and the return policy is set by senior management and consistent among all of our client relationships. Based on historical experience, actual returns by our clients have been rare and immaterial across our client base. Management monitors returns by clients carefully as we increase the number of retail outlets within our distribution network. Reserves are established to reflect actual and anticipated losses resulting from the returns of defected and unsold merchandise based on historical information. Currently we estimate returns to be less than 1% of our sales and reserves have been made accordingly each reporting period. The return reserve based on this percentage of sales has been consistent with actual returns in our brief operating history. The balances of the return reserve at March 31, 2013 and December 31, 2012 was $10,317.

Cost of sales

Cost of goods sold consists of cost of purchases for resale to stores located in in Canada, Dubai, France, Italy, Japan, Kuwait, Mexico, Saudi Arabia, Russia, Hong Kong the United Kingdom, and the United States.  It also consists of cost of purchases for resale of our branded online Horiyoshi the Third, The Thiiird, and Heroes and Demons stores as well as our branded retail outlet in London. In addition, write offs of obsolete inventory, changes in the inventory reserve, and shrinkage are included in cost of goods sold. Our customers are required to pay all shipping costs for the delivery of their orders. 

 

Accounts receivable and allowance for doubtful accounts

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Customer accounts with balances over 90 days old are considered delinquent. The carrying amount of accounts receivable are reduced by an allowance for doubtful accounts that reflects our Company's best estimate of the amounts that will not be collected. Our Company reviews outstanding accounts and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Our Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Our Company has assessed accounts receivable and determined that a reserve is necessary and at March 31, 2013 and December 31, 2012, the allowance for doubtful accounts was $7,530.

Earnings (Loss) per Share

The Company presents earnings (loss) per share (“EPS”) in accordance with ASC 260,“Earnings per Share. ASC 260 requires dual presentation of basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Due to the net loss during the year ended December 31, 2012, the assumed exercise of stock warrants was anti-dilutive. Therefore, basic and diluted losses per share are the same for all periods presented. At March 31, 2013 there were 3,333 stock warrants that could dilute future earnings. Basic and diluted losses per share have been retroactively restated to reflect a 12:1 reverse stock split on April 3, 2013. 

Foreign currency transactions

Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency other than an entity's functional currency and from foreign-denominated revenues translated into U.S. dollars. Changes in currency exchange rates may affect the relative prices at which we and our foreign competitors sell products in the same market and collect receivables from such sales. Products are generally sold in U.S. dollars (USD) or British pound sterlings (GBP).

Changes to currency rates may affect the prices at which we conduct business with our vendors and our employees. Payments subject to foreign currency translation are executed at our deposit bank’s currency spot rate at the time of payment, generally at each month’s end.

The functional currency of the Company’s subsidiaries outside the U.S. is the respective local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”).

During the three months ended March 31, 2013 we incurred a foreign currency transaction loss of $50,138, which is included as part of net income, and a foreign currency translation gain of $44,766, which is included as part of AOCI.

Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carry-forwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carry-forwards is provided when it is determined that such assets will more likely than not go unrealized. If it becomes more likely than not that a tax asset will be realized, the related valuation allowance on such assets would be reversed.

The Company accounts for income taxes in accordance with the ASC 740-10-25, which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, it requires recognition of future tax benefits, such as carry forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.

Inventory

Inventories, consisting of finished goods, work in process, and raw materials are valued at the lower of cost, as determined by the average cost, or market. Cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. Prior to June 1, 2011, the Company carried no salable inventory and shipped manufactured goods related to purchase orders directly from Stone Corporation. At March 31, 2013 inventory consists of $678,779 of finished goods, $1,348 of work in process, and $77,892 of raw materials.

The Company maintains a perpetual inventory and report by product. This is updated daily based upon shipping and sales reports. Due to the high style nature of the Company’s merchandise, reserves are recorded to reduce the carrying value of slow moving, out of season, and broken style merchandise to market value and as additional cost of sales. As of March 31, 2013 and December 31, 2012, there have been reserves of $66,916 and $69,214, respectively, made for inventory on hand.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at March 31, 2013 and December 31,2012 were $75,910 and $60,284, respectively. Prepaid expenses and other current assets represent deposits on operating leases and amounts paid for goods and services yet to be received.

Property and Equipment

Property and equipment are recorded at cost and valued at $167,693 as of March 31, 2013. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which is five years for the office equipment, websites, and computers, three years, for software, and seven years for leasehold improvements for financial reporting purposes.

Accounts payable and accrued expenses

Accounts payable are those funds owed to our business partners for goods and services rendered which are related to our business operations. Our accounts payable at March 31, 2013 and December 31, 2012 were $393,085 and $265,868, respectively.

The Company accrues expenses related to business travel, professional services rendered but not yet paid for and various office expenses and reimbursements. As a result of the limited number of employees and short term nature of their employment it was not necessary for the Company to separately accrue for vacation or payroll time for the quarter ended March 31, 2013. Our accrued expenses were $301,264 at March 31, 2013 and $212,691 at December 31, 2012.

Fair Value of Financial Instruments

The carrying amount reported in the accompanying consolidated balance sheets for cash, accounts receivable, inventory, accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. It was not practicable to estimate the fair value of notes payable to related parties.

Segment reporting

The Company considers its operations to constitute a single segment which is the design and distribution of clothes and accessories. The Company does not operate under a multiple segment reporting model.

Note 3. Property and equipment

Property and equipment consisted of the following:

		March 31, 2013				December 31, 2012
Furniture and equipment		$	85,144			$	87,267
Computers and software			25,410				25,410
Website			25,052				25,052
Leasehold improvements			32,087				34,002
		$	167,693			$	171,731
Less, accumulated depreciation			(44,769	)			(38,103	)
Property and equipment, net		$	122,924			$	133,628

Depreciation expense for the three months ended March 31, 2013 and 2012 were $7,637 and $6,678, respectively.

Note 4. Subordinated Notes Payable and Demand Loans

As of March 31, 2013 and December 31, 2012, our Company was obligated to Steve Suk, a Director of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $104,002 and $108,514, respectively. This amount is included on the balance sheet under “Due to shareholders”.

As of March 31, 2013 and December 31, 2012, our Company was obligated to Lone Star Capital Limited, for a non-interest bearing demand loan with a balance of $1,601,320 and $1,392,553, respectively. This amount is included on the balance sheet under “Related party, demand loan”. Interest has been imputed on this note at 3.25% per annum. Total imputed interest of $12,573 for the 3 month period ended March 31, 2013.

On August 30, 2012, our Company entered into a credit facility agreement with AMS Holdings Limited. The credit facility has an aggregate principal amount of $300,000 and can be drawn on at any time. Any amounts outstanding are due on the demand of the lender and are non-interest bearing. As of March 31, 2013 and December 31, 2012, our Company was obligated to AMS Holdings Limited for $150,000. This amount is included on the balance sheet under “Demand loans”.

Note 5. Related Party Transactions

On September 17, 2008, Horiyoshi III Worldwide Ltd. (as we then were) entered into a License Agreement with Stone Corporation Inc. d/b/a Stone Japan, a Japanese corporation that is 80% owned by Lone Star Capital Limited, (a Hong Kong company and our principal shareholder) and 20% owned by Yoshihito Nakano, Master Horiyoshi III. Pursuant to the license agreement we hold an exclusive, worldwide, 35 year license, effective September 17, 2008, to use all copyright and trademark rights associated with our products and brand, and to exclusively manufacture and distribute apparel, beauty products, and other products related to our business. No third party is permitted to use the IP licensed to us for the production of non-apparel merchandise. We paid consideration of $10 in respect of the licensed rights. In the event that Stone Japan intends to sell the intellectual property rights licensed to us, we shall have a first right of purchase for those rights so long as the license agreement is in effect to purchase those rights at any time in the seven (7) years preceding the termination of the license agreement. The purchase price shall be equal to two (2) times the average annual gross sales turnover of our products based on the licensed rights during the three years preceding the date of exercise of the right of purchase.

On June 1, 2011, as a result of rising costs in Japan and weakness of the United States Dollar against the Japanese Yen, our Company ceased its manufacturing relationship with Stone Corporation and entered into an amended agreement for licensing rights. Pursuant to the amended license agreement we hold the exclusive, worldwide rights to use, and sublicense to use, rights related to the mark “HORIYOSHI”, and all derivatives thereof, in connection with the manufacture, promotion, sale and distribution of all products, goods, and services, in all categories, without limitation. The amended license agreement expired on May 31, 2012 and contains five extension options in five year increments. During the three months ended March 31, 2013, as consideration for the IP rights, we recognized $90,000 of expenses related to license fees, all of which have been included in accrued expenses at March 31, 2013.

The Company will continue to pay Stone Corporation a flat monthly license fee of $30,000 until the termination of the licensing agreement.

As of March 31, 2013 and December 31, 2012, the Company had a receivable from consignment sales from Eric Chung, a former director of Horiyoshi the Third Limited, in the amount of $12,383.

In March 2013, the management and directors of the Company authorized the conversion of $50,000 of debt held by Lonestar Capital Limited, into restricted shares of HHWW common stock to be valued at $0.015 per share. This transaction increased the number of shares issued and outstanding to 810,106.

Note 6. Stock-Based Compensation and Warrants

Stock Awards

On January 1, 2011, we entered into a consulting agreement with Raymond A. Catroppa, CFA. Pursuant to the terms of the consulting agreement, we provided Mr. Catroppa with 3,333 warrants to purchase equity shares at $0.50 per share. The vesting period was from January 1, 2011 to December 31, 2011. The amount fully vested at December 31, 2011.

 

The fair value of each warrant granted is estimated on the date of the grant using the Black-Scholes Model. The Black-Scholes Model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the warrant and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The expected life of a warrant grant is based on management’s estimate. The fair value of each warrant grant is recognized as a compensation expense over the vesting period of the warrant on a straight line basis. All warrants were vested and expensed as of December 31, 2011. The warrants have no expiration date. There were no additional awards granted during the quarter ended March 31, 2013.

 

Note 7. Commitments and Contingencies

Operating Leases

In August 2011, the Company entered into an operating lease agreement and moved our executive offices, sales showroom, and support staff to 3113 S. Grand Avenue, Los Angeles, CA 90007. The lease has term of 2 years and one month and expires in August 2013.

In September 2011, the Company entered into an agreement to lease a building for its first retail store at 19 Connaught Street, London W2. The lease has a term of 7 years and expires at the end of August 2018. The Company accounts for this lease as an operating lease.

The Company also leases certain office equipment under operating lease agreements.

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of March 31, 2013: 

	2013 – remainder			$	72,178
	2014				43,433
	2015				43,433
	2016				42,306
	2017				42,306
	Thereafter				28,204
	Total			$	271,860

Operating lease rent expense (including real estate taxes and common area maintenance costs) was approximately $33,317 and $41,403 for the three months ended March 31, 2013 and 2012. Rent expense is allocated to operating expenses in the accompanying consolidated statements of operations.

Note 8. Seasonality

To date, with the majority of the Company’s revenues coming from the luxury segment there is seasonality in the revenue steam. The company attends important design shows that are focused on the Women’s and Men’s spring season and Women’s and Men’s fall season which occur in March and September. This translates into the Company booking a large portion of orders and corresponding revenues in the first and third quarter on a yearly basis.

Note 9. Subsequent Events

In April 2013, the Company enacted a 12 to 1 reverse stock split which decreased the number of shares issued and outstanding to 810,106. All share and per share amounts have been retroactively restated to reflect the effects of this transaction. 

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

The following discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this quarterly report.

Our consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

Overview

Horiyoshi Worldwide, Inc. (HHWW) is a clothing and accessories design and distribution company whose products are inspired by the artwork of Japanese master tattoo artist Yoshihito Nakano - better known as Horiyoshi III. The Horiyoshi name has been internationally recognized for decades and Horiyoshi III is considered by his peers and followers as a legend in his field. The business was established September 1, 2008 to capitalize on the multi-generational legacy of the Tattoo Masters by offering consumers a unique collection of knitwear, t-shirts and accessory items. The Company began selling its products from the “Horiyoshi” collection in 2009. The “Horiyoshi” collection retails at a suggested price point of approximately $140-160 for T-shirts, $480-945 for knits, $600-800 for hoodies, and $280-420 for scarves. In 2011, the Company launched the Heroes & Demons collection of men’s t-shirts which retails at a suggested price point of approximately $60-$75. In July 2012, the Company launched “The Thiiird” collection of men’s t-shirts, denims, sweats and hoodies. The Thiiird retails at a suggested price point of approximately $200 to $400 for denim, $115 to $140 for t-shirts, $270 to $365 for hoodies and sweats, $700 to $1000 for jackets. The rights to the design catalogue are exclusively licensed to Horiyoshi the Third, Inc. (HTT) a wholly owned subsidiary of HHWW (“the Company”). Horiyoshi Worldwide [U.K.] Limited, another subsidiary wholly owned by HHWW, was created in 2011 and operates the Company’s first branded retail outlet in London.

The Company’s design teams are passionate about the art work of Horiyoshi III and take great care integrating the imagery into the Company’s garments. HHWW’s management feels that it is positioning the Company to take advantage of the increasing inflection of design, art and culture in today’s fashion world. By introducing quality clothes that infuse the internationally recognized art work of Horiyoshi III the company believes it is at the vanguard of a growing interest in unique aspects of the art and cultural imagery of the Far East. The Company’s strategy includes the development of a line extension marketed at a lower price point and focused on larger markets. In conjunction a number of new distribution channels are under development. Our goal is to build a brand that is recognized throughout the world for creating quality products with universal appeal.

Executive Summary

For the three months ended March 31, 2013, we reported net sales of $316,360, a decrease of $201, or less than 1%, less than the $316,561 reported for the quarter ended March 31, 2012. Gross margin increased to 53% for the quarter ended March 31, 2013 compared to 44% for the quarter ended March 31, 2012. Operating expenses, which include all selling, general and administrative costs, decreased $194,151, or 27%, to $540,941 for the quarter ended March 31, 2013 as compared to $735,092 for the quarter ended March 31, 2012. Net loss for the quarter ended March 31, 2013 was $424,182 compared to a net loss of $590,191 for the quarter ended March 31, 2012.

Results of Operations

The following summary of our results of operations should be read in conjunction with our consolidated financial statements for the three months ended March 31, 2013 and March 31, 2012. 

Operating results for the three months March 31, 2013 and March 31, 2012 are summarized below:

		Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
Revenue		$	316,360			$	316,561
COGS			149,463				176,111
Gross Profit			166,897				140,450
Expenses			540,941				735,092
Other Income (Loss)			(50,138	)			4,451
Interest expense			12,573				—
Net Loss		$	(436,755	)		$	(590,191	)

Revenue

We earned revenues of $316,360 for the three months ended March 31, 2013 compared to revenues of $316,561 for the three months March 31, 2012. Revenues remained flat in the three month periods ended March 31, 2013 and 2012 as a result of decreased sales to our wholesale customers offset by increased retail revenue via our branded websites and London store.

 

Cost of Goods Sold

 

Cost of goods sold for the three months ended March 31, 2013 were $149,463 compared to $176,111 for the three months ended March 31, 2012. Cost of goods sold represented 47% of sales for the three months ended March 31, 2013 as compared to 56% for the three months ended March 31, 2012. This decrease in COGS as a percentage of sales for the three months March 31, 2013 can be attributed to cost savings from moving a portion of production from Japan to Los Angeles, smaller production quantities leading to less markdowns of slow moving inventory, and a larger volume of high margin sales generated from our branded retail store in London and branded websites.

 

Expenses

Our total expenses for the three months ended March 31, 2013 and 2012 are outlined in the table below:

		Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
Selling		$	50,803			$	57,774
General and administrative			482,501				651,890
Depreciation			7,637				6,678
Amortization			—				18,750
Total expenses		$	540,941			$	735,092

 

For the three months ended March 31, 2013 expenses decreased $194,151, or 27%, to $539,630 as compared to $735,092 for the corresponding period in 2012. This decrease can be attributed to a management’s implementation of an aggressive cost cutting initiative which led to decreases in promotional inventory gifting, travel, meals and entertainment expense, and consulting fees.

Liquidity and Financial Condition

Working Capital
			At March 31, 2013				At December 31, 2012				Change
Current Assets		$	916,247			$	870,914			$	45,333
Current Liabilities		$	2,549,762			$	2,166,144			$	(383,618	)
Working Capital		$	(1,633,515	)		$	(1,295,230	)		$	(338,285	)

 

Cash Flows
			Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
Net Cash Used in Operating Activities		$	(230,323	)		$	(736,125	)
Net Cash Used by Investing Activities		$	—			$	(14,222	)
Net Cash Provided by Financing Activities		$	189,255			$	83,480
Net Effect of Foreign Currency Translation		$	44,766			$	419
Net (Decrease) Increase in Cash During the Period		$	3,698			$	(666,448	)

For the three months ended March 31, 2013, net cash used in operating activities was $230,323 as a result of changes in our working capital and a three month net loss of $436,755.

For the three months ended March 31, 2013, net cash provided by financing activities was $189,255 as a result of proceeds of loans from Lonestar Capital, a related party, offset by repayments of loans to shareholders and a demand loan.

We will require additional funds to fund our budgeted expenses in the future. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There is no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on their investment in our common stock. Further, we may continue to be unprofitable. We may need to raise additional funds in the future in order to proceed with our budgeted expenses. Additionally, there is no assurance that any party will advance additional funds to us in order to enable us to sustain our plan of operations or to repay our liabilities.

Liquidity and Capital Resources

Growth of our operations will be based on our ability to internally finance from cash flow, raise equity and/or debt to increase sales and production. Our primary sources of liquidity are: (i) cash from sales of our products; and (ii) financing activities. Our cash balance as of March 31, 2013 is $15,845.

Prior to the $5,000,000 in equity financing in December 2010, our Company funded some of its operations through debt financing with related party transactions.

As of March 31, 2013, our Company was obligated to Steve Suk, a Director of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $104,002.

As of March 31, 2013, our Company was obligated to Lone Star Capital Limited, a related party, for a non-interest bearing demand loan with a balance of $1,601,320.

As of March 31, 2013, our Company was obligated to AMS Holdings Limited, for a non-interest bearing demand loan with a balance of $150,000.

Plan of Operation and Cash Requirements

Our wholly-owned subsidiary, Horiyoshi the Third Limited, began selling its products in 2009. Our wholly owned subsidiary Horiyoshi Worldwide [U.K.] limited, began operating our first branded retail outlet in London in 2011. Our plan of action over the next twelve months is to continue to market and sell the Horiyoshi, the Thiiird, and Heroes & Demons collections and raise additional capital financing as necessary, to grow operations.

The success of our operations will be based on our ability to grow by financing the operation through internal cash flow or to raise funds through equity and/or debt financing to invest in marketing, sales and distribution of our product line. The challenging markets for credit and for the sale of luxury apparel resulting from the recent financial crisis and current period of economic stagnation have negatively affected the markets for many luxury goods. The availability of equity and/or debt financings remains uncertain.

 

Going Concern

For the three months ended March 31, 2013, our Company has a loss of $436,755 and an accumulated deficit of $7,184,201. Our Company intends to fund operations through operational cash flow and equity/debt financing arrangements. These sources may be insufficient to fund its capital expenditures, working capital and other cash requirements for the future. In response to these problems, management intends to raise additional funds through public or private placement offerings. These factors, among others, raise substantial doubt about our Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Seasonality

To date, with the majority of the Company’s revenues coming from the luxury segment there is seasonality in the revenue steam. The company attends important design shows that are focused on the Women’s and Men’s spring season and Women’s and Men’s fall season which occur in March and September. This translates into the Company booking a large portion of orders and corresponding revenues in the first and third quarter on a yearly basis. However, as sales through our branded websites and retail store in London continue to grow, it will serve to smooth out earnings on a yearly basis going forward.

 

Critical Accounting Policies

Use of estimates

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare for financial statements. A complete summary of these policies is included in the notes to our financial statements. In general management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Recently issued accounting pronouncements

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

  

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our president and chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer), to allow for timely decisions regarding required disclosure.

As of the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our president and chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president and chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 1A. Risk Factors.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 

Item 6. Exhibits

	Exhibit Number			Description
	(3)			(i) Articles of Incorporation and (ii) Bylaws
	3.1			Certificate of Amendment filed with the Nevada Secretary of State on June 17, 2010, effective June 21, 2010. (Incorporated by reference from our Current Report on Form 8-K filed on July 20, 2010).
	3.2			Bylaws  (Incorporated by reference from exhibit 3.2 of our Registration Statement on Form SB-2 filed on April 13, 2007)
	3.3			Amendment to the Articles of Incorporation of Registrant as filed with the Nevada Secretary of State on April 30, 2009 (Incorporated by reference from exhibit 3.1 of our Current Report on Form 8-K filed on May 8, 2009).
	(10)			Material Contracts
	10.1			License Agreement dated September 17, 2008 between Horiyoshi III Worldwide Ltd. and Stone Corporation Inc. (Incorporated by reference from our Current Report on Form 8-K filed on November 8, 2010).
	10.2			Share Exchange Agreement among the company, Horiyoshi the Third Limited and the Shareholders of Horiyoshi the Third Limited dated September 1, 2010. (Incorporated by reference from our Current Report on Form 8-K filed on September 3, 2010).
	10.3			Amendment to Share Exchange Agreement dated November 5, 2010 with Horiyoshi the Third Limited. (Incorporated by reference from our Current Report on Form 8-K filed on November 8, 2010).
	10.4			Share Cancellation Agreement dated November 5, 2010 with Mitsuo Kojima. (Incorporated by reference from our Current Report on Form 8-K filed on November 8, 2010).
	10.5			Share Issuance Agreement dated November 29, 2010 with Zyndy Trade Corp.
	10.6			Consulting Agreement dated January 1, 2011 with Raymond A. Catroppa (Incorporated by reference from our Current Report on Form 8-K filed on February 28, 2011).
	10.7			License Agreement dated June 1, 2011between Horiyoshi The Third Limited and Stone Corporation Inc.
	10.8			Agreement For Settlement of Prepaid Assets and Forgiveness of Debt dated June 30, 2011 between Horiyoshi The Third Limited, Lonestar Capital Limited, and Stone Corporation Inc.
	(14)			Code of Ethics
	14.1			Code of Ethics (Incorporate by reference from exhibit 14 of  our Annual Report on Form 10-KSB filed on March 26, 2008
	(21)			Subsidiaries of the Registrant
	21.1			Horiyoshi the Third Limited
	(31)			Rule 13a-14(a)/15d-14(a) Certifications
	31.1			Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer
	31.2			Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer
	(32)			Section 1350 Certifications
	32.1			Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer
	32.2			Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	HORIYOSHI WORLDWIDE INC.
Date: May 20, 2013	By:	/s/ Kerry Chung
		Kerry Chung President, Chief Executive Officer and Director
		(Principal Executive Officer)

 

Date: May 20, 2013	By:	/s/ Darren Takemoto, CPA
		Darren Takemoto, CPA Chief Financial Officer and Secretary
		(Principal Financial Officer and Principal Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.