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EX-23.1 - CONSENT OF KLJ & ASSOCIATES LLP - Peekay Boutiques, Inc.pkay_ex231.htm

As filed with the Securities and Exchange Commission on August 19, 2015

Registration No. 333-203870

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________

 

Amendment No.  2 to

FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

PEEKAY BOUTIQUES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

5990

 

46-4007972

(State or other jurisdiction
of incorporation or organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer
Identification No.)

 

901 West Main Street, Suite A, Auburn, WA 98001

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

 ____________________________

 

Vcorp Services, LLC

1811 Silverside Road

Wilmington, Delaware 19810

888-528-2677

(Names, addresses and telephone numbers of agents for service)

____________________________

 

Copies to:

Louis A. Bevilacqua, Esq.

BEVILACQUA PLLC

1629 K Street, NW, Suite 300

Washington, DC 20006

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

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

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

(Do not check if a smaller reporting company)

 

 

   

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered  

 

Proposed Maximum Aggregate Offering Price (1)

 

 

Amount of Registration Fee (2)(5)

 

Common Stock, par value $0.001 per share (3) (4)

 

$ 50,000,000

 

 

$ 5,810.00

 

Underwriter's common stock purchase warrants(6) (7)

 

 

-

 

 

 

-

 

Common stock included in underwriter's common stock purchase warrants (3) (7)

 

$ 1,725,000

 

 

$ 200.45

 

Total 

 

$ 51,725,000

 

 

$ 6,010.45

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

 

(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

(3) Pursuant to Rule 416 under the Securities Act, the shares of common stock registered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of stock splits, stock dividends, recapitalizations or other similar transactions.

 

(4) Includes shares of common stock the underwriter has  the option to purchase to cover over-allotments, if any.

 

(5) The Registrant previously paid $5,810.00 of the registration fee in connection with the initial filing of this registration statement. 

 

(6) No fee required pursuant to Rule 457(g) under the Securities Act of 1933, as amended. 

 

(7) Represents 3% of the shares to be sold in this offering, including shares that may be sold upon exercise of the underwriter's over-allotment option. The underwriter's warrants are exercisable at a per share price equal to 115% of the common stock public offering price .  

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 
i

  

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS

 

Subject to completion, dated , 2015

 

 

 

PEEKAY BOUTIQUES, INC.

 

SHARES OF COMMON STOCK

 

This is a firm commitment public offering of [___] shares of common stock by Peekay Boutiques, Inc. No public market currently exists for our common stock. We anticipate that the initial public offering price of our common stock will be between $[___] and $[___] per share.

 

We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act.

 

INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY READ AND CONSIDER "RISK FACTORS" BEGINNING ON PAGE 10.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

    Per Share     Total  

Public offering price

 

$

   

$

 

Underwriting discounts and commissions (1)

 

$

     

$

   

Proceeds, before expenses, to us

 

$

     

$

   

 

(1) The underwriter will receive compensation in addition to the underwriting discount s and commissions described above, which compensation consists of (i) five-year compensation warrants entitling the underwriter to purchase 3.0% of the aggregate number of shares issued in this offering, including shares issued pursuant to the exercise of the over-allotment option, with an exercise price equal to 115% of the price per share of the common stock sold in this offering, and (ii) reasonable out-of-pocket expenses incurred by the underwriter (up to a maximum amount of $125,000 for all such expenses), including fees of the underwriter's legal counsel . See "Underwriting" beginning on page 75 of this prospectus for a description of compensation payable to the underwriter.

 

We have granted the underwriter a 45-day option to purchase up to [___] additional shares of common stock solely to cover over-allotments, if any. See "Underwriting" for a full description of compensation payable to the underwriter.

 

The underwriter expects to deliver the shares against payment therefor on or about , 2015

 

The date of this prospectus is , 2015.

 

 
ii

 

TABLE OF CONTENTS

 

Prospectus Summary

1  

Risk Factors

10

 

Special Note Regarding Forward-Looking Statements and Market Data

29

 

Use of Proceeds

31

 

Dividend Policy

33

 

Determination of Offering Price

33

 

Dilution

33

 

Capitalization

34

 

Market for Common Equity and Related Stockholder Matters

35

 

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

36

 

Business

44

 

Management

55

 

Security Ownership of Certain Beneficial Owners and Management

66

 

Certain Relationships and Related Transactions

68

 

Description of Capital Stock

69

 

Underwriting

76

 

Legal Matters

80

 

Experts

80

 

Where You Can Find Additional Information

80

 

Index To Financial Statements

F-1

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriter has not, authorized anyone to provide you with any information other than that contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriter is not , making an offer of these securities in any jurisdiction where the offer is not permitted. 

 

For investors outside the United States: We have not and the underwriter has not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of this prospectus outside the United States.

 

 
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SUMMARY

 

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements, the notes thereto and matters set forth under "Risk Factors."

 

Overview of Our Business

 

Based on our management's belief and experience in the industry, we believe we are a leading retailer of lingerie, sexual health and wellness products. Our company was founded in 1981 in Auburn, WA by a mother and daughter team with a focus on creating a comfortable and inviting store environment catering to women and couples. We are dedicated to creating both a place and attitude of acceptance and education for our customers. Today, our company is a leader in changing the perception of sexual wellness throughout the United States with 48 locations across six states. 

 

Our stores offer a broad selection of lingerie, sexual health and wellness products and accessories. We offer over 5,000 stock keeping units, or SKUs. We strive to create a visually inspiring environment at our stores and employ highly trained, knowledgeable sales staff, which ensures that our customers leave our stores

enlightened by new information, great ideas and fun products.

 

Our mission is to provide a warm and welcoming retail environment for individuals and couples to explore sexual wellness.

 

Store Design and Operations

 

Our stores are designed and built to appeal to a mainstream customer base. Exterior signage is designed, constructed and installed by professional signage partners. Signage and logos are visible, well-lit and easy to read. The entrance to our stores typically consists of glass windows featuring high-end lingerie displays coordinated by our corporate visual merchandising department. Every detail of our stores is intended to convey a welcoming, open and friendly shopping environment.

 

We have engaged an architectural firm to develop a brand new retail store design. The all-female design team has decades of experience in retail store design and

execution. The new store layout is designed to flourish in the highest-end shopping centers with its fun, welcoming and open atmosphere. With an energetic color palette and dynamic lighting, the new store design is aligned with the shopping preferences of today's mainstream women and couples. Our new prototype has currently been rolled out at five locations in California, namely, North Hollywood, San Bernardino, Santa Monica, Palmdale and Northridge. In March 2015, we opened our newest store in Valencia, California.

 

Merchandise

 

We employ a seven-member merchandising team responsible for product sourcing, vendor negotiations and relationship management, purchasing, planning and analysis, as well as visual merchandising. We utilize "trend-right" in-store displays, which are custom-made, feature tables designed to show elegant collections of seasonal merchandise. Our merchandising philosophy is focused on understanding our customers' needs.

 

 
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We offer our customers a variety of wellness- and sexual health-related products. Products are designed for women and couples to enhance their sexual satisfaction and meet their broad range of expectations. We offer a variety of quality products ranging from entry-level price points to premium, high-end brands. We have over 5,000 SKUs available ranging from $1 condoms to $265 vibrators. Seasonally, new products represent 20-25% of our overall product assortment. In addition to our broad retail brand portfolio, we also provide SuteraTMprivate label merchandise. As part of our change in merchandising strategy to a "wellness" focus, we have minimized our visual category, which constitutes video sales (a lower-margin product not targeted at our key demographic).

 

During the fiscal year ended December 31, 2014, our breakdown of sales by product category was as follows:

 

 

·

Sales of personal items constituted approximately 47% of our sales. These items include massagers, vibrators, personal care, and restraints, including brands such as Jimmy Jane, Pipedream, We Vibe and SuteraTM Toys.

     
 

·

Sales of gift items constituted approximately 37% of our sales. These items include personal lubricants, apothecary, candles, condoms and sensitizers and desensitizers, including brands such as Crazy Girl, Kamasutra, Earthly Body and System Jo.

     
 

·

Sales of lingerie constituted approximately 16% of our sales. Lingerie includes a broad range of sleepwear, bodystockings, clubwear, costumes, corsets, babydolls, hosiery and panties, including brands such as Dreamgirl, Coquette, Escante and Rene Rofe.

 

Marketing and Advertising

 

We market our retail stores through a variety of channels, including billboards, direct mail, radio, interactive and social media and grassroots events. All new stores are allotted a special marketing budget dedicated to a grand opening event. We have an integrated marketing plan that extends from out-of-store to in-store elements, including posters, signage and displays created by a professional in-house design staff.

 

Store Locations

 

We select geographic areas and store sites on the basis of demographic information, the quality and nature of neighboring tenants, store visibility and location accessibility. We seek to locate stores primarily in or near centers with major national brands and regional brands such as Target, Walgreens, TJ Maxx, Sally Beauty Supply, Starbucks and others. Based on our management's belief and experience in the industry, our customer demographics also align well with those of Nordstrom, Macy's and other higher-end specialty retailers.

  

We balance our store expansion between new and existing marketplaces. In our existing marketplaces, we add stores as necessary to provide additional coverage. In new marketplaces, we generally seek to expand in geographically contiguous areas to leverage our experience. We believe that our knowledge of local marketplaces is an important part of our success.

 

 
2

 

The following table provides a history of our store count during the last two fiscal years:

 

   

Fiscal Year Ended December 31,

 
   

2014

   

2013

 

Stores open at beginning of period

   

44

     

42

 

Net store openings during period

   

3

     

1

 

Stores acquired during period

   

-

     

1

 
                 

Stores open at end of period

   

47

     

44

 

 

On March 23, 2015, we opened our newest retail store in Valencia, California.

 

Competition

 

Our major competitors for our lingerie, sexual health and wellness products include Adam & Eve, Ann Summers, Pure Romance, Pleasure Chest, Kiss & Tell and Romantix. For our lingerie products, we also compete with traditional department stores such as Macy's and Nordstrom and specialty stores such as Victoria's Secret. We also compete with the online businesses of the aforementioned retailers, as well as pure play e-commerce businesses such as Amazon. Our competitive advantages are the quality and assortment of our merchandise and services, our value proposition, the quality of our customers' shopping experience brought about as the result of our knowledgeable and welcoming sales personnel and the convenience of our stores and website as a one-stop destination for lingerie, sexual health and wellness products.

 

Customer Service

 

We strive to complement our extensive merchandise selection and innovative store design with superior customer service. We actively recruit individuals with significant knowledge and experience in the field of lingerie, sexual health and wellness products. We try to ensure that our customers walk out of our stores enlightened with new information, great ideas and fun products. We seek individuals with retail experience because we believe their general retail knowledge can be leveraged in the lingerie, sexual health and wellness products industry. We believe that employees' knowledge of the products and ability to explain the advantages of the products increases sales and that their prompt, knowledgeable service fosters the confidence and loyalty of customers and differentiates our business from other professional retailers of lingerie, sexual health and wellness products. Our employees are trained to foster a warm and welcoming retail environment for individuals and couples to explore sexual wellness. We believe that this attitude of acceptance and education for consumers sets us apart from our competitors. 

 

We emphasize product knowledge during initial training as well as during ongoing training sessions, with programs intended to provide new associates and managers with significant training. The training programs encompass operational and product training and are designed to increase employee and store productivity. Store employees are also required to participate in training on an ongoing basis to keep up-to-date on new products and operational practices.

 

Most of our stores are staffed with a store manager, assistant store manager and two or three part-time associates. A district manager, who reports directly to the Vice President of Retail, supervises the operations of each store.

 

 
3

 

Our Competitive Strengths

 

Based on our management's belief and experience in the industry, the following competitive strengths enable us to compete effectively in and capitalize on the growing lingerie, sexual health and wellness products market. 

 

 

·

Niche dominance. Based on our management's experience in the industry, w e believe that we are the dominant brand in the lingerie and sexual health and wellness market, recognized for offering the highest quality products in a bright and comfortable store.

     
 

·

Our unique customer experience. We combine top-of-the-line products, value and convenience with the distinctive environment and experience of a specialty retailer. Our well-trained sales personnel provide customized advice tailored to our customers' needs to ensure that customers walk out of our stores enlightened with new information, great ideas and fun products. We believe that our customer service strategy, convenient locations and attractive store design combine to create a unique shopping experience.

     
 

·

Strong vendor relationships across product categories. We have strong, active relationships with over 70 vendors. We believe the scope of these relationships, which have taken years to develop, creates a significant impediment for other retailers to replicate our model. We work closely with our vendors to market both new and existing brands in a collaborative manner.

     
 

·

Experienced Management Team. Our management team has over 150 years of combined experience in the retail market.

 

Our Growth Strategy

 

We will strive to be a leading retailer of lingerie, sexual health and wellness products by pursuing the following growth strategies:

  

 

·

 

Retail expansion strategy: In 2013, we re-engineered our new store design and layout to reflect our new retail concept, and in 2014 we began our new store expansion in earnest with the opening of five new stores.  We have used these new stores to test and adjust the concept and new site selection criteria and process, and are now positioned to ramp up our new store buildout plans.  We believe our new stores now feature d cor aligned with the shopping preference of today's modern women and couples. This foundation will allow us to scale our new store openings from five in 2014 to up to 50 or more stores on an annual basis in the future, if desired.  As we increase our new store openings, we will need to add two additional headcount to our general and administrative expenses, to focus solely on site selection, store construction and maintenance, and will add one District Manager for every ten stores added.Each new store requires an initial cash outlay of approximately $260,000, for store buildout , fixture expenditures, initial inventory load-in and pre-opening expenses.

     
 

·

 

Online retail expansion: We believe that the creation of a stronger online presence and more targeted focus on e-commerce and omni-channel retail will result in growth opportunities for our business. Increased focus on e-commerce will provide additional brand recognition and awareness for our brick and mortar stores.

     
 

·

 

Expansion of private label business: We launched our SuteraTM Toys private label brand in 2012 and believe that it has been well-received by our customers. We plan to build brand recognition through SuteraTM print and online ads and to feature SuteraTM products in physical and online retail stores.

     
 

·

 

Acquisition opportunities: Our market is primarily made up of small, regional players and represents a significant opportunity for expansion of store footprint through both greenfield store development in new markets and targeted acquisitions. Many regional and e-commerce companies exist both domestically and internationally. Acquisitions would allow us to quickly expand our geographic footprint into new and adjacent markets.

 

 
4

 

Risks

 

Our business and our ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should carefully consider the factors described in the section captioned "Risk Factors" beginning on page 10 of this prospectus and the following factors:

 

 

·

the highly competitive nature of, and the increasing consolidation of, the lingerie, sexual health and wellness products industry;

     
 

·

anticipating changes in consumer preferences and buying trends and managing our product lines and inventory;

     
 

·

potential fluctuation in our same store sales and quarterly financial performance;

     
 

·

our dependence upon manufacturers who may be unwilling or unable to continue to supply products to us;

     
 

·

the possibility of material interruptions in the supply of products by our vendors or third-party distributors;

     
 

·

products sold by us being found to be defective in labeling or content;

     
 

·

compliance with laws and regulations or becoming subject to additional or more stringent laws and regulations;

     
 

·

successfully identifying acquisition candidates and successfully completing desirable acquisitions;

     
 

·

integrating acquired businesses;

     
 

·

opening and operating new stores profitably;

     
 

·

the impact of the health of the economy upon our business;

     
 

·

protecting our intellectual property rights, particularly our trademarks;

     
 

·

the risk that our products may infringe on the intellectual property rights of others;

     
 

·

disruption in our information technology systems;

     
 

·

the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system;

     
 

·

being a holding company, with no operations of our own, and depending on our subsidiaries for cash;

     
 

·

after this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval;

 

 
5

 

 

·

our substantial indebtedness;

     
 

·

the possibility that we may incur substantial additional debt, including secured debt, in the future;

     
 

·

restrictions and limitations in the agreements and instruments governing our debt;

     
 

·

generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or obtaining additional financing;

     
 

·

changes in interest rates increasing the cost of servicing our debt;

     
 

·

the potential impact on us if the financial institutions we deal with become impaired; and

     
 

·

the costs and effects of litigation.

 

Our Corporate History and Background

 

We were incorporated in the State of Nevada on October 30, 2013 under the name Dico, Inc.

 

At the close of business on December 31, 2014, we entered into a securities exchange agreement, or the Exchange Agreement, with Christals Acquisition and its members, pursuant to which we acquired 100% of the issued and outstanding equity capital of Christals Acquisition in exchange for 2,524,870 shares of our common stock, par value $0.0001 per share, which constituted 70.5% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Exchange Agreement. In addition, at the closing of the share exchange, Christals paid us $350,000 in cash. This cash was immediately used for the following purposes (i) to pay down all of our outstanding liabilities, (ii) $308,436 of this cash was used as a partial payment toward the redemption of a total of 15,000,000 of our restricted shares from David Lazar, our former Chief Operating Officer and Secretary, pursuant to a redemption agreement that we entered into with Mr. Lazar on December 31, 2014, and (iii) to satisfy aggregate purchase price payable to holders of a total of 1,052,600 shares of our common stock, which shares were transferred to the members of Christals Acquisition as a condition to the closing of the exchange transaction. In addition to receiving the $308,436 payment for the redemption of his 15,000,000 shares of our common stock, we also transferred to Mr. Lazar our remaining inventory of loose diamonds pursuant to a bill of sale and assignment agreement as the balance of the consideration for the redemption of his shares. Immediately following the closing of the exchange transaction and the related transactions described above, the former members of Christals Acquisition and certain equity owners of such members who immediately received distributions of such securities, became the owners of 3,577,470 shares of our common stock, constituting 99.9% of our issued and outstanding common stock as of such closing. For accounting purposes, the exchange transaction with Christals Acquisition was treated as a reverse acquisition, with Christals Acquisition as the acquirer and Peekay Boutiques, Inc. as the acquired party.

 

As a result of our acquisition of Christals Acquisition, we now own all of the issued and outstanding equity capital of Christals Acquisition, a holding company, which in turn owns all of the equity capital of Peekay Acquisition and its several subsidiaries, which are engaged in the retail sale of lingerie, sexual health and wellness products.

 

Christals Acquisition was formed on January 3, 2012 for the purpose of acquiring all of the equity interests in each of the Christals Stores. The Christals Stores were comprised of several limited liability companies that operated as a retailer of lingerie, sexual health and wellness products. The acquisition of the Christals Stores was consummated on October 9, 2012. Thereafter, on December 31, 2012, Christals Acquisition, through its indirect subsidiary, Peekay SPA, acquired Peekay and ConRev, both of which operated as retailers of lingerie, sexual health and wellness products. Peekay was incorporated in the state of Washington on November 5, 1982. ConRev was incorporated in the state of Washington on December 29, 2004.

  

On January 23, 2015, we changed our name to Peekay Boutiques, Inc. to more accurately reflect our new business.

 

 
6

   

Our Corporate Structure

 

All of our business operations are conducted through our several operating subsidiaries. The chart below presents our corporate structure as of the date of this prospectus:

 

 

Our principal executive offices are located at 901 West Main Street, Suite A, Auburn, Washington 98001. The telephone number at our principal executive office is 1-800-447-2993.

 

 
7

 

 

THE OFFERING

 

Common stock offered by us

[___] shares.

Common stock to be outstanding immediately after this offering

[___] shares. If the underwriter's over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be [___].

Over-allotment option

The underwriter has an option for a period of 45 days to purchase up to [___] additional shares of our common stock to cover over-allotments, if any.

Use of proceeds

We intend to use the net proceeds received from this offering for debt repayment, working capital and general corporate purposes. See "Use of Proceeds" on page 34.

Underwriter Compensation Warrants We will issue to the underwriter, upon the closing of this offering, compensation warrants entitling the underwriter to purchase 3.0% of the aggregate number of shares of common stock issued in this offering, including shares issued pursuant to the exercise of the overallotment option. The underwriter warrants will have a term of five years and may be exercised commencing 12 months after the date of effectiveness of the Registration Statement on Form S-1 of which this prospectus forms a part.

Risk factors

See "Risk Factors" beginning on page 10 and the other information included in this prospectus for a discussion of factors you should carefully consider before investing in our securities.

No trading market

Our common stock is currently eligible to be quoted on the OTC Bulletin Board under the symbol "PKAY." However, there is currently no trading market for our common stock and there is no assurance that a regular trading market will ever develop.

 

Unless we indicate otherwise, all information in this prospectus:

 

 

·

is based on 3,582,470 shares of common stock issued and outstanding as of August 18, 2015; and

     
 

·

assumes no exercise by the underwriter of  its option to purchase up to an additional [___] shares of common stock to cover over-allotments, if any.

 

See "Underwriting" for a full description of compensation payable to the underwriter.

   

Conventions Used in this Prospectus

 

Throughout this prospectus we use certain terms repeatedly. To assist you in reading and understanding the disclosure contained in this prospectus, please note the following frequently used terms, which, except as otherwise specified, have the meanings set forth below:

 

 

·

 

"we," "us," "our," "our company," or the "Company" are to the combined business of Peekay Boutiques, Inc. (formerly Dico, Inc.) and its consolidated subsidiaries, Christals Acquisition, Peekay Acquisition, Peekay SPA, Peekay, Conrev, Condom Revolution, Charter Smith and the Christals Stores;

     
 

·

"Christals Acquisition" are to Christals Acquisition, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Peekay Boutiques, Inc.;

     
 

·

"Peekay Acquisition" are to Peekay Acquisition, LLC, a Delaware limited liability company and wholly-owned subsidiary of Christals;

     
 

·

"Peekay SPA" are to Peekay SPA, LLC, a Delaware limited liability company and the wholly-owned subsidiary of Peekay Acquisition;

     
 

·

"Peekay" are to Peekay, Inc., a Washington corporation and wholly-owned subsidiary of Peekay SPA;

     
 

·

"Conrev" are to Conrev, Inc., a Washington corporation and wholly-owned subsidiary of Peekay;

     
 

·

"Condom Revolution" are to Condom Revolution, Inc., a California corporation and wholly-owned subsidiary of Conrev;

     
 

·

"Charter Smith" are to Charter Smith Sanhueza Retail, Inc., a California corporation and wholly-owned subsidiary of Conrev;

     
 

·

"Christals Stores" are to the following entities which each operate one store: ZJ Gifts F-2, L.L.C, ZJ Gifts F-3, L.L.C, ZJ Gifts F-4, L.L.C, ZJ Gifts F-5, L.L.C, ZJ Gifts F-6, L.L.C, ZJ Gifts I-1, L.L.C, ZJ Gifts M-1, L.L.C, ZJ Gifts M-2, L.L.C, and ZJ Gifts M-3, L.L.C.;

     
 

·

"SEC" are to the Securities and Exchange Commission;

     
 

·

"Exchange Act" are to the Securities Exchange Act of 1934, as amended;

     
 

·

"Securities Act" re to the Securities Act of 1933, as amended;

     
 

·

"U.S. dollars," "dollars" and "$" are to the legal currency of the United States.

 

 
8

 

Summary Financial Data

 

The following table sets forth our summary statement of operations data for the fiscal years ended December 31, 2014 and 2013 derived from the audited financial statements of Christals Acquisition and the related notes included elsewhere in this prospectus. The summary financial data for the three months ended June 30, 2015 and 2014, and as of June 30, 2015, are derived from our unaudited financial statements appearing elsewhere in this prospectus and are not indicative of results to be expected for the full year. Our financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of our future performance. You should read this information together with the sections entitled "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus.

 

(In thousands of U.S. dollars, except for other operating data)

 

(Unaudited) Six Months Ended June 30,     

 

 

Fiscal Year December 31,

 

Income Statement:

 

2015 

 

 

2014 

 

 

2014

 

 

2013

 

Net revenue

 

$ 21,203

 

 

$ 20,029

 

 

$ 39,625

 

 

$ 39,449

 

Cost of goods sold 

 

 

7,595

 

 

 

6,834

 

 

 

13,740

 

 

 

13,640

 

Gross profit 

 

 

13,608

 

 

 

13,195

 

 

 

25,885

 

 

 

25,809

 

Selling, general & administrative expense 

 

 

10,993

 

 

 

10,349

 

 

 

20,964

 

 

 

19,570

 

Depreciation and amortization 

 

 

1,546

 

 

 

979

 

 

 

2,199

 

 

 

1,902

 

Operating income 

 

 

1,069

 

 

 

1,867

 

 

 

2,722

 

 

 

4,337

 

Interest and other expense 

 

 

3,295

 

 

 

3,297

 

 

 

6,702

 

 

 

6,681

 

Income tax expense 

 

 

47

 

 

 

-

 

 

 

202

 

 

 

233

 

Net loss 

 

$ (2,273 )

 

$ (1,430 )

 

$ (4,182 )

 

$ (2,577 )

 

Other operating data:

       

Number of stores, beginning of period

 

44

   

42

 

Number of stores, end of period

   

47

     

44

 

Average selling square footage per store

   

3,388

     

3,495

 

 

 

 

As of June 30 , 2015 

 

 

Actual

 

 

Pro Forma (1) (2)

Balance Sheet Data: 

 

 

 

 

 

Cash and cash equivalents  

 

$ 530

 

 

Total assets  

 

 

50,139

 

 

 

Total liabilities 

 

 

58,446

 

 

 

Total stockholders’ equity (deficit) 

 

 

(8,306 )

 

 

 

(1) Pro forma amounts give effect to the sale of the shares in this offering at the assumed initial public offering price of $[__] per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $[___] per share would increase (decrease) each of cash and cash equivalents, working capital, total assets, additional paid-in capital, and total stockholders' equity by $[___], assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

 

(2) The pro forma data are illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

 
9

 

RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully read and consider all of the risks described below, together with all of the other information contained or referred to in this prospectus, before making an investment decision with respect to our common shares or our company. If any of the following events occur, our financial condition, business and results of operations (including cash flows) may be materially adversely affected. In that event, the market price of our common shares could decline, and you could lose all or part of your investment.

 

RISKS RELATED TO OUR BUSINESS

 

Our auditor has raised substantial doubt about our ability to continue as a going concern. If we are unable to refinance our existing senior debt or otherwise raise capital, we may be forced to cease operations and liquidate.

 

Our financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. During 2013 and 2014, we incurred net losses of $2,577,263 and $4,181,890, respectively, largely as a result of interest expense on our outstanding debt of $6.6 million annually, which exceeds the operating profits generated through the operations of our business. Approximately $38.2 million in senior secured debt matures on December 31, 2015, and we do not have the resources necessary to pay this debt as it comes due. Our ability to continue our operations and execute our business plan is dependent on our ability to refinance this debt and/or to raise sufficient capital to pay this debt and other obligations as they come due (or are extended through a refinancing) and to provide sufficient capital to operate our business as contemplated. If we are unable to refinance our existing senior debt or raise equity capital we may have to cease operations and liquidate our assets and the holders of our equity may lose all or a significant portion of the value of their equity.

 

Our substantial indebtedness could adversely affect our financial condition.

 

We have a significant amount of indebtedness. As of December 31, 2014, our total debt was approximately $51 million.

 

Subject to the limits contained in our existing debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. Due to the capital intensive nature of our business and our growth strategy, we expect that we will incur additional indebtedness in the future. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could adversely affect our financial condition by, for example:

 

 

·

making it more difficult for us to satisfy our obligations with respect to our existing debt;

     
 

·

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

     
 

·

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

     
 

·

increasing our vulnerability to general adverse economic and industry conditions;

     
 

·

exposing us to the risk of increased interest rates as certain of our borrowings may be at variable rates of interest in the future;

     
 

·

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

     
 

·

placing us at a disadvantage compared to other, less leveraged competitors; and

     
 

· 

increasing our cost of borrowing.

 

 
10

 

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or refinance our debt obligations, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness, including the notes. We may not be able to affect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.

 

The terms of our existing debt contains certain restrictive covenants that could limit our operational flexibility, including our ability to open stores.

 

We have over $51 million total indebtedness, of which over $38 million is under a credit facility that has a term expiring in December 2015. Substantially all of our assets are pledged as collateral for outstanding borrowings under this credit facility. Outstanding borrowings under this facility and other unsecured notes bear interest at rates ranging from 9% to 15%. The credit facility agreement contains usual and customary restrictive covenants relating to our management and the operation of our business, including leverage and minimum cash covenants. Additional covenants limit our ability to grant liens on our assets, incur additional indebtedness, pay cash dividends and redeem our stock, enter into transactions with affiliates and merge or consolidate with another entity. These covenants could restrict our operational flexibility and any failure to comply with these covenants or our payment obligations would limit our ability to borrow under the credit facility and, in certain circumstances, may allow the lenders thereunder to require repayment.

 

We needed to obtain waivers from our secured lenders of our leverage ratio and minimum liquidity covenants and will likely require additional waivers of covenants in the future. If our secured lenders do not provide such waivers and if we are unable to refinance our secured debt on terms favorable to us, we could default on such debt, which would have potentially material adverse consequences.

 

During 2014, we obtained three covenant waivers through amendments to our financing agreements with our secured lenders, dated March 31, 2014, September 30, 2014 and December 31, 2014. These waivers cover covenant requirements through April 30, 2015. We expect that we will need additional covenant waivers in future periods. There can be no assurance that we will be able to obtain these or other waivers, or that we will continue to be in compliance with the terms and conditions of our debt agreements. 

 

We obtained a fourth covenant waiver to the Financing Agreement under the Fourth Amendment to the Financing Agreement, dated June 30, 2015, for the period ending June 30, 2015. 

 

Among other things, the Financing Agreement required: 

 

(1) that we maintain a certain leverage ratio for each period of four fiscal quarters ending on June 30, 2015 and September 30, 2015; and
(2) that we have liquidity of at least $1,500,000 at all times from June 30, 2015 through September 30, 2015 (the "Financial Covenants").

 

Pursuant to the Fourth Amendment, the lenders consented to, and waived any event of default relating to noncompliance with, the Financial Covenants, through September 30, 2015, subject to the following provisions: 

 

(1) if any of our or other borrowers' or guarantors' Obligations (as defined in the Financing Agreement) remain outstanding as of November 15, 2015, then we and they must satisfy:

 

(i) the original leverage ratio requirement under the Financing Agreement for the period of four fiscal quarters ending September 30, 2015 as set forth in Section 7.03(a) of the Financing Agreement, and
(ii) the liquidity test at the end of the fiscal quarter ending September 30, 2015 as set forth in Section 7.03(b) of the Financing Agreement; and

 

(2) we and the other borrowers and guarantors may not make certain Permitted Management Fee (as defined in the Financing Agreement) payments until the Financial Covenants have been satisfied and all Obligations of our Company and the other borrowers and guarantors and Commitments (as defined in the Financing Agreement) have been satisfied or terminated, but such Permitted Management Fees shall continue to accrue; and
(3) we agreed to pay to the Administrative Agent (as defined in the Financing Agreement) an exit fee (the "Exit Fee"), for the account of each consenting lender, in an amount equal to the sum of 0.25% of the aggregate principal amount of the outstanding loans of such consenting lender, calculated on each of (i) the 15th day of July 2015 and the 15th day of each calendar month thereafter (if any Obligations remain outstanding on such day), and (ii) the last day of July and the last day of each calendar month thereafter (if any Obligations remain outstanding on such day). The Exit Fee is nonrefundable and deemed fully earned as of the 15th day and last day of each calendar month for the Exit Fee that accrues on such day and until paid shall constitute "Obligations" that are secured by "Collateral" (as defined in the Financing Agreement). The Exit Fee is due on the earlier to occur of (A) the Final Maturity Date (as defined in the Financing Agreement) and (B) the date which all of the other Obligations are repaid or required to be repaid in full in cash.

 

We expect that we will need additional covenant waivers in future periods.

 

There can be no assurance that we will be able to obtain additional waivers, or that we will continue to be in compliance with the terms and conditions of the agreements with our secured and other lenders. If we fail to obtain waivers or default on our secured debt, then our lenders may be able to accelerate such debt or take other action against us, which would have material adverse consequences on our financial condition and our ability to continue to operate.

 

We may need to raise additional funds to pursue our growth strategy, and we may be unable to raise capital when needed, which could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

From time to time we may seek additional equity or debt financing to provide for capital expenditures and working capital consistent with our growth strategy. In addition, if general economic, financial or political conditions in our markets change, or if other circumstances arise that have a material effect on our cash flow, the anticipated cash needs of our business as well as our belief as to the adequacy of our available sources of capital could change significantly. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital to meet those needs. If financing is not available on satisfactory terms or at all, we may be unable to execute our growth strategy as planned and our results of operations may suffer.

 

 
11

 

The health of the economy in the channels we serve may affect consumer purchases of discretionary items such lingerie, sexual health and wellness products, which could have a material adverse effect on our business, financial condition, profitability and cash flows. In addition, the recent global economic crisis and volatility in global economic conditions and the financial markets may adversely affect our business, financial condition, profitability, and cash flows.

 

Our results of operations may be materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and internationally. Concerns over inflation, employment, tax laws, energy costs, healthcare costs, geopolitical issues, terrorism, the availability and cost of credit, the mortgage market, sovereign and private banking systems, sovereign deficits and increasing debt burdens and the real estate and other financial markets in the U.S. and Europe have contributed to increased volatility and diminished expectations for the U.S. and certain foreign economies. We appeal to a wide demographic consumer profile and offer an extensive selection of lingerie, sexual health and wellness products sold to retail consumers. Continued uncertainty in the economy could adversely impact consumer purchases of discretionary items across all of our product categories. Factors that could affect consumers' willingness to make such discretionary purchases include: general business conditions, levels of employment, interest rates, tax rates, the availability of consumer credit and consumer confidence in future economic conditions. In the event of a prolonged economic downturn or acute recession, consumer spending habits could be adversely affected and we could experience lower than expected net sales.

  

In addition, the recent global economic crisis and volatility and disruption to the capital and credit markets have had a significant, adverse impact on global economic conditions, resulting in recessionary pressures and declines in consumer confidence and economic growth. While these declines have moderated, the level of consumer spending is not where it was prior to the global recession, and economic conditions could lead to further declines in consumer spending in the future. Additionally, there can be no assurance that various governmental activities to stabilize the markets and stimulate the economy will restore consumer confidence or change spending habits. Reduced consumer spending could cause changes in customer order patterns and changes in the level of merchandise purchased by our customers, and may signify a reset of consumer spending habits, all of which may adversely affect our business, financial condition, profitability and cash flows.

 

Recent economic conditions have also resulted in a tightening of the credit markets, including lending by financial institutions, which is a source of capital for our borrowing and liquidity. This tightening of the credit markets has increased the cost of capital and reduced the availability of credit. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers alike, and a corresponding decrease in global infrastructure spending. While global credit and financial markets appear to be recovering from extreme disruptions experienced over the past few years, uncertainty about continuing economic stability remains. It is difficult to predict how long the current economic and capital and credit market conditions will continue, the extent to which they will continue to recover, if at all, and which aspects of our products or business may be adversely affected. Current market and credit conditions could continue to make it more difficult for developers and landlords to obtain the necessary credit to build new retail centers. A significant decrease in new retail center development could limit our future growth opportunities as long as the aforementioned conditions exist.

 

Additionally, the general deterioration in economic conditions could adversely affect our commercial partners including our product vendors as well as the real estate developers and landlords who we rely on to construct and operate centers in which our stores are located. A bankruptcy or financial failure of a significant vendor or a number of significant real estate developers or shopping center landlords could have a material adverse effect on our business, financial condition, profitability, and cash flows.

 

We may be unable to compete effectively in our highly competitive markets.

 

The markets for lingerie, sexual health and wellness products are highly competitive with few barriers to entry even when economic conditions are favorable. We compete against a diverse group of retailers, both small and large, including regional and national department stores, specialty retailers, drug stores, mass merchandisers, Internet businesses, and catalog retailers. We believe the principal bases upon which we compete are the breadth of merchandise, our value proposition, the quality of our customers' shopping experience and the convenience of our stores as one-stop destinations for lingerie, sexual health and wellness products and services. Many of our competitors are, and many of our potential competitors may be, larger and have greater financial, marketing and other resources and therefore may be able to adapt to changes in customer requirements more quickly, devote greater resources to the marketing and sale of their products, generate greater national brand recognition or adopt more aggressive pricing policies than we can. As a result, we may lose market share, which could have a material adverse effect on our business, financial condition, profitability and cash flows.

  

 
12

 

If we are unable to stay abreast of trends in the lingerie, sexual health and wellness products market and react to changing consumer preferences in a timely manner, our sales will decrease.

  

We believe our success depends in substantial part on our ability to:

 

 

·

create a warm and welcoming retail environment for individuals and couples to explore sexual wellness;

     
 

·

recognize and define trends in lingerie, sexual health and wellness products;
     
 

·

anticipate, gauge and react to changing consumer demands in a timely manner;

     
 

·

translate market trends into appropriate, saleable product and service offerings in our stores in advance of our competitors;

     
 

·

source, develop and maintain vendor relationships that provide us access to the newest merchandise on reasonable terms; and

     
 

·

distribute merchandise to our stores in an efficient and effective manner and maintain appropriate in-stock levels.

 

If we are unable to anticipate and fulfill the merchandise needs of the regions in which we operate, our net sales may decrease and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

If we fail to retain our existing senior management team or attract qualified new personnel, such failure could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

Our business requires disciplined execution at all levels of our organization. This execution requires an experienced and talented management team. Lisa Berman was appointed as our Chief Executive Officer upon the consummation of the reverse acquisition on December 31, 2014. Janet Mathews was appointed Chief Financial Officer of Christals Acquisition effective April 2014 and became our Chief Financial Officer upon the closing of the reverse acquisition, and Bob Patterson was appointed as the Chief Information Officer of Christals Acquisition effective January 2013, was promoted to Chief Operating Officer of Christals Acquisition in October 2014 and became our Chief Operating Officer upon the consummation of the reverse acquisition. If we were to lose the benefit of the experience, efforts and abilities of key executive personnel, it could have a material adverse effect on our business, financial condition, profitability and cash flows. Furthermore, our ability to manage our retail expansion will require us to continue to train, motivate and manage our associates. We will need to attract, motivate and retain additional qualified executive, managerial and merchandising personnel and store associates. Competition for this type of personnel is intense, and we may not be successful in attracting, assimilating and retaining the personnel required to grow and operate our business profitably.

  

 
13

 

Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons, which could result in a decline in the price of our common stock.

 

Our comparable store sales and quarterly results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable store sales and quarterly financial performance, including:

 

 

·

general U.S. economic conditions and, in particular, the retail sales environment;

     
 

·

changes in our merchandising strategy or mix;

     
 

·

performance of our new and remodeled stores;

     
 

·

the effectiveness of our inventory management;

     
 

·

timing and concentration of new store openings, including additional human resource requirements and related pre-opening and other start-up costs;

     
 

·

cannibalization of existing store sales by new store openings;

     
 

·

levels of pre-opening expenses associated with new stores;

     
 

·

timing and effectiveness of our marketing activities;

     
 

·

seasonal fluctuations due to weather conditions; and

     
 

· 

actions by our existing or new competitors.

 

Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results to be expected for any other quarter, and comparable store sales for any particular future period may decrease. In that event, the price of our common stock would likely decline. For more information on our quarterly results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 

We may not be able to sustain our growth plans and successfully develop and implement our long-range strategic and financial plan, which could have a material adverse effect on our business, financial condition, profitability and cash flows. In addition, we intend to continue to open new stores, which could strain our resources and have a material adverse effect on our business, financial condition, profitability and cash flows.

 

Our continued and future growth largely depends on our ability to implement our long-range strategic and financial plan and successfully open and operate new stores on a profitable basis. Our senior management is currently evaluating our long-range strategic and financial plan to align and prioritize our growth strategies, as well as additional investments that will be needed to support continued and future growth. There can be no assurance that we will be successful in implementing our growth plan or long-range strategic initiatives, and our failure to do so could have a material adverse impact on our business, financial condition, profitability and cash flows. During fiscal 2013, we opened 2 new stores and in fiscal 2014, we have opened 5 new stores with a sixth store opening in March 2015. We intend to continue to grow our number of stores for the foreseeable future. During fiscal 2014, the average investment required to open a typical new store, including inventory, was approximately $250,000. Our continued expansion places increased demands on our financial, managerial, operational, supply-chain and administrative resources. For example, our planned expansion will require us to increase the number of people we employ as well as to monitor and upgrade our management information and other systems and our distribution infrastructure. These increased demands and operating complexities could cause us to operate our business less efficiently and could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

 
14

 

A reduction in traffic to, or the closing of, the other destination retailers in the shopping areas where our stores are located could significantly reduce our sales and leave us with unsold inventory, which could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

As a result of our real estate strategy, most of our stores are located in off-mall shopping areas known as strip centers and power centers. Power centers typically contain three to five big-box anchor stores along with a variety of smaller specialty tenants and a strip center has two to six retail co-tenants. As a consequence of most of our stores being located in such shopping areas, our sales are derived, in part, from the volume of traffic generated by the other destination retailers and the anchor stores in the retail areas and power centers where our stores are located. Customer traffic to these shopping areas may be adversely affected by the closing of destination retailers or anchor stores, or by a reduction in traffic to such stores resulting from a regional or global economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular retail area. Such a reduction in customer traffic would reduce our sales and leave us with excess inventory, which could have a material adverse effect on our business, financial condition and results of operations. We may respond by increasing markdowns or initiating marketing promotions to reduce excess inventory, which would further decrease our gross profits and net income. This risk is more pronounced during the recent economic downturn that has resulted in a number of national retailers filing for bankruptcy or closing stores due to depressed consumer spending levels.

 

We may acquire entities with significant leverage, increasing the entity's exposure to adverse economic factors.

 

Our future acquisitions could include entities whose capital structures may have significant leverage. Although we will seek to use leverage in a manner we believe is prudent, any leveraged capital structure of such investments will increase the exposure of the acquired entity to adverse economic factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the relevant entity or their industries. If an entity cannot generate adequate cash flow to meet its debt obligations, we may suffer a partial or total loss of capital invested in such entity. To the extent there is not ample availability of financing for leveraged transactions (e.g., due to adverse changes in economic or financial market conditions or a decreased appetite for risk by lenders); our ability to consummate certain transactions could be impaired.

 

We may not be able to successfully identify acquisition candidates or successfully complete desirable acquisitions.

 

In the past several years, we have completed multiple acquisitions and we intend to pursue additional acquisitions in the future. We actively review acquisition prospects, which would complement our existing lines of business, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities. There can be no assurance that we will continue to identify suitable acquisition candidates.

 

If suitable candidates are identified, sufficient funds may not be available to make such acquisitions. We compete against many other companies, some of which have greater financial and other resources than we do. Increased competition for acquisition candidates could result in fewer acquisition opportunities and higher acquisition prices. In addition, we are highly leveraged and the agreements governing our indebtedness contain limits on our ability to incur additional debt to pay for acquisitions. Additionally, the amount of equity that we can issue to make acquisitions or raise additional capital is severely limited. We may be unable to finance acquisitions that would increase our growth or improve our financial and competitive position. To the extent that debt financing is available to finance acquisitions, our net indebtedness could increase as a result of any acquisitions.

 

 
15

 

If we acquire any businesses in the future, they could prove difficult to integrate, disrupt our business or have an adverse effect on our results of operations.

 

Any acquisitions that we do make may be difficult to integrate profitably into our business and may entail numerous risks, including:

 

 

·

difficulties in assimilating acquired operations, stores or products, including the loss of key employees from acquired businesses;

     
 

·

difficulties and costs associated with integrating and evaluating the distribution or information systems and/or internal control systems of acquired businesses;

     
 

·

difficulties in competing with existing stores or business or diverting sales from existing stores or business;

     
 

·

expenses associated with the amortization of identifiable intangible assets;

     
 

·

problems retaining key technical, operational and administrative personnel;

     
 

·

diversion of management's attention from our core business, including loss of management focus on marketplace developments;

     
 

·

adverse effects on existing business relationships with suppliers and customers, including the potential loss of suppliers of the acquired businesses;

     
 

·

operating inefficiencies and negative impact on profitability;

     
 

·

entering geographic areas or channels in which we have limited or no prior experience; and

     
 

· 

those related to general economic and political conditions, including legal and other barriers to cross-border investment in general, or by U.S. companies in particular.

 

In addition, during the acquisition process, we may fail or be unable to discover some of the liabilities of businesses that we acquire. These liabilities may result from a prior owner's noncompliance with applicable laws and regulations. Acquired businesses may also not perform as we expect or we may not be able to obtain the expected financial improvements in the acquired businesses.

 

If we are unable to profitably open and operate new stores, our business, financial condition and results of operations may be adversely affected.

 

Our future growth strategy depends in part on our ability to open and profitably operate new stores in existing and additional geographic areas. In the U.S., the capital requirements to open a new store, including inventory, average approximately $250,000. We may not be able to open all of the new stores we plan to open and any new stores we open may not be profitable, either of which could have a material adverse impact on our financial condition or results of operations. There are several factors that could affect our ability to open and profitably operate new stores, including:

 

 
16

 

 

·

the inability to identify and acquire suitable sites or to negotiate acceptable leases for such sites;

     
 

·

proximity to existing stores that may reduce the new store's sales or the sales of existing stores;

     
 

·

difficulties in adapting our distribution and other operational and management systems to an expanded network of stores;

     
 

·

the level of sales made through our internet channels and the potential that sales through our internet channels will divert sales from our stores;

     
 

·

the potential inability to obtain adequate financing to fund expansion because of our high leverage and limitations on our ability to issue equity under our credit agreements, among other things;

     
 

·

difficulties in obtaining any governmental and third-party consents, permits and licenses;

     
 

·

limitations on capital expenditures which may be included in financing documents that we enter into; and

     
 

· 

difficulties in adapting existing operational and management systems to the requirements of national or regional laws and local ordinances.

 

In addition, as we continue to open new stores, our management, as well as our financial, distribution and information systems, and other resources will be subject to greater demands. If our personnel and systems are unable to successfully manage this increased burden, our results of operations may be materially affected.

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.

 

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company's internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management's assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.

 

 
17

 

A report of our management is included under Item 9A "Controls and Procedures" of our annual report on Form 10-K filed as Exhibit 99.1 to our current report on Form 8-K/A filed on April 23, 2015. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.

 

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2014, management identified material weaknesses. These material weaknesses were associated with separation of duties, internal control process documentation and testing of controls. We are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A "Controls and Procedures" of our annual report on Form 10-K filed as Exhibit 99.1 to our current report on Form 8-K/A filed on April 23, 2015 for more information.

  

We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.

 

We do not manufacture any products we sell, and instead purchase our products from manufacturers and private label fillers. Since we purchase products from many manufacturers and fillers under at-will contracts and contracts which can be terminated without cause upon 90 days' notice or less, or which expire without express rights of renewal, manufacturers and fillers could discontinue sales to us immediately or upon short notice. In lieu of termination, a manufacturer may also change the terms upon which it sells, for example, by raising prices or broadening distribution to third parties. For these and other reasons, we may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the future.

 

Although we plan to mitigate the negative effects resulting from potential unfavorable changes in our relationships with suppliers, there can be no assurance that our efforts will partially or completely offset the loss of these distribution rights. Any significant interruption in the supply of products by manufacturers and fillers could disrupt our ability to deliver merchandise to our stores and customers in a timely manner, which could have a material adverse effect on our business, financial condition and results of operations.

 

Manufacturers and label fillers are subject to certain risks that could adversely impact their ability to provide us with their products on a timely basis, including inability to procure ingredients, industrial accidents, environmental events, strikes and other labor disputes, union organizing activity, disruptions in logistics or information systems, loss or impairment of key manufacturing sites, product quality control, safety, and licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which neither they nor we have control. In addition, our operating results depend to some extent on the orderly operation of our receiving and distribution processes, which depend on manufacturers' adherence to shipping schedules and our effective management of our distribution facilities and capacity.

 

If a material interruption of supply occurs, or a significant manufacturer or filler ceases to supply us or materially decreases its supply to us, we may not be able to acquire products with similar quality as the products we currently sell or to acquire such products in sufficient quantities to meet our customers' demands or on favorable terms to our business, any of which could adversely impact our business, financial condition and results of operations.

 

 
18

 

If products sold by us are found to be defective in labeling or content, our credibility and that of the brands we sell may be harmed, marketplace acceptance of our products may decrease, and we may be exposed to liability in excess of our products liability insurance coverage and manufacturer indemnities.

 

We do not control the production process for the products we sell. We may not be able to identify a defect in a product we purchase from a manufacturer or label filler before we offer such product for resale. In many cases, we rely on representations of manufacturers and fillers about the products we purchase for resale regarding the composition, manufacture and safety of the products, as well as the compliance of our product labels with government regulations. Our sale of certain products exposes us to potential product liability claims, recalls or other regulatory or enforcement actions initiated by federal, state or foreign regulatory authorities or through private causes of action. Such claims, recalls or actions could be based on allegations that, among other things, the products sold by us are misbranded, contain contaminants or impermissible ingredients, provide inadequate instructions regarding their use or misuse, or include inadequate warnings concerning flammability or interactions with other substances. Claims against us could also arise as a result of the misuse by purchasers of such products or as a result of their use in a manner different than the intended use. We may be required to pay for losses or injuries actually or allegedly caused by the products we sell and to recall any product we sell that is alleged to be or is found to be defective.

 

Any actual defects or allegations of defects in products sold by us could result in adverse publicity and harm our credibility or the credibility of the manufacturer, which could adversely affect our business, financial condition and results of operations. Although we may have indemnification rights against the manufacturers of many of the products we distribute and rights as an "additional insured" under the manufacturers' insurance policies, it is not certain that any manufacturer or insurer will be financially solvent and capable of making payment to any party suffering loss or injury caused by products sold by us. Further, some types of actions and penalties, including many actions or penalties imposed by governmental agencies and punitive damages awards, may not be remediable through reliance on indemnity agreements or insurance. Furthermore, potential product liability claims may exceed the amount of indemnity or insurance coverage or be excluded under the terms of an indemnity agreement or insurance policy and claims for indemnity or reimbursement by us may require us to expend significant resources and may take years to resolve. If we are forced to expend significant resources and time to resolve such claims or to pay material amounts to satisfy such claims, it could have an adverse effect on our business, financial condition and results of operations.

 

We rely on our good relationships with vendors to supply lingerie, sexual health and wellness products on reasonable terms. If these relationships were to be impaired, or if certain vendors were to change their distribution model or are unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in lingerie, sexual health and wellness products, either of which could have a material adverse effect on our competitive position, business, financial condition, profitability and cash flows.

 

We have no long-term supply agreements or exclusive arrangements with vendors and, therefore, our success depends on maintaining good relationships with our vendors. Our business depends to a significant extent on the willingness and ability of our vendors to supply us with a sufficient selection and volume of products to stock our stores. Some of our vendors may not have the capacity to supply us with sufficient merchandise to keep pace with our growth plans. If we fail to maintain strong relationships with our existing vendors, or fail to continue acquiring and strengthening relationships with additional vendors of lingerie, sexual health and wellness products, our ability to obtain a sufficient amount and variety of merchandise on reasonable terms may be limited, which could have a negative impact on our competitive position.

 

During fiscal 2014 and 2013, merchandise supplied to us by our top ten vendors accounted for approximately 44% and 42% of our net sales, respectively. There continues to be vendor consolidation within the lingerie, wellness and sexual health products industry. The loss of or a reduction in the amount of merchandise made available to us by any one of these key vendors, or by any of our other vendors, could have an adverse effect on our business, financial condition, profitability and cash flows.

  

Any material disruption of our information systems could negatively impact financial results and materially adversely affect our business operations, particularly during the holiday season.

 

We are increasingly dependent on a variety of information systems to effectively manage the operations of our growing store base and fulfill customer orders from our e-commerce business. Our current systems solution will not scale far beyond 80 stores. Management has identified a need to replace our ERP solution to support long-term growth and to provide sufficient internal controls over financial reporting. This implementation is anticipated as a 2017 capital project. The failure of our information systems to perform as designed could have an adverse effect on our business and results of our operations. Any material disruption of our systems could disrupt our ability to track record and analyze the merchandise that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and credit card transactions, and our ability to receive and process e-commerce orders or engage in normal business activities. Moreover, security breaches or leaks of proprietary information, including leaks of customers' private data, could result in liability, decrease customer confidence in our company, and weaken our ability to compete in the marketplace, which could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

 
19

 

Our e-commerce operations are increasingly important to our business and are an area that we believe can grow significantly in the future. The Lovers website serves as an effective extension of our marketing and prospecting strategies by exposing potential new customers to our brand, product offerings, and enhanced content. As the importance of our website and e-commerce operations to our business grows, we are increasingly vulnerable to website downtime and other technical failures. Our failure to successfully respond to these risks could reduce e-commerce sales and damage our brand's reputation.

 

We are subject to risks relating to our information technology systems, and any failure to adequately protect our critical information technology systems could have a material adverse effect on our operations.

 

We rely on information technology systems across our operations, including for management, supply chain and financial information and various other processes and transactions. Our ability to effectively manage our business depends on the security, reliability and capacity of these systems. Information technology system failures, network disruptions or breaches of security could disrupt our operations, causing delays or cancellation of customer orders or impeding the manufacture or shipment of products, processing of transactions or reporting of financial results. An attack or other problem with our systems could also result in the disclosure of proprietary information about our business or confidential information concerning our customers or employees, which could result in significant damage to our business and our reputation.

 

Cyber security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, damage our reputation, and cause a loss of confidence in our business, products and services, which could adversely affect our business, financial condition, profitability and cash flows. We employ IT security and security-related products and services to proactively monitor our systems and networks. We maintain continual vigilance in regard to the protection of sensitive information and we believe that we are in compliance with all applicable data protection laws and regulations.

 

Unauthorized disclosure of confidential customer, associate or company information could damage our reputation, expose us to litigation and negatively impact our business.

 

We collect, process and retain sensitive and confidential customer and associate information as part of our normal course of business. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential information. Despite the security measures we have in place, our systems and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, human errors, or other similar events. Any security breach of customer, associate or company confidential information could result in damage to our reputation and result in lost sales, litigation, fines, or additional investments to fix or replace the systems that were breached. Any of these events could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

Our e-commerce business may be unsuccessful.

 

We offer many of our lingerie, sexual health and wellness products for sale through our website and we expect to expand and further promote these offerings in the future. As a result, we encounter risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand and develop our internet operations, website and software and other related operational systems. Although we believe that our participation in both e-commerce and physical store sales is a distinct advantage for us due to synergies and the potential for new customers, supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations. For example, if our e-commerce business successfully grows, it may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us online rather than from our physical stores, thereby reducing the financial performance of our stores. In addition, offering different products through each channel could cause conflicts and cause some of our current or potential internet customers to consider competing distributors of lingerie, sexual health and wellness products. In addition, offering products through our internet channel could cause some of our current or potential vendors to consider competing internet offerings of their products either on their own or through competing distributors. As we continue to grow our e-commerce business, the impact of attracting existing rather than new customers, of conflicts between product offerings online and through our stores, and of opening up our channels to increased internet competition could have a material adverse impact on our business, financial condition, profitability and cash flows, including future growth.

  

 
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If we are unable to protect our intellectual property rights, our brand and reputation could be harmed, which could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

We regard our trademarks, trade dress, copyrights, trade secrets, know-how and similar intellectual property as critical to our success. Our principal intellectual property rights include registered and common law trademarks on our names "Peekay," "Christals," "Conrev," "Condom Revolution," "Touch of Romance," "Lovers," "Lovers Package," "Sutera," and other marks incorporating these names, copyrights in our website content, rights to our domain name www.loverspackage.com and trade secrets and know-how with respect to our branded product formulations, product sourcing, sales and marketing and other aspects of our business. As such, we rely on trademark and copyright law, trade secret protection and confidentiality agreements with certain of our employees, consultants, suppliers and others to protect our proprietary rights. If we are unable to protect or preserve the value of our trademarks, copyrights, trade secrets or other proprietary rights for any reason, or if other parties infringe on our intellectual property rights, our brand and reputation could be impaired and we could lose customers.

 

We, as well as our vendors, are subject to laws and regulations that could require us to modify our current business practices and incur increased costs, which could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

In the U.S. markets, numerous laws and regulations at the federal, state and local levels can affect our business. Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. If we fail to comply with any present or future laws or regulations, we could be subject to future liabilities, a prohibition on the operation of our stores or a prohibition on the sale of our products. In particular, failure to adequately comply with the following legal requirements could have a material adverse effect on our business, financial condition, profitability and cash flows:

 

In March 2010, comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, the "Acts") was passed and signed into law. This healthcare reform legislation significantly expands healthcare coverage to many uninsured individuals and to those already insured. Due to the breadth and complexity of the healthcare reform legislation and the staggered implementation and uncertain timing of the regulations and lack of interpretive guidance, it is difficult to predict the overall impact of the healthcare reform legislation on our business over the coming years. Possible adverse effects include increased costs, exposure to expanded liability and requirements for us to revise the ways in which we conduct business. For example, the Patient Protection and Affordable Care Act has imposed new mandates on employers, including a requirement effective January 1, 2014 (which has been extended in certain respects to January 1, 2016 for employers with 50 to 99 full-time employees or to January 1, 2015 for employers with 100 or more full-time employees under U.S. Treasury Department and Internal Revenue Service regulations) to provide "creditable" health insurance to employees or pay a financial penalty. Given our current health plan design, and assuming the law is implemented without significant changes, these mandates could materially increase our costs. Moreover, if we choose to opt out of offering health insurance to our employees, we may become less attractive as an employer and it may be harder for us to compete for qualified employees. Additionally, because significant provisions of the Acts will become effective on various dates over the next several years, future changes could significantly impact any effects on our business that we previously anticipated.

 

Our expanding workforce, growing in pace with our number of stores, makes us vulnerable to changes in labor and employment laws. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefits costs, which could hurt our profitability and affect our growth strategy.

 

 
21

 

As we grow the number of our stores in new cities and states, we are subject to local building codes in an increasing number of local jurisdictions. Our failure to comply with local building codes, and the failure of our landlords to obtain certificates of occupancy in a timely manner, could cause delays in our new store openings, which could increase our store opening costs, cause us to incur lost sales and profits, and damage our public reputation.

 

Ensuring compliance with local zoning and real estate land use restrictions across numerous jurisdictions is increasingly challenging as we grow the number of our stores in new cities and states. Our store leases generally require us to provide a certificate of occupancy with respect to the interior buildout of our stores (landlords generally provide the certificate of occupancy with respect to the shell of the store and the larger shopping area and common areas), and while we strive to remain in compliance with local building codes relating to the interior buildout of our stores, the constantly increasing number of local jurisdictions in which we operate makes it increasingly difficult to stay abreast of changes in, and requirements of, local building codes and local building and fire inspectors' interpretations of such building codes. Moreover, our landlords may be unable, due to the requirements of local zoning laws, to obtain in a timely manner a certificate of occupancy with respect to the shell of our stores and/or the larger shopping centers and/or common areas (which certificate of occupancy is required by local building codes for us to open our store), which would cause us in some instances to delay store openings. As the number of local building codes and local building and fire inspectors to which we and our landlords are subject to increases, we may be increasingly vulnerable to increased construction costs and delays in store openings caused by our or our landlords' compliance with local building codes and local building and fire inspectors' interpretations of such building codes, which increased construction costs and/or delays in store openings could increase our store opening costs, cause us to incur lost sales and profits, and damage our public reputation and could have a material adverse effect on our business, financial condition, profitability and cash flows.

 

Increases in the demand for, or the price of, raw materials used to build and remodel our stores could hurt our profitability.

 

The raw materials used to build and remodel our stores are subject to availability constraints and price volatility caused by weather, supply conditions, government regulations, general economic conditions and other unpredictable factors. As a retailer engaged in an active building and remodeling program, we are particularly vulnerable to increases in construction and remodeling costs. As a result, increases in the demand for, or the price of, raw materials could have a material adverse effect on our business, financial condition, profitability and cash flows. We expect the net investment to open a new store in 2015 to increase due to increases in material and labor costs resulting from a stronger commercial and residential building environment compared to the last several years.

 

Use of social media may adversely impact our reputation or subject us to fines or other penalties.

 

There has been a substantial increase in the use of social media platforms, including blogs, social media websites, and other forms of internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. Negative commentary regarding us or the products we sell may be posted on social media platforms and similar devices at any time and may be adverse to our reputation or business. Customers value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction.

 

We also use social media platforms as marketing tools. For example, we maintain Facebook, Twitter, Google+, Instagram and Pinterest accounts. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition, profitability and cash flows, or subject us to fines or other penalties.

 

 
22

 

Litigation costs and the outcome of litigation could have a material adverse effect on our business and any loss contingency accruals may not be adequate to cover actual losses.

 

From time to time we may be subject to litigation claims through the ordinary course of our business operations regarding, but not limited to, employment matters, security of consumer and employee personal information, contractual relations with suppliers, marketing and infringement of trademarks and other intellectual property rights. Litigation to defend ourselves against claims by third parties, or to enforce any rights that we may have against third parties, may be necessary, which could result in substantial costs and diversion of our resources, causing a material adverse effect on our business, financial condition, profitability and cash flows. We establish accruals for potential liability arising from legal proceedings when potential liability is probable and the amount of the loss can be reasonably estimated based on currently available information. We may still incur legal costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a certain matter, or in the aggregate. An unfavorable resolution of a legal proceeding or claim could materially adversely impact our business, financial condition, profitability and cash flows.

 

Management does not believe the nature of any pending legal proceeding will have a material adverse effect on our business, financial condition, profitability and cash flows. However, management's assessment may change at any time based upon the discovery of facts or circumstances that are presently not known to us. Therefore, there can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, profitability and cash flows.

 

We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.

 

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. We cannot assure you that the cash flow and earnings of our operating subsidiaries will be adequate for our subsidiaries to service their debt obligations. If our subsidiaries do not generate sufficient cash flow from operations to satisfy corporate obligations, we may have to: undertake alternative financing plans (such as refinancing), restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. We cannot assure you that any such alternative refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.

 

Furthermore, we and our subsidiaries may incur substantial additional indebtedness in the future that may severely restrict or prohibit our subsidiaries from making distributions, paying dividends or making loans to us.

 

 
23

 

As an "Emerging Growth Company" under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.

 

We qualify as an "emerging growth company" under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

 

·

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

     
 

·

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

     
 

·

submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay" and "say-on-frequency;" and

     
 

·

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO's compensation to median employee compensation.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

Until such time, however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.

 

Our business is seasonal and our first and fourth quarters contribute a disproportionate amount of our net revenue and cash flow, and any factors negatively impacting us during our first and fourth quarters could reduce our net revenue and cash flow, leaving us with excess inventory and making it more difficult for us to finance our capital requirements.  

 

We have experienced, and expect to continue to experience, substantial seasonal fluctuations in our net sales and operating results, which are typical of many specialty retailers and common to most retailers generally. Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season. To a lesser extent, our business is also affected by Valentine's Day, which occurs during our first quarter. Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year. Our quarterly results of operations have varied in the past and are likely to do so again in the future. Any factors negatively affecting us during the first or last quarter of our fiscal year, including unfavorable economic or weather conditions, could have a material adverse effect on our financial condition and results of operations, reducing our cash flow, leaving us with excess inventory and making it more difficult for us to finance our capital requirements.

 

 
24

 

RISKS RELATED TO THE MARKET FOR OUR STOCK

 

The market price for our common stock may be volatile, and an investor may not be able to sell our stock at a favorable price or at all.

 

The market price of our common stock is likely to fluctuate significantly from time to time in response to factors including:

 

 

·

differences between our actual financial and operating results and those expected by investors;

     
 

·

fluctuations in quarterly operating results;

     
 

·

our performance during peak retail seasons such as the holiday season;

     
 

·

market conditions in our industry and the economy as a whole;

     
 

·

changes in the estimates of our operating performance or changes in recommendations by any research analysts that may follow our stock in the future or any failure to meet the estimates made by research analysts that issue research reports on our company in the future;

     
 

·

investors' perceptions of our prospects and the prospects of the lingerie, sexual health and wellness products market;
     
 

·

the performance of our key vendors;

     
 

·

announcements by us, our vendors or our competitors of significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

     
 

·

introductions of new products or new pricing policies by us or by our competitors;

     
 

·

stock transactions by our principal stockholders;

     
 

·

recruitment or departure of key personnel; and

     
 

·

the level and quality of securities research analyst coverage for our common stock.

 

In addition, public announcements by our competitors, other retailers and vendors concerning, among other things, their performance, strategy, or accounting practices could cause the market price of our common stock to decline regardless of our actual operating performance.

 

 
25

 

Our shares are eligible for quotation on the OTCBB but no quotations have been made and no trading has occurred in our shares. Due to the lack of an active trading market for our securities, you may have difficulty selling any shares you purchase in this offering, which could result in the loss of your investment.

 

There is presently no demand for our common stock and no active public market exists for the shares being offered in this prospectus. Our shares are eligible for quotation on the OTCBB. The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter (OTC) securities. The OTCBB is not an issuer listing service, market or exchange. Although the OTCBB does not have any listing requirements per se, to be eligible for quotation on the OTCBB, issuers must remain current in their filings with the SEC or applicable regulatory authority. Market Makers are not permitted to begin quotation of a security whose issuer does not meet this filing requirement. Securities already quoted on the OTCBB that become delinquent in their required filings will be removed following a 30 or 60 day grace period if they do not make their required filing during that time. If an active market is never ever developed for our common stock, it will be difficult or impossible for you to sell any shares you purchase in this offering. In such case, you may find that you are unable to achieve any benefit from your investment or liquidate your shares without considerable delay, if at all.

 

Furthermore, the OTCBB, in general, is a significantly more limited market than the New York Stock Exchange or NASDAQ. Even if a market begins to develop in our shares, the quotation of our shares on the OTCBB may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

 

Our stock is subject to restrictions on transfer and other covenants contained in a stockholder rights agreement. These restrictions and covenants may negatively affect the value of our stock and limit liquidity.

 

On December 31, 2014, our company, Christals Acquisition and the members of Christals Acquisition, entered into the Exchange Agreement. The parties to the Exchange Agreement agreed to abide by the terms and provisions set forth in Annex C to such agreement. Annex C is a stockholder rights agreement that grants to certain former members of Christals Acquisition, who are now stockholders of our company, substantially the same investor rights that such former members had as members of Christals Acquisition. These rights include, among others, the right to appoint an observer, the right to appoint a member to the board of directors of our company, tag-along rights, drag along rights, rights of first offer, preemptive rights and registration rights. These rights will terminate when and if we consummate an equity or equity-linked financing transaction in which we raise at least $10 million. This offering would qualify as a termination event which would terminate these rights if we receive purchase orders for at least $10 million of the common stock being offered in this offering. While these rights remain in effect, it will be very difficult for our stockholders to transfer their stock and the value of our stock may decline as a result of the restrictive covenants contained in the stockholder rights agreement. For further information regarding the stockholder rights agreement, please refer to "Description of Capital Stock - Stockholder Rights Agreement".

  

We have provided registration rights to certain holders of our common stock that may require us to register their shares after the completion of this initial public offering. The exercise of these registration rights may substantially reduce the market price of our common stock and the existence of these rights may make it more difficult for us to complete future offerings. 

 

On December 31, 2014, our company, Christals Acquisition and the members of Christals Acquisition, entered into the Exchange Agreement. The parties to the Exchange Agreement agreed to abide by the terms and provisions set forth in Annex C to such agreement. Annex C is a stockholder rights agreement that grants to certain former members of Christals Acquisition, who are now stockholders of our company, substantially the same investor rights that such former members had as members of Christals Acquisition. These rights include, among others, registration rights covering any restricted shares of common stock held by them. While these shares are not being registered as part of this offering, we are required to file with the SEC a reoffer registration statement to register such shares that cannot be sold without limitation as to volume under Rule 144. These rights will terminate when and if we consummate an equity or equity-linked financing transaction in which we raise at least $10 million. This offering would qualify as a termination event which would terminate these rights if we receive purchase orders for at least $10 million of the common stock being offered in this offering. 

 

In addition, a warrant to purchase [__] shares of common stock that we will issue to the underwriter as partial compensation for its services as underwriter will provide for certain "demand" and "piggyback" registration rights at our expense with respect to the underlying shares of common stock during the five-year period commencing twelve months after the effective date of the registration statement on Form S-1 of which this prospectus forms a part. Upon the consummation of this offering, we will have a total of [__] shares of common stock outstanding (based on the number of shares outstanding as of [__]  , 2015). Following the completion of this offering, the shares covered by registration rights will represent approximately [__] % of our outstanding common stock (or [__] %, if the underwriter exercises in full its option to purchase additional shares). Registration of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. 

 

The presence of this additional number of shares of common stock eligible for trading in the public market may substantially reduce the market price of our common stock. In addition, the existence of these holders' registration rights may make it more difficult for us to complete future public offerings and may reduce the amount of capital that we are able to raise for our own account in these offerings.

 

We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.

 

The SEC has adopted regulations which generally define so-called "penny stocks" to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a "penny stock" and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.

 

 
26

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

 

We do not intend to pay dividends for the foreseeable future.

 

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.

  

Provisions in our Articles of Incorporation, including the ability of our board to issue preferred stock without stockholder approval, bylaws and Nevada law may negatively affect the value of any stock that you acquire in this offering.

 

Our Articles of Incorporation authorize our board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by stockholders. These terms may include preferences as to dividends and liquidation, voting rights, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

 

In addition, Nevada corporate law and our Articles of Incorporation and Bylaws also contain other provisions that could discourage, delay or prevent a change in control of our Company or changes in its management that our stockholders may deem advantageous. These provisions:

 

 

·

deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding shares of common stock will be able to elect all of our directors;

     
 

·

require any stockholder wishing to properly bring a matter before a meeting of stockholders to comply with specified procedural and advance notice requirements; and

     
 

·

allow any vacancy on the board of directors, however the vacancy occurs, to be filled by the directors.

  

Provisions in our charter documents and under Nevada law could discourage a takeover that stockholders may consider favorable.

 

Provisions in our articles of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our board of directors has the right to determine the authorized number of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to control the size of or fill vacancies on our board of directors.

 

 
27

 

Risks Related to this Offering

 

After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval.

 

Upon the closing of this offering, and assuming the sale of [___] shares of our common stock at an assumed public offer price of $[___] per share (which is the midpoint of the price range on the cover page of this prospectus) our executive officers and Directors, combined with our other existing stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately % of our common stock. If these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:

 

 

·

delay, defer or prevent a change in control;

     
 

·

entrench our management and the Board of Directors; or

     
 

·

impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.

 

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

 

The public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued, you will incur further dilution. Based on an assumed public offering price of $[___] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $[___] per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately [___]% of the aggregate price paid by all purchasers of our stock but will own only approximately [___]% of our common stock outstanding after this offering.

 

Additional dilution may be experienced upon exercise of the underwriter's warrant.  

 

A warrant to purchase [__] shares of common stock that we will issue to the underwriter as partial compensation for its services as underwriter will provide for certain "demand" and "piggyback" registration rights at our expense with respect to the underlying shares of common stock during the five-year period commencing twelve months after the effective date of the registration statement on Form S-1 of which this prospectus forms a part. 

 

There will be further dilution of your investment when and if the underwriter's warrant is exercised. As of the date of this prospectus, and based on an assumed public offering price of $[___] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the warrant may be exercised to purchase up to an aggregate of [___] shares of our common stock. This warrant will be issued subject to an average exercise price of $[___] per share, based on the above assumed public offering price per share. In addition, we may in the future issue additional shares of our common stock upon exercise of the conversion features of shares of preferred stock that we may issue in the future (see the risk factor entitled " Provisions in our Articles of Incorporation, including the ability of our board to issue preferred stock without stockholder approval, bylaws and Nevada law may negatively affect the value of any stock that you acquire in this offering. " above). For additional discussion of the terms of our preferred stock, see "Description of Capital Stock - Preferred Stock" contained elsewhere in this prospectus. 

 

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of stockholders intend to sell shares, could reduce the market price of our common stock. After this offering, we will have [___] outstanding shares of common stock based on the number of shares outstanding as of in connection with the offering. This number includes the [___] shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing stockholders. All of the remaining outstanding shares of our common stock are currently restricted as a result of securities laws or lock-up agreements but will become eligible to be sold at various times after the offering. In addition, the current holders of our outstanding shares of common stock have certain tag-along rights, drag along rights, rights of first offer, preemptive rights and registration rights with respect to their shares of common stock, including shares of common stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the foregoing shares, unless we consummate an equity or equity-linked financing transaction in which we raise at least $10 million. This offering would qualify as a termination event which would terminate these rights if we receive purchase orders for at least $10 million of the common stock being offered in this offering. See "Description of Capital Stock - Stockholder Rights Agreement."

  

 
28

 

If you are not an institutional investor, you may purchase our securities in this offering only if you reside within certain states in which we will apply to have the securities registered.

 

We have applied to register our shares of common stock, or will rely on an exemption from registration, to offer and sell our common stock to retail customers only in Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Louisiana, Minnesota, Missouri, New York, Rhode Island, Utah, Virginia, and Wisconsin. In the states where we have applied to have our common stock registered for sale, we will not sell our common stock to retail customers in these states unless and until such registration is effective. If you are not an "institutional investor," you must be a resident of one of these jurisdictions to purchase our common stock in this offering. We may offer and sell our common stock in this offering to institutional investors in every state pursuant to an exemption provided for sales to these investors under the state Blue Sky laws. The definition of an "institutional investor" varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. Under the National Securities Markets Improvement Act of 1996, states are pre-empted from regulating transactions in certain categories of securities that are designated as "covered securities." Since we will file periodic and annual reports under the Securities Exchange Act of 1934, our common stock will be considered covered securities. Therefore, resales of the registered securities are exempt from state registration requirements. However, each state retains jurisdiction to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with the sale of securities. For a complete discussion of the Blue Sky state securities laws and registrations affecting this offering, please see the section titled "Underwriting - State Blue Sky Information".

 

Our security holders may face significant restrictions on the resale of our securities due to state "blue sky" laws.

 

Each state has its own securities laws, often called "blue sky" laws, which (1) limit sales of securities to a state's residents unless the securities are registered in that state or qualify for an exemption from registration and (2) govern the reporting requirements for broker-dealers and stock brokers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. Also, the broker must be registered in that state. We do not know whether our securities will be registered, or exempt, under the laws of any states. A determination regarding registration will be made by the broker-dealers, if any, who agree to serve as the market-makers for our securities. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. Investors should consider the resale market for our securities to be limited. Security holders may be unable to resell their securities, or they may be unable to resell them without the significant expense of state registration or qualification.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

 

Forward-Looking Statements

 

In addition to historical information, this prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are contained principally in the sections entitled "Description of Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any historical results and future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" and the following factors:

 

 
29

 

 

·

the highly competitive nature of, and the increasing consolidation of, the lingerie, sexual health and wellness products industry;

     
 

·

anticipating changes in consumer preferences and buying trends and managing our product lines and inventory;

     
 

·

potential fluctuation in our same store sales and quarterly financial performance;

     
 

·

our dependence upon manufacturers who may be unwilling or unable to continue to supply products to us;

     
 

·

the possibility of material interruptions in the supply of products by our vendors or third-party distributors;

     
 

·

products sold by us being found to be defective in labeling or content;

     
 

·

compliance with laws and regulations or becoming subject to additional or more stringent laws and regulations;

     
 

·

successfully identifying acquisition candidates and successfully completing desirable acquisitions;

     
 

·

integrating acquired businesses;

     
 

·

opening and operating new stores profitably;

     
 

·

the impact of the health of the economy upon our business;

     
 

·

protecting our intellectual property rights, particularly our trademarks;

     
 

·

the risk that our products may infringe on the intellectual property rights of others;

     
 

·

disruption in our information technology systems;

     
 

·

the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system;

     
 

·

being a holding company, with no operations of our own, and depending on our subsidiaries for cash;

     
 

·

our substantial indebtedness;

     
 

·

the possibility that we may incur substantial additional debt, including secured debt, in the future;

     
 

·

restrictions and limitations in the agreements and instruments governing our debt;

     
 

·

generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or obtaining additional financing;

     
 

·

changes in interest rates increasing the cost of servicing our debt;

     
 

·

the potential impact on us if the financial institutions we deal with become impaired; and

     
 

·

the costs and effects of litigation.

 

 
30

 

Readers are urged to carefully review and consider the various disclosures made by us in this prospectus and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this prospectus speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

 

Market Data and Forecast

 

Unless otherwise indicated, information in this prospectus concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third-party sources, as well as data from our internal research, and are based on such data and knowledge of our industry, which we believe to be reasonable. None of the independent industry publications used in this prospectus was prepared on our or our affiliates' behalf. We acknowledge our responsibility for all disclosures in this prospectus, but caution readers that we have not independently verified the underlying information in such publications and reports.

 

This prospectus also contains data related to the lingerie and sexual health and wellness products industry in the United States. These market data include estimates and projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data turn out to be incorrect, actual results may differ significantly from the projections. For example, the lingerie, sexual health and wellness products market may not grow at the rate projected by market data, or at all. In addition, the rapidly changing nature of the lingerie, sexual health and wellness products industry subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties.

 

USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $[___], assuming an initial public offering price of $[___] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriter exercises its over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $[___].  

 

A $1.00 increase (decrease) in the assumed initial public offering price of $[___] per share, would increase (decrease) the net proceeds from this offering by approximately $[___], assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 
31

 

We currently intend to use the net proceeds from this offering as follows: (i) approximately $38.2 million will be used for debt repayment purposes, comprised of the following categories of debt: (a) $27.0 million will be used to repay our Tranche A Term Loan (see table below); and (b) $ 11.2 million will be used to repay our Tranche B Term Loan (see table below); (ii) approximately $95,540 will be used to repay waiver fees ; (iii) approximately $1.5 million will be issued to upgrade our computer systems and software ; and (iv) approximately $5.2 million will be used for working capital and general corporate purposes. In order to fund future growth, we may seek to enter into a new senior debt facility, on terms more favorable than our current debt facility.

 

As of December 31, 2014, the amount, maturity date and term of each of our notes payable are as follows:

 

Notes Payable

 

Amount

 

Maturity Date

 

Interest Rate

 

Duration

 

Tranche A Term Loan

 

$27.0 million

 

December 27, 2015

 

12%

 

3 years

 

Tranche B Term Loan

 

$11.2 million

 

December 27, 2015

 

15%

 

3 years

 

Christals Seller Notes

 

$3.4 million

 

January 9, 2017

 

12%

 

4.25 years

 

Peekay Seller Notes

 

$9.3 million

 

December 31, 2016

 

9% on $6 million and 12% on $3.3 million

 

4 years

 

 

During 2014, we obtained three covenant waivers through amendments to our financing agreements with our secured lenders, dated March 31, 2014, September 30, 2014 and December 31, 2014 . These waivers cover covenant requirements through April 30, 2015. We expect that we will need additional covenant waivers in future periods. There can be no assurance that we will be able to obtain these or other waivers, or that we will continue to be in compliance with the terms and conditions of  our debt agreements.

 

We obtained a fourth covenant waiver to the Financing Agreement under the Fourth Amendment to the Financing Agreement, dated June 30, 2015, for the period ending June 30, 2015. 

 

Among other things, the Financing Agreement required: 

 

(1) that we maintain a certain leverage ratio for each period of four fiscal quarters ending on June 30, 2015 and September 30, 2015; and
(2) that we have liquidity of at least $1,500,000 at all times from June 30, 2015 through September 30, 2015 (the "Financial Covenants").

 

Pursuant to the Fourth Amendment, the lenders consented to, and waived any event of default relating to noncompliance with, the Financial Covenants, through September 30, 2015, subject to the following provisions: 

 

(1) if any of our or other borrowers' or guarantors' Obligations (as defined in the Financing Agreement) remain outstanding as of November 15, 2015, then we and they must satisfy:

 

(i) the original leverage ratio requirement under the Financing Agreement for the period of four fiscal quarters ending September 30, 2015 as set forth in Section 7.03(a) of the Financing Agreement, and
(ii) the liquidity test at the end of the fiscal quarter ending September 30, 2015 as set forth in Section 7.03(b) of the Financing Agreement; and

 

(2) we and the other borrowers and guarantors may not make certain Permitted Management Fee (as defined in the Financing Agreement) payments until the Financial Covenants have been satisfied and all Obligations of our Company and the other borrowers and guarantors and Commitments (as defined in the Financing Agreement) have been satisfied or terminated, but such Permitted Management Fees shall continue to accrue; and
(3) we agreed to pay to the Administrative Agent (as defined in the Financing Agreement) an exit fee (the "Exit Fee"), for the account of each consenting lender, in an amount equal to the sum of 0.25% of the aggregate principal amount of the outstanding loans of such consenting lender, calculated on each of (i) the 15th day of July 2015 and the 15th day of each calendar month thereafter (if any Obligations remain outstanding on such day), and (ii) the last day of July and the last day of each calendar month thereafter (if any Obligations remain outstanding on such day). The Exit Fee is nonrefundable and deemed fully earned as of the 15th day and last day of each calendar month for the Exit Fee that accrues on such day and until paid shall constitute "Obligations" that are secured by "Collateral" (as defined in the Financing Agreement). The Exit Fee is due on the earlier to occur of (A) the Final Maturity Date (as defined in the Financing Agreement) and (B) the date which all of the other Obligations are repaid or required to be repaid in full in cash.

 

After debt repayment and waiver fees, we anticipate using any remaining proceeds from this offering to continue to grow and invest in our business, including upgrading our computer systems and software, as well as make expenditures related to addressing compliance with U.S. public company requirements, including hiring additional personnel and investing in our corporate infrastructure.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

 

 
32

 

DIVIDEND POLICY

 

We have not declared or paid any cash dividends on our common stock, and we do not anticipate declaring or paying cash dividends for the foreseeable future. We are not subject to any legal restrictions respecting the payment of dividends, except that we may not pay dividends if the payment would render us insolvent. Any future determination as to the payment of cash dividends on our common stock will be at our Board of Directors' discretion and will depend on our financial condition, operating results, capital requirements and other factors that our Board of Directors considers to be relevant.

 

DETERMINATION OF OFFERING PRICE

 

The offering price of the common stock has been arbitrarily determined. The price does not bear any relationship to our assets, book value, historical earnings or net worth. No valuation or appraisal has been prepared for our business.

  

Although our common stock is eligible for quotation on the OTCBB, prior to this offering, there has been no active public market for our shares. The public offering price will be determined through negotiations between us and [______], or [______], as the underwriter. The factors to be considered in determining the public offering price may include our future prospects and those of our industry in general, sales, earnings and certain of our other financial operating information in recent periods, and the market prices of securities and certain financial and operating information of companies engaged in activities similar to those we engage in. The estimated public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. 

 

We cannot assure you that the public offering price will correspond to the price at which the shares will trade in the public market subsequent to the offering or that an active trading market for the shares will develop and continue after the offering.

 

DILUTION

 

If you invest in our common stock in this offering, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after giving effect to this offering.

 

Our historical net tangible book value as of June 30, 2015 was approximately $[___] million, or $[___] per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding as of June 30, 2015 .  

 

Our pro forma net tangible book value as of June 30, 2015 was $[___], or $[___] per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding as of June 30, 2015 .  

 

After giving effect to the sale of the shares in this offering at the assumed initial public offering price of $[___] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at  June 30, 2015 would have been approximately $[___], or $[___] per share. This represents an immediate increase in pro forma net tangible book value of approximately $[___] per share to our existing stockholders, and an immediate dilution of $[___] per share to investors purchasing shares of common stock in this offering.

 

 
33

 

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

 

The following table illustrates the per share dilution to investors purchasing shares in the offering:

 

Assumed initial public offering price per share

     

$

     

Historical net tangible book value per share as of  June 30, 2015

$

           

Pro forma net tangible book value per share as of  June 30,   2015

$

           

Increase in net tangible book value per share attributable to new investors

$

           

Pro forma net tangible book value per share after this offering

     

$

     

Dilution per share to new investors

     

$

     

 

If the underwriter exercises its over-allotment option in full, the pro forma as adjusted net tangible book value will increase to $[___] per share, representing an immediate dilution of $[___] per share to new investors, assuming that the initial public offering price will be $[___] per share, which is the midpoint of the range set forth on the cover page of this prospectus.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $[___] per share would increase (decrease) the pro forma as adjusted net tangible book value by $[___], the pro forma as adjusted net tangible book value per share by $[___] per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering by $[___] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

Shares Purchased

       

Total Consideration

       

Average PricePer Share

 
 

Number

     

Percentage

       

Amount

       

Percentage

   

Existing stockholders

         

%

   

$

           

%

   

$

   

New investors

                                         

Total

       

100

%

   

$

         

100

%

         

 

The number of shares of our common stock to be outstanding immediately after this offering as shown above assumes that all of the shares offered hereby are sold and is based on 3,582,470 shares of common stock issued and outstanding as of June 30, 2015. This number of shares does not include [___] shares of our common stock subject to the underwriters' over-allotment option, and also assumes no exercise of warrants that will be issued to the underwriter upon completion of this offering . If the underwriter's warrant had been outstanding and fully exercised as of June 30, 2015, net tangible book value per share after this offering would have been $[___] and total dilution per share to new investors would have been $[___], or [___]%, assuming no exercise of the over-allotment option.

 

CAPITALIZATION

 

The following table sets forth our capitalization, as of June 30, 2015 :  

 

 

·

on an actual basis;

     
 

·

on a pro forma basis to give effect to the sale of the shares of our common stock in this offering at the assumed initial public offering price of $[___] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.

 

 
34

 

You should consider this table in conjunction with our financial statements and the notes to those financial statements included elsewhere in this prospectus.

 

 

 

As of June 30, 2015

 

 

Actual

 

 

Pro Forma

 

Total assets

 

$ 50,139,441

 

 

 

-

 

Total liabilities

 

 

(58,445,859 )

 

 

-

 

Common stock, $0.0001 par value, 300,000,000 shares authorized, 3,582,470 shares issued and outstanding

 

 

358

 

 

 

-

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized, no shares outstanding

 

 

-

 

 

 

-

 

Additional paid-in capital, net of shareholder distributions

 

 

725,541

 

 

 

 

 

Retained earnings (deficit)

 

 

(9,032,317 )

 

 

 

 

Stockholders' equity

 

$ (8,306,418 )

 

$ -

 

  

A $1.00 increase or decrease in the assumed initial public offering price of $ [___] per share would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders' deficit on a pro forma as adjusted basis by approximately $[___] million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

 

The number of our shares of common stock shown above on a pro forma basis to be outstanding after this offering is based on (i) 3,582,470 shares of common stock issued and outstanding as of June 30, 2015, and (ii) [___] shares of common stock issued in this offering. The number excludes: (i) shares of our common stock that we may issue upon the underwriter's over-allotment option exercise; and (ii) shares of common stock underlying warrants that will be issued to the underwriter upon completion of this offering.

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our common stock is currently eligible to be quoted on the OTC Bulletin Board under the symbol "PKAY." However, there is currently no trading market for our common stock and there is no assurance that a regular trading market will ever develop. OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connecting dealers. OTC Bulletin Board issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.

 

Approximate Number of Holders of Our Common Stock

 

As of August 18 , 2015, there were approximately 33 holders of record of our common stock.  This number excludes the shares of our common stock owned by stockholders holding stock under nominee security position listings.

 

Dividend Policy

 

We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

  

Securities Authorized for Issuance under Equity Compensation Plans

 

We do not have in effect any compensation plans under which our equity securities are authorized for issuance and we do not have any outstanding stock options.

 

 
35

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion contains certain forward-looking information. See "Special Note Regarding Forward-Looking Statements and Market Data" above for certain information concerning those forward-looking statements. Our financial statements are prepared in U.S. dollars and in accordance with United States generally accepted accounting principles.

 

Overview

 

Based on our management's belief and experience in the industry, we believe we are a leading retailer of lingerie, sexual health and wellness products. Our company was founded in 1981 in Auburn, WA by a mother and daughter team with a focus on creating a comfortable and inviting store environment catering to women and couples. We are dedicated to creating both a place and attitude of acceptance and education for our customers. Today, our company is a leader in changing the perception of sexual wellness throughout the United States with 48 locations across 6 states. 

 

Our stores offer a broad selection of lingerie, sexual health and wellness products and accessories. We offer over 5,000 stock keeping units, or SKUs. We strive to create a visually inspiring environment at our stores and employ highly trained, knowledgeable sales staff, which ensures that our customers leave our stores enlightened by new information, great ideas and fun products.

 

Our mission is to provide a warm and welcoming retail environment for individuals and couples to explore sexual wellness.

 

Principal Factors Affecting our Financial Performance

 

Our operating results are primarily affected by the following factors:

 

 

·

Current economic conditions and their impact on customer spending levels;

     
 

·

Our current leverage ratio and minimum liquidity and our ability to continue to obtain waivers from our lenders as needed or to refinance our existing indebtedness.

     
 

·

Competition;

     
 

·

Effectiveness of our customer acquisition and retention marketing programs;

     
 

·

The sourcing and introduction of new products and brands;

     
 

·

Maintenance and/or enhancement of our current vendor relationships and product margins;

     
 

·

Our ability to respond on a timely basis to changes in consumer preferences and/or the marketplace;

     
 

·

The location, timing and number of new stores; and

     
 

·

Our ability to increase traffic, conversion and the average ticket value in our existing stores.

 

Results of Operations

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

The following table sets forth key components of our results of operations for the three months ended June 30, 2015 and 2014. 

 

 

 

Three Months Ended June 30, 2015  

 

 

Three Months Ended June 30, 2014

 

 

Amount  

(in thousands) 

 

 

Percentage of Revenue 

 

 

Amount  

(in thousands) 

 

 

Percentage of Revenue 

 

Net revenue  

 

$ 9,498

 

 

 

100.0

 

 

$ 8,925

 

 

 

100.0

 

Cost of goods sold  

 

 

3,486

 

 

 

36.7

 

 

 

2,996

 

 

 

33.6

 

Gross profit  

 

 

6,012

 

 

 

63.3

 

 

 

5,929

 

 

 

66.4

 

Selling, general & administrative expense 

 

 

5,357

 

 

 

56.4

 

 

 

5,092

 

 

 

57.0

 

Depreciation and amortization 

 

 

779

 

 

 

8.2

 

 

 

517

 

 

 

5.8

 

Operating income (loss) 

 

 

(124 )

 

 

(1.3 )

 

 

320

 

 

 

3.6

 

Interest expense and other 

 

 

1,663

 

 

 

17.5

 

 

 

1,661

 

 

 

18.6

 

Income tax expense 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net loss 

 

$ (1,787 )

 

 

(18.8 )

 

$ (1,341 )

 

 

(15.0 )

 

Net revenue. For the three months ended June 30, 2015, net revenue increased $0.6 million, or 6.4%, to $9.5 million, as compared to the same period in 2014. Our same store sales increased $0.5 million, or 5.3%, to $9.1 million, for the three months ended June 30, 2015 as compared to the same period in 2014. For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal year.

 

Gross profit. Gross profit for the three months ended June 30, 2015 was $6.0 million, an increase of $0.1 million or 1.4% over the same period in 2014. Gross profit, expressed as a percentage of net revenue, declined 310 basis points from 66.4% for the three months ended June 30, 2014 to 63.3% for the three months ended June 30, 2015, due to changes in product assortment associated with our revised media strategy, a reduction in the number of products in our private label program, and higher discounting and promotional activities in our new stores.

 

 
36

 

Selling, general and administrative expense. For the three months ended June 30, 2015, selling, general and administrative expenses totaled $5.4 million, an increase of $0.3 million over the same period in 2014. The increase includes operating expenses for the six new stores opened in 2014 and 2015, which totaled $0.6 million during the three months ended June 30, 2015, an increase of $0.3 million over 2014. We also increased our spend on advertising, marketing and merchandising materials during the second quarter of 2015 to promote our brand and capitalize on the 50 Shades of Gray movie and DVDrelease. General and administrative employee costs for the three months ended June 30, 2015 were flat as compared to the same period in 2014. 

 

Depreciation and amortization. Depreciation and amortization for the three months ended June 30, 2015 was $0.8 million, $0.3 million higher than for the same period in 2014, primarily due to increased depreciation associated with new store construction in 2014 and 2015, and an increase in the amortization of fees associated with our senior credit facility. 

 

Interest and tax expense. Interest expense for the three months ended June 30, 2015 and 2014 was $1.7 million in both years. No measurable income tax expense was recognized for the three months ended June 30, 2015 or 2014. 

 

Net loss. As a result of the foregoing, the net loss for the three months ended June 30, 2015 was $1.8 million as compared to a loss $1.3 million for the same period in 2014. 

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

The following table sets forth key components of our results of operations for the six months ended June 30, 2015 and 2014. 

 

 

 

Six Months Ended   June 30, 2015

 

 

Six Months Ended   June 30, 2014

 

 

 

Amount  

(in thousands) 

 

 

Percentage of Revenue 

 

 

Amount  

(in thousands) 

 

 

Percentage of Revenue 

 

Net revenue  

 

$ 21,203

 

 

 

100.0

 

 

$ 20,029

 

 

 

100.0

 

Cost of goods sold  

 

 

7,595

 

 

 

35.8

 

 

 

6,834

 

 

 

34.1

 

Gross profit  

 

 

13,608

 

 

 

64.2

 

 

 

13,195

 

 

 

65.9

 

Selling, general & administrative expense 

 

 

10,993

 

 

 

51.9

 

 

 

10,349

 

 

 

51.7

 

Depreciation and amortization 

 

 

1,546

 

 

 

7.3

 

 

 

979

 

 

 

4.9

 

Operating income 

 

 

1,069

 

 

 

5.0

 

 

 

1,867

 

 

 

9.3

 

Interest expense and other 

 

 

3,295

 

 

 

15.5

 

 

 

3,297

 

 

 

16.4

 

Income tax expense 

 

 

47

 

 

 

0.2

 

 

 

-

 

 

 

-

 

Net loss 

 

$ (2,273 )

 

 

(10.7 )

 

$ (1,430 )

 

 

(7.1 )

 

Net revenue . For the six months ended June 30, 2015, net revenue increased $1.2 million, or 5.9% to $21.2 million, as compared to the same period in 2014. Our same store sales increased $0.9 million, or 4.5%, to $20.03 million, for the six months ended June 30, 2015 as compared to the same period in 2014. For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal year. 

 

During fiscal year 2014 and the first six months of 2015, we opened six new stores. Revenue generated by these stores increased by $0.5 million or 182% for the six months ended June 30, 2015, as compared to the same period in 2014.  

 

Gross profit . Gross profit for the six months ended June 30, 2015 was $13.6 million, an increase of $0.4 million or 3.1% over the same period in 2014. Gross profit, expressed as a percentage of net revenue, declined 170 basis points from 65.9% for the six months ended June 30, 2014 to 64.2% for the six months ended June 30, 2015, due to changes in product assortment associated with our revised media strategy, a reduction in the number of products in our private label program, and higher discounting and promotional activities in our new stores..  

 

Selling, general and administrative expense. For the six months ended June 30, 2015, selling, general and administrative expenses totaled $11 million, an increase of $0.6 million over the same period in 2014. The increase includes operating expenses for the six new stores opened in 2014 and 2015, which totaled $0.6 million during the six months ended June 30, 2015, an increase of $0.3 million over 2014. We also increased our spend on advertising, marketing and merchandising materials by $0.4 million during the first six months of 2015 to promote our Valentine’s Day business and capitalize on the 50 Shades of Gray movie release. General and administrative employee costs for the six months ended June 30, 2015 were flat as compared to the same period in 2014. 

 

Depreciation and amortization . Depreciation and amortization for the six months ended June 30, 2015 was $1.5 million, $0.5 million higher than for the same period in 2014, primarily due to increased depreciation associated with new store construction in 2014 and 2015, and an increase in the amortization of fees associated with our senior credit facility.  

 

Interest and tax expense . Interest expense for the six months ended June 30, 2015 and 2014 was $3.3 million in both periods. No measurable income tax expense was recognized for the six months ended June 30, 2015 or 2014. 

 

Net loss . As a result of the foregoing, the net loss for the six months ended June 30, 2015 was $2.3 million, as compared to $1.4 million for the same period in 2014.

 

 
37

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

The following table sets forth key components of our results of operations for fiscal years ended December 31, 2014 and 2013.

 

 

 

Year Ended December 31, 2014

 

 

Year Ended December 31, 2013

 

 

 

Amount (in thousands)

 

 

Percentage of Revenue

 

 

Amount (in thousands)

 

 

Percentage of Revenue

 

Net revenue

 

$ 39,625

 

 

 

100.0

 

 

$ 39,449

 

 

 

100.0

 

Cost of goods sold

 

 

13,740

 

 

 

34.7

 

 

 

13,640

 

 

 

34.6

 

Gross profit

 

 

25,885

 

 

 

65.3

 

 

 

25,809

 

 

 

65.4

 

Selling, general & administrative expense

 

 

20,964

 

 

 

52.9

 

 

 

19,570

 

 

 

49.6

 

Depreciation and amortization

 

 

2,199

 

 

 

5.5

 

 

 

1,902

 

 

 

4.8

 

Operating income

 

 

2,722

 

 

 

6.9

 

 

 

4,337

 

 

 

11.0

 

Interest and other expense

 

 

6,702

 

 

 

16.9

 

 

 

6,681

 

 

 

16.9

 

Income tax expense

 

 

202

 

 

 

0.5

 

 

 

233

 

 

 

0.6

 

Net loss

 

$ (4,182 )

 

 

(10.5 )

 

$ (2,577 )

 

 

(6.5 )

 

Net revenue. For the year ended December 31, 2014, net revenue increased $0.2 million, or 0.4%, to $39.6 million, as compared to the year ended December 31, 2013. We opened five new stores in the Southern California market during 2014, which generated $0.7 million in net revenue. This revenue increase was partially offset by reduction in revenues generated in our Texas and Tennessee chain of $0.2 million and a $0.1 million reduction in our internet/wholesale business, as a result of changes made in the product assortment to align them with the rest of our stores. We also closed 2 stores during 2014, which lowered revenue by approximately $0.2 million.

 

Gross profit. Gross profit for the year ended December 31, 2014 was $25.9 million, an increase of $0.3% over the year ended December 31, 2013. Gross profit, expressed as a percentage of net revenue, declined 10 basis points from 65.4% in 2013 to 65.3% in 2014, due primarily to increased freight costs and promotional pricing associated with the liquidation of inventory from acquired stores and discounts offered during store opening events.

 

Selling, general and administrative expense. For the year ended December 31, 2014, selling, general and administrative expenses totaled $21.0 million, an increase of $1.4 million over the year ended December 31, 2013. The increase includes operating expenses for the five new stores opened in Southern California, which totaled $0.7 million during 2014. Preopening store and remodeling expenses were $0.3 million for the year ended December 31, 2014, an increase of $0.2 million over the year ended December 31, 2013. General and administrative employee costs for the year ended December 31, 2014 were $0.3 million higher than in 2013, primarily due to a headcount increase to support our new store growth initiative.

 

Depreciation and amortization. Depreciation and amortization for the year ended December 31, 2014 was $2.2 million, $0.3 million higher than the year ended December 31, 2013 primarily due to increased depreciation associated with new store construction in 2014, and an increase in the amortization of fees associated with our senior credit facility.

 

Interest and other expense and tax expense. Interest and other expense for the year ended December 31, 2014 was consistent year-on-year at $6.7 million , or 16.9% of revenue. Income tax expense was constant year-on-year at $0.2 million.  

 

Net loss. As a result of the foregoing, the net loss for the year ended December 31, 2014 was $4.2 million, as compared to $2.6 million for the year ended December 31, 2013.

 

Liquidity and Capital Resources

 

As of June 30 , 2015 , we had cash and cash equivalents of $ 0.5 million. The following table provides a summary of our net cash flows from operating, investing, and financing activities.

 

Cash Flow

 

 

 

Six Months Ended June 30, 

 

 

2015 

 

 

2014 

 

Net cash (used) in operating activities  

 

$ (591,809 )

 

$ (893,515 )

Net cash used in investing activities  

 

 

(110,236 )

 

 

(528,703 )

Net cash provided by financing activities  

 

 

105,472

 

 

 

126,080

 

Net (decrease) in cash and cash equivalents  

 

 

(596,573 )

 

 

(1,296,138 )

Cash and cash equivalents at beginning of the year  

 

 

1,126,887

 

 

 

3,308,498

 

Cash and cash equivalent at end of the year  

 

$ 530,314

 

 

$ 2,012,360

 

 

Operating activities. Operating activities consist of net income, adjusted for certain non-cash items, including depreciation and amortization, and the effect of changes in working capital. During the six months ended June 30, 2015, we used $0. 6 million in cash from operating activities, to fund an operating cash loss of $0.7 million . During the same period in 2014, we used $0. 9 million in cash from operating activities, primarily to fund an operating cash loss of $0. 5 million and a reduction in accounts payable and accrued expenses of $0.5 million

 

Investing activities. We have used cash primarily to make acquisitions, and to remodel and build new stores. During the six months ended June 30, 2015, we used $0.1 million for leasehold improvements and equipment for our new store in Valencia, California. During the same period in 2014, we used $0. 5 million for new store construction, remodels, and equipment purchases.  

 

Financing activities. During the six months ended June 30, 2015 and 2014, we neither used nor generated cash from financing activities.

 

 
38

 

Loan Commitments

 

As of June 30 , 2015 , the amount, maturity date and term of each of our notes payable are as follows:

 

Notes Payable

 

Amount*

 

Maturity Date 

 

Interest Rate

 

 

Duration

Tranche A Term Loan 

 

$27.0 million 

 

December 27, 2015

 

 

12

%

 

3 years 

Tranche B Term Loan 

 

$11.2 million 

 

December 27, 2015

 

 

15

%

 

3 years 

Christals Seller Notes 

 

$3.4 million 

 

January 9, 2017

 

 

12

%

 

4.25 years 

Peekay Seller Notes 

 

$9.3 million 

 

December 31, 2016

 

9% on $6 million and 12% on $3.3 million 

 

 

4 years 

 

During the year ended December 31, 2014, we obtained three covenant waivers through Amendments to the Financing Agreements dated March 31, 2014, September 30, 2014 and December 31, 2014 , which cover covenant requirements through April 30, 2015. The Company agreed to pay waiver fees totaling $955,398. A total of $191,080 in fees was paid in cash during 2014; $573,239 and $95,540 was paid in cash to the lenders on February 20, 2015 and March 31, 2015, respectively. The remaining $95,540 is due at loan maturity

 

We obtained a fourth covenant waiver to the Financing Agreement under the Fourth Amendment to the Financing Agreement, dated June 30, 2015, for the period ending June 30, 2015. 

 

Among other things, the Financing Agreement required: 

 

(1) that we maintain a certain leverage ratio for each period of four fiscal quarters ending on June 30, 2015 and September 30, 2015; and
(2) that we have liquidity of at least $1,500,000 at all times from June 30, 2015 through September 30, 2015 (the "Financial Covenants").

 

Pursuant to the Fourth Amendment, the lenders consented to, and waived any event of default relating to noncompliance with, the Financial Covenants, through September 30, 2015, subject to the following provisions: 

 

(1) if any of our or other borrowers' or guarantors' Obligations (as defined in the Financing Agreement) remain outstanding as of November 15, 2015, then we and they must satisfy

 

(i) the original leverage ratio requirement under the Financing Agreement for the period of four fiscal quarters ending September 30, 2015 as set forth in Section 7.03(a) of the Financing Agreement, and
(ii) the liquidity test at the end of the fiscal quarter ending September 30, 2015 as set forth in Section 7.03(b) of the Financing Agreement; and

 

(2) we and the other borrowers and guarantors may not make certain Permitted Management Fee (as defined in the Financing Agreement) payments until the Financial Covenants have been satisfied and all Obligations of our Company and the other borrowers and guarantors and Commitments (as defined in the Financing Agreement) have been satisfied or terminated, but such Permitted Management Fees shall continue to accrue; and
(3) we agreed to pay to the Administrative Agent (as defined in the Financing Agreement) an exit fee (the "Exit Fee"), for the account of each consenting lender, in an amount equal to the sum of 0.25% of the aggregate principal amount of the outstanding loans of such consenting lender, calculated on each of (i) the 15th day of July 2015 and the 15th day of each calendar month thereafter (if any Obligations remain outstanding on such day), and (ii) the last day of July and the last day of each calendar month thereafter (if any Obligations remain outstanding on such day). The Exit Fee is nonrefundable and deemed fully earned as of the 15th day and last day of each calendar month for the Exit Fee that accrues on such day and until paid shall constitute "Obligations" that are secured by "Collateral" (as defined in the Financing Agreement). The Exit Fee is due on the earlier to occur of (A) the Final Maturity Date (as defined in the Financing Agreement) and (B) the date which all of the other Obligations are repaid or required to be repaid in full in cash.

 

We expect that we will need additional covenant waivers in future periods. There can be no assurance that we will be able to obtain these or other waivers, or that we will continue to be in compliance with the terms and conditions of our debt agreements.  

 

Obligations Under Material Contracts

 

Except with respect to the loan obligations disclosed above, and the minimum amounts due under various lease arrangements for our stores, corporate headquarter and warehouse (which are more fully described in Note 5 of each of the audited and unaudited consolidated financial statements contained herein), we have no material obligations to pay cash or deliver cash to any other party.

 

Impact of Inflation and Changing Prices

 

Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future could have an adverse effect on our ability to maintain current levels of gross profit and could results in an increase in operating expenses, as a percentage of revenue, if we cannot increase our retail prices to cover these increased costs. In addition, inflation could materially increase the interest rates that we are able to obtain, if we were to refinance our debt or increase our borrowings.

 

Off-Balance Sheet Arrangements

 

We do not have any 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 or capital expenditures or capital resources that is material to an investor in our securities.

 

 
39

 

Seasonality

 

Our business is subject to seasonal fluctuation. Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season. To a lesser extent, our business is also affected by Valentine's Day. Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.

 

Going Concern

 

Our auditor has raised substantial doubt about our ability to continue as a going concern.  Our financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. During 2013 and 2014, we incurred net losses of $2,577,263 and $ 4,181,890 , respectively, largely as a result of interest expense on our outstanding debt of $6.6 million annually, which exceeds the operating profits generated through the operations of its business. Approximately $38.2 million in senior secured debt matures on December 31, 2015, and we do not have the resources necessary to pay this debt as it comes due. Our ability to continue our operations and execute our business plan is dependent on its ability to refinance this debt and/or to raise sufficient capital to pay this debt and other obligations as they come due (or are extended through a refinancing) and to provide sufficient capital to operate our business as contemplated. Management is in the process of exploring refinancing options, and raising additional equity capital through either private, public market or PIPE transactions.  

 

Emerging Growth Company

 

We qualify as an "emerging growth company" under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

 

·

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

     
 

·

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

     
 

·

submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay" and "say-on-frequency;" and

     
 

·

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO's compensation to median employee compensation.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

 
40

 

We will remain an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

The Company's most significant areas of estimation and assumption are:

 

 

·

determination of the appropriate amount and timing of markdowns to clear unproductive or slow-moving retail inventory and overall inventory obsolescence;

     
 

·

estimation of future cash flows used to assess the recoverability of long-lived assets,

 

Cash and Cash Equivalents

 

All short-term investments with original maturities of three months or less at date of purchase are considered cash equivalents.

 

 
41

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. The Company maintains their cash in bank deposit accounts at high credit quality financial institutions. At times, the balances maintained with Wells Fargo Bank exceed federally insured limit of $250,000 per accountholder. The Company also maintains a certain amount of cash on hand at the retail store locations. The Company has not experienced any significant losses with respect to its cash.

 

Receivables

 

Receivables consist primarily of amounts receivable from vendors and a wholesale trade account. These receivables are computed based on provisions of the vendor agreements in place and the Company's completed performance. The Company's vendors are primarily U.S. based producers of consumer products, from whom the Company purchases resale product inventory. The Company does not require collateral on its receivables and does not accrued interest. Credit risk with respect to receivables is limited due to the nature of the relationship with the vendors.

 

Inventory

 

Inventory consists of merchandise acquired for resale and is valued at the lower of cost or market, with cost determined on a FIFO basis, and includes costs to purchase and distribute the goods, net of any markdowns or volume discounts. The Company maintains reserves for potential obsolescence and shrinkage.

 

Vendor Allowances

 

The Company receives allowances from vendors in the normal course of business, including markdown allowances, purchase volume discounts and rebates, and other merchandise credits. Vendor allowances are recorded as a reduction of the vendor's product cost and are recognized in cost of sales as the product is sold.

 

Fair Value of Financial Instruments

 

The Company's management believes the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value due to their short maturity.

 

Long-Lived Assets

 

Property and equipment are stated at cost. Maintenance and repair costs are charged to expense as incurred. Depreciation is provided using the straight-line method with estimated useful lives as indicate below:

 

Furniture and equipment 

7 years

Software

3 years

Computer equipment

5 years

Leasehold improvements

15 years

 

Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the related assets or the leases term, and this amortization is included in depreciation.

 

 
42

 

Deferred Rent

 

Many of the Company's operating leases contain predetermined fixed increases of the minimum rental rate during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the expected lease term and records the difference between the amounts charged to expense and the rent paid as deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated for rent payments or the date the Company takes possession of the leased space. As part of many lease agreements, the Company receives construction allowances for landlords for tenant improvements. These leasehold improvements made by the Company are capitalized and amortized over the shorter of the lease term or 15 years. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted cash flows. If long-lived assets are impaired, an impairment loss is recognized and is measured as the amount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future undiscounted cash flows from operating activities requires significant estimates of factors that include future sales growth and gross margin performance. Management believes they have appropriately determined future cash flows and operating performance; however, should actual results differ from those expected, additional impairment may be required.

 

Goodwill

 

Goodwill represents the excess of cost over the fair value of net assets acquired using acquisition accounting and is not amortized.

 

Under FASB ASC 350, Intangibles - Goodwill and Other ("ASC 350"), goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives.

 

On at least an annual basis, management assesses whether there has been any impairment in the value of goodwill by first comparing the fair value to the net carrying value. If the carrying value exceeds its estimated fair value, a second step is performed to compute the amount of the impairment. An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill impairment testing are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.

 

Finance Costs, Net

 

The Company is party to debt agreements that contain non-interest fees and expenses, such as underwriting and covenant waiver fees. These fees are accrued as incurred and amortized over the life of the financing agreement.

 

Revenue Recognition

 

The Company derives revenues from sale of merchandise and upon the following: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.

 

 
43

 

Cost of Goods Sold

 

Cost of goods sold consists primarily of the merchandise cost of products sold, including inbound freight, duties and packaging

 

Advertising / Marketing

 

Advertising costs are charged to expense when incurred. The Company's advertising method is primarily direct mail, media (print, radio, television, and theater advertisements), billboards, and customer recommendations.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses includes payroll, bonus and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs; and general expenses for the operation of our retail stores and corporate offices; insurance expense; professional and management services and fees. It also includes store pre-opening and remodeling expenses.

 

Recent Accounting Pronouncements

 

See Note 2 to each of the audited and unaudited consolidated financial statements of Christals Acquisition included elsewhere in this prospectus. 

 

OUR BUSINESS

 

Overview

 

Based on our management's belief and experience in the industry, we believe we are a leading retailer of lingerie, sexual health and wellness products. Our company was founded in 1981 in Auburn, WA by a mother and daughter team with a focus on creating a comfortable and inviting store environment catering to women and couples. We are dedicated to creating both a place and attitude of acceptance and education for our customers. Today, our company is a leader in changing the perception of sexual wellness throughout the United States with 48 locations across 6 states.  

 

Our stores offer a broad selection of lingerie, sexual health and wellness products and accessories. We offer over 5,000 stock keeping units, or SKUs. We strive to create a visually inspiring environment at our stores and employ highly trained, knowledgeable sales staff, which ensures that our customers leave our stores enlightened by new information, great ideas and fun products.

 

Our mission is to provide a warm and welcoming retail environment for individuals and couples to explore sexual wellness.

 

 
44

 

Our Corporate History and Background

 

We were incorporated in the State of Nevada on October 30, 2013 under the name Dico, Inc.

 

At the close of business on December 31, 2014, we entered into the Exchange Agreement with Christals Acquisition and its members, pursuant to which we acquired 100% of the issued and outstanding equity capital of Christals Acquisition in exchange for 2,524,870 shares of our common stock, par value $0.0001 per share, which constituted 70.5% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Exchange Agreement. In addition, at the closing of the share exchange, Christals paid us $350,000 in cash. This cash was immediately used for the following purposes (i) to pay down all of our outstanding liabilities, (ii) $308,436 of this cash was used as a partial payment toward the redemption of a total of 15,000,000 of our restricted shares from David Lazar, our former Chief Operating Officer and Secretary, pursuant to a redemption agreement that we entered into with Mr. Lazar on December 31, 2014, and (iii) to satisfy aggregate purchase price payable to holders of a total of 1,052,600 shares of our common stock, which shares were transferred to the members of Christals Acquisition as a condition to the closing of the exchange transaction. In addition to receiving the $308,436 payment for the redemption of his 15,000,000 shares of our common stock, we also transferred to Mr. Lazar our remaining inventory of loose diamonds pursuant to a bill of sale and assignment agreement as the balance of the consideration for the redemption of his shares. Immediately following the closing of the exchange transaction and the related transactions described above, the former members of Christals Acquisition and certain equity owners of such members who immediately received distributions of such securities, became the owners of 3,577,470 shares of our common stock, constituting 99.9% of our issued and outstanding common stock as of such closing. For accounting purposes, the exchange transaction with Christals Acquisition was treated as a reverse acquisition, with Christals Acquisition as the acquirer and Peekay Boutiques, Inc. as the acquired party.

 

As a result of our acquisition of Christals Acquisition, we now own all of the issued and outstanding equity capital of Christals Acquisition, a holding company, which in turn owns all of the equity capital of Peekay Acquisition and its several subsidiaries, which are engaged in the retail sale of lingerie, sexual health and wellness products.

  

Christals Acquisition was formed on January 3, 2012 for the purpose of acquiring all of the equity interests in each of the Christals Stores. The Christals Stores were comprised of several limited liability companies that operated as a retailer of lingerie, sexual health and wellness products. The acquisition of the Christals Stores was consummated on October 9, 2012. Thereafter, on December 31, 2012, Christals Acquisition, through its indirect subsidiary, Peekay SPA, acquired Peekay and ConRev, both of which operated as retailers of lingerie, sexual health and wellness products. Peekay was incorporated in the state of Washington on November 5, 1982. ConRev was incorporated in the state of Washington on December 29, 2004.

  

On January 23, 2015, we changed our name to Peekay Boutiques, Inc. to more accurately reflect our new business.

 

 
45

 

Our Corporate Structure

 

All of our business operations are conducted through our several operating subsidiaries. The chart below presents our corporate structure as of the date of this prospectus:

 

 

Our principal executive offices are located at 901 West Main Street, Suite A, Auburn, Washington 98001. The telephone number at our principal executive office is 1-800-447-2993.

 

 
46

 

Our Industry

 

Based on our management's belief and experience in the industry, we are a specialty retailer at the forefront of the growing mainstream acceptance of sexual wellness products . Our management believes that these products represent a $1 trillion market and that it is one of the fastest growing market segments . Based on our management's belief and experience in the industry, the rapid growth of this consumer sector is driven by the influence that the aging of the population of baby boomers has on the current consumer market and the increased pursuit across all ages of activities and behaviors that promote longevity and quality of life. Based on our management's belief and experience in the industry, retail in this sector is highly fragmented and sexual health and wellness segment is just coming into focus. 

 

Based on our management's belief and experience in the industry, there is a strong demand among U.S. consumers for sexual wellness products and we predict significant growth into the future. 

 

Based on our management's belief and experience in the industry, intimate care products are another rapidly growing product category under the sexual health and wellness segment. 

 

Based on our management's belief and experience in the industry, the increased acceptance of this sector by shoppers of all ages, especially women, has led to retailers serving the health and wellness segment to give these items more visible shelf locations. Another important factor in the growing mainstream acceptance of sexual wellness products is the change in attitudes among major publications. National periodicals such as Men's Health, Rolling Stone, Redbook, Maxim and Cosmopolitan regularly feature articles and accept advertising for vendors such as Trojan, Durex, Liberator and Lelo. Cable television is also beginning to echo the trends of sexual health and wellness in advertising by Trojan, Durex and Adam and Eve and programming like Sex and the City, Two Broke Girls, Two and a Half Men, Dr. Oz, Oprah and regular and repeat exposure in reality-based programming.  

 

Our Competitive Strengths

 

Based on our management's belief and experience in the industry, the following competitive strengths enable us to compete effectively in and capitalize on the growing lingerie, sexual health and wellness products market. 

 

 

·

Niche dominance. Based on our management's experience in the industry, w e believe that we are the dominant brand in the lingerie and sexual health and wellness market, recognized for offering the highest quality products in a bright and comfortable store.

     
 

·

Our unique customer experience. We combine top-of-the-line products, value and convenience with the distinctive environment and experience of a specialty retailer. Our well-trained sales personnel provide customized advice tailored to our customers' needs to ensure that customers walk out of our stores enlightened with new information, great ideas and fun products. We believe that our customer service strategy, convenient locations and attractive store design combine to create a unique shopping experience.

     
 

·

Strong vendor relationships across product categories. We have strong, active relationships with over 70 vendors. We believe the scope of these relationships, which have taken years to develop, creates a significant impediment for other retailers to replicate our model. We work closely with our vendors to market both new and existing brands in a collaborative manner.

     
 

·

Experienced Management Team. Our management team has over 150 years of combined experience in the retail market.

 

 
47

 

Our Growth Strategy

 

We will strive to be a leading retailer of lingerie, sexual health and wellness products by pursuing the following growth strategies:

  

 

·

Retail expansion strategy: In 2013, we re-engineered our new store design and layout to reflect our new retail concept, and in 2014 we began our new store expansion in earnest with the opening of five new stores.  We have used these new stores to test and adjust the concept and new site selection criteria and process, and are now positioned to ramp up our new store buildout plans.  We believe our new stores now feature d cor aligned with the shopping preference of today's modern women and couples. This foundation will allow us to scale our new store openings from five in 2014 to up to 50 or more stores on an annual basis in the future, if desired.  As we increase our new store openings, we will need to add two additional headcount to our general and administrative expenses, to focus solely on site selection, store construction and maintenance, and will add one District Manager for every ten stores added.Each new store requires an initial cash outlay of approximately $260,000, for store buildout , fixture expenditures, initial inventory load-in and pre-opening expenses.

     
 

·

Online retail expansion: We believe that the creation of a stronger online presence and more targeted focus on e-commerce and omni-channel retail will result in growth opportunities for our business. Increased focus on e-commerce will provide additional brand recognition and awareness for our brick and mortar stores.

     
 

·

Expansion of private label business: We launched our SuteraTM Toys private label brand in 2012 and believe that it has been well-received by our customers. We plan to build brand recognition through SuteraTM print and online ads and to feature SuteraTM products in physical and online retail stores.

     
 

·

Acquisition opportunities: Our market is primarily made up of small, regional players and represents a significant opportunity for expansion of store footprint through both greenfield store development in new markets and targeted acquisitions. Many regional and e-commerce companies exist both domestically and internationally. Acquisitions would allow us to quickly expand our geographic footprint into new and adjacent markets.

 

Store Design and Operations

 

Our stores are designed and built to appeal to a mainstream customer base. Exterior signage is designed, constructed and installed by professional signage partners. Signage and logos are visible, well-lit and easy to read. The entrance to our stores typically consists of glass windows featuring high-end lingerie displays coordinated by our corporate visual merchandising department. Every detail of our stores is intended to convey a welcoming, open and friendly shopping environment.

 

We have engaged an architectural firm to develop a brand new retail store design. The all-female design team has decades of experience in retail store design and execution. The new store layout is designed to flourish in the highest-end shopping centers with its fun, welcoming and open atmosphere. With an energetic color palette and dynamic lighting, the new store design is aligned with the shopping preferences of today's mainstream women and couples. Our new prototype has currently been rolled out at five locations in California, namely, North Hollywood, San Bernardino, Santa Monica, Palmdale and Northridge. In March 2015, we opened our newest store in Valencia, California.

 

Merchandise

 

We employ a seven-member merchandising team responsible for product sourcing, vendor negotiations and relationship management, purchasing, planning and analysis, as well as visual merchandising. We utilize "trend-right" in-store displays, which are custom-made, feature tables designed to show elegant collections of seasonal merchandise. Our merchandising philosophy is focused on understanding our customers' needs.

 

We offer our customers a variety of wellness- and sexual health-related products. Products are designed for women and couples to enhance their sexual satisfaction and meet their broad range of expectations. We offer a variety of quality products ranging from entry-level price points to premium, high-end brands. We have over 5,000 SKUs available ranging from $1 condoms to $265 vibrators. Seasonally, new products represent 20-25% of our overall product assortment. In addition to our broad retail brand portfolio, we also provide SuteraTM private label merchandise. As part of our change in merchandising strategy to a "wellness" focus, we have minimized our visual category, which constitutes video sales (a lower-margin product not targeted at our key demographic).

 

 
48

 

During the fiscal year ended December 31, 2014, our breakdown of sales by product category was as follows:

 

 

·

 

Sales of personal items constituted approximately 47% of our sales. These items include massagers, vibrators, personal care and restraints, including brands such as Jimmy Jane, Pipedream, We Vibe and SuteraTM Toys.

     
 

·

 

Sales of gift items constituted approximately 37% of our sales. These items include personal lubricants, apothecary, candles, condoms and sensitizers and desensitizers, including brands such as Crazy Girl, Kamasutra, Earthly Body and System Jo.

     
 

·

 

Sales of lingerie constituted approximately 16% of our sales. Lingerie includes a broad range of sleepwear, bodystockings, clubwear, costumes, corsets, babydolls, hosiery and panties, including brands such as Dreamgirl, Coquette, Escante and Rene Rofe.

 

Marketing and Advertising

 

We market our retail stores through a variety of channels, including billboards, direct mail, radio, interactive and social media and grassroots events. All new stores are allotted a special marketing budget dedicated to a grand opening event. We have an integrated marketing plan that extends from out-of-store to in-store elements, including posters, signage and displays created by a professional in-house design staff.

 

Store Locations

  

We select geographic areas and store sites on the basis of demographic information, the quality and nature of neighboring tenants, store visibility and location accessibility. We seek to locate stores primarily in or near centers with major national brands and regional brands such as Target, Walgreens, TJ Maxx, Sally Beauty Supply, Starbucks and others. Based on our management's belief and experience in the industry, our customer demographics also align well with those of Nordstrom, Macy's and other higher-end specialty retailers.

  

We balance our store expansion between new and existing marketplaces. In our existing marketplaces, we add stores as necessary to provide additional coverage. In new marketplaces, we generally seek to expand in geographically contiguous areas to leverage our experience. We believe that our knowledge of local marketplaces is an important part of our success.

 

 
49

 

The following table provides a history of our store count during the last two fiscal years:

 

    Fiscal Year Ended December 31,  
   

2014

   

2013

 

Stores open at beginning of period

   

44

     

42

 

Net store openings during period

   

3

     

1

 

Stores acquired during period

   

-

     

1

 
                 

Stores open at end of period

   

47

     

44

 

 

On March 23, 2015, the Company opened its newest retail store in Valencia, California.

 

Competition

 

Our major competitors for our lingerie, sexual health and wellness products include Adam & Eve, Ann Summers, Pure Romance, Pleasure Chest, Kiss & Tell and Romantix. For our lingerie products, we also compete with traditional department stores such as Macy's and Nordstrom and specialty stores such as Victoria's Secret. We also compete with the online businesses of the aforementioned retailers, as well as pure play e-commerce businesses such as Amazon. Our competitive advantages are the quality and assortment of our merchandise and services, our value proposition, the quality of our customers' shopping experience brought about as the result of our knowledgeable and welcoming sales personnel and the convenience of our stores and website as a one-stop destination for lingerie, sexual health and wellness products.  

 

Customer Service

  

We strive to complement our extensive merchandise selection and innovative store design with superior customer service. We actively recruit individuals with significant knowledge and experience in the field of lingerie, sexual health and wellness products.We try to ensure that our customers walk out of our stores enlightened with new information, great ideas and fun products. We seek individuals with retail experience because we believe their general retail knowledge can be leveraged in the lingerie, sexual health and wellness products industry. We believe that employees' knowledge of the products and ability to explain the advantages of the products increases sales and that their prompt, knowledgeable service fosters the confidence and loyalty of customers and differentiates our business from other professional retailers of lingerie, sexual health and wellness products. Our employees are trained to foster a warm and welcoming retail environment for individuals and couples to explore sexual wellness. We believe that this attitude of acceptance and education for consumers sets us apart from our competitors. 

  

We emphasize product knowledge during initial training as well as during ongoing training sessions, with programs intended to provide new associates and managers with significant training. The training programs encompass operational and product training and are designed to increase employee and store productivity. Store employees are also required to participate in training on an ongoing basis to keep up-to-date on new products and operational practices.

 

 
50

 

Most of our stores are staffed with a store manager, assistant store manager and two or three part-time associates. A district manager, who reports directly to the Vice President of Retail, supervises the operations of each store.

 

Relationships with Vendors

 

We employ a variety of vendors with no single vendor representing more than 10% of our total purchases. We maintain close relationships with our domestic and foreign vendors. We believe that our broad store footprint and geographic reach provides us with an ability to form long-standing relationships with suppliers. We source more than 85% of our products directly from U.S. based companies. Our private label brand, SuteraTM , constitutes about 6% of our sales and is sourced from manufacturers in China. We believe that our relatively large industry presence allows us privileged access to premium factories resulting in a reliable and responsive supply chain.

 

Top 20 Vendors

(#s are in thousands)

 

Vendor

 

2014

   

2013

   

% of 2014 Purchases

 

Vendor # 1

 

$

1,050

     

490

     

8.1

%

Vendor # 2

   

802

     

380

     

6.2

%

Vendor # 3

   

765

     

705

     

5.9

%

Vendor # 4

   

747

     

688

     

5.8

%

Vendor # 5

   

708

     

589

     

5.5

%

Vendor # 6

   

569

     

300

     

4.4

%

Vendor # 7

   

559

     

542

     

4.3

%

Vendor # 8

   

427

     

382

     

3.3

%

Vendor # 9

   

403

     

135

     

3.1

%

Vendor # 10

   

398

     

224

     

3.1

%

Vendor # 11

   

319

     

144

     

2.5

%

Vendor # 12

   

306

     

173

     

2.4

%

Vendor # 13

   

306

     

291

     

2.4

%

Vendor # 14

   

262

     

150

     

2.0

%

Vendor # 15

   

262

     

328

     

2.0

%

Vendor # 16

   

236

     

137

     

1.8

%

Vendor # 17

   

228

     

205

     

1.8

%

Vendor # 18

   

221

     

217

     

1.7

%

Vendor # 19

   

214

     

150

     

1.6

%

Vendor # 20

   

209

     

187

     

1.6

%

   

$

8,993

   

$

6,419

     

69.3

%

 

Products are purchased from these vendors on an at-will basis or under contracts which can be terminated without cause upon 90 days' notice or less or expire without express rights of renewal. Such manufacturers could discontinue sales to us at any time or upon short notice. If any of these suppliers discontinued selling or were unable to continue selling to us, there could be a material adverse effect on our business and results of operations.

 

 
51

 

As is typical in the distribution businesses, relationships with vendors are subject to change from time to time. Changes in our relationships with vendors occur often, and could positively or negatively impact our net sales and operating profits. Please see Item 1A "Risk Factors-Risks Related to our Business-We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us." However, we believe that we can be successful in mitigating negative effects resulting from unfavorable changes in the relationships between us and our vendors through, among other things, the development of new or expanded vendor relationships.

 

Management Information Systems

 

Our management information systems provide order processing, accounting and management information for the marketing, distribution and store operations functions of our business. The ERP functionality is built on the Microsoft Dynamics platform with custom add-ons from certified solutions providers. The information gathered by the ERP supports automatic replenishment of in-store inventory and provides support for product purchase decisions. Please see Item 1A "Risk Factors- Risks Related to our Business-We are subject to risks relating to our information technology systems, and any failure to adequately protect our critical information technology systems could have a material adverse effect on our operations."

 

Trademarks and Other Intellectual Property Rights

 

Our trademarks, certain of which are material to our business, are registered or legally protected in the U.S. Together with our subsidiaries, we own 10 trademark registrations in the U.S. We also rely upon trade secrets and know-how to develop and maintain our competitive position. We protect intellectual property rights through a variety of methods, including reliance upon trademark, patent and trade secret laws and confidentiality agreements with many vendors, employees, consultants and others who have access to our proprietary information. The duration of our trademark registrations is generally 2 years.

 

Regulation

 

We are subject to a wide variety of laws and regulations, which historically have not had a material effect on our business. For example, in the U.S., most of the products sold and the content and methods of advertising and marketing utilized are regulated by a host of federal agencies, including, in each case, one or more of the following: the Food and Drug Administration, or FDA, the Federal Trade Commission, or FTC, and the Consumer Products Safety Commission. Since we are a retailer (and not a manufacturer) of these products, responsibility for compliance generally falls upon the manufacturer. In marketplaces outside of the U.S., regulation is also comprehensive and focused upon product labeling and safety issues.

 

 
52

 

Employees

 

As of December 31, 2014, we had a total of 321 employees, 137 of whom are full-time employees. The following table sets forth the number of our full-time employees by function.

 

Function

 

Number of Employees

 

Retail Sales

   

90

 

Retail Management & Support

   

9

 

Warehousing & Distribution

   

10

 

Retail Marketing and E-commerce

   

10

 

Merchandising and Inventory Management

   

5

 

Accounting, Payroll and Benefits Administration

   

4

 

IT Support

   

3

 

Loss Prevention

   

3

 

Executive Management

   

2

 

Maintenance

   

1

 

Total

   

137

 

 

None of our employees belong to a union or are a party to any collective bargaining or similar agreement. We consider our relationships with our employees to be good.

 

Description of Property

 

All of our retail stores and our corporate offices are leased or subleased. Our retail stores are predominantly located in convenient, high-traffic, locations such as strip centers and power centers. Our typical store is approximately 3,500 square feet. Most of our retail store leases provide for a fixed minimum annual rent and generally have a five-year initial term with options for two or three extension periods of five or three years each, exercisable at our option. As of December 31, 2014, we operated 47 retail stores in 6 states, as shown in the table below:

 

State

 

Number of Stores

 

Washington

   

20

 

California

   

16

 

Texas

   

5

 

Tennessee

   

3

 

Oregon

   

2

 

Iowa

   

1

 

Total:

   

47

 

 

Our principal executive office is located at 901 West Main Street, Suite A, Auburn, Washington 98001. The lease for the executive office expires on March 31, 2016. We have a total of 16,430 square feet of space at our executive office.

 

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

 

Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

 
53

 

Emerging Growth Company Status

 

We qualify as an "emerging growth company" under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

 

·

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

     
 

·

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

     
 

·

submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay" and "say-on-frequency;" and

     
 

·

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO's compensation to median employee compensation.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

 
54

 

MANAGEMENT

 

Directors and Executive Officers

  

The following sets forth information about our directors and executive officers as of the date of this prospectus:

  

NAME

 

AGE

 

POSITION

Lisa Berman

 

61

 

Chief Executive Officer and President

Janet Mathews

59

Chief Financial Officer, Treasurer and Secretary

Bob Patterson

 

52

 

Chief Operating Officer

Martin Walker

 

44

 

Vice President, Marketing and Visual Merchandising

David Leigh

 

50

 

Vice President, Retail

George Williams

 

59

 

Vice President, Merchandising and Inventory

Ellery W. Roberts

 

45

 

Chairman

Edward Tobin

 

58

 

Director

David Aho

 

32

 

Director

 

Lisa Berman. Ms. Berman became our Chief Executive Officer and President after the close of business on December 31, 2014, when we completed our reverse acquisition of Christals Acquisition. Prior to becoming our Chief Executive Officer and President, from August 2012 Ms. Berman was the Founder and Principal of Insights, a consulting business she established in 2005 to focus on assisting businesses in growth, turnaround and investing activities, and, from 2013-2014, provided advisory services to the Board of Directors of Christals Acquisiton. During and prior to her time with Insights, she held contract executive positions as well as advised and consulted on multifaceted businesses. From July 2008 to August 2012, Ms. Berman was the Chief Executive Officer and Director of Jimmyjane, a multi-channel design and manufacturing startup leading sexual health and wellness into the mainstream. Ms. Berman left the Chief Executive Officer role at Jimmyjane in August 2012, and maintained the Director role through transition until September 2013. Prior to Jimmyjane, Ms. Berman held a Chief Executive Officer role at Hallmark Cards, The Picture People, and executive roles for The Limited, Pottery Barn, Guess? (NYSE: GES), and Victoria's Secret. Ms. Berman has spent over 20 years in the retail industry specializing in high growth, and turnaround experience with specialty consumer brands. During her career, she has opened hundreds of retail stores and has demonstrated a unique talent to replicate the distinct brand experience in each location while defining the store environment with a strong focus on the sales organization to be customer-centric. Ms. Berman has been an advisor to Christal's Acquisition, since 2013.

  

Janet Mathews. Ms. Mathews became our Chief Financial Officer, Treasurer and Secretary on December 31, 2014, when we completed our reverse acquisition of Christals Acquisition. Ms. Mathews has also been the Chief Financial Officer of our subsidiary, Christals Acquisition, since April 2014. Ms. Mathews has over 15 years of experience as a public and private company Chief Financial Officer, specializing in direct to consumer retail and e-commerce businesses, operating in the wellness/healthy living and lifestyle sectors. Prior to joining Christals Acquisition, Ms. Mathews was the Chief Financial Officer for GreatOutdoors/Altrec.com from 2010 through March 2014, an e-commerce/retail company providing high-quality outdoor and active apparel and gear online. From 2006 through 2009, she was the Chief Financial Officer and Treasurer for Pharmaca Integrative Pharmacy, Inc., a retail chain delivering natural health and wellness products. From 1996 to 2006, Ms. Mathews served as Chief Financial and Administrative Officer and VP of Business Development for Gaiam, Inc., a consumer lifestyle company, specializing in wellness, fitness and environmental products, content, and services. During her tenure with Gaiam, she completed an initial public offering, two follow-on offerings and several PIPE transactions, as well as completing over twenty merger and acquisition transactions. Ms. Mathews has extensive experience in identifying and driving strategic growth opportunities, while streamlining systems, processes and operations to improve efficiency and profitability.

 

 
55

 

Bob Patterson. Mr. Patterson became our Chief Operating Officer on December 31, 2014, when we completed our reverse acquisition of Christals Acquisition. Mr. Patterson is a senior leader with over 25 years of experience in operations and IT management. He served as Chief Information Officer of Peekay, Inc., one of our subsidiaries, from January 2013 to May 2014, and has been Chief Operating Officer of Peekay, Inc. since May 2014. He has also been the General Manager and Chief Information Officer of our subsidiary, Christals Acquisition, since October 2012. Prior to joining Christals Acquisition, from March 2010 to September 2012, Mr. Patterson served as an Operating Partner for private equity with Blacksteet Capital. From February 2010 to March 2011, he was also an IT Steering Committee/IT & Operations Consultant for Moosejaw Outfitters, an outdoor specialty retailer. From 1999 to 2009, Mr. Patterson served as the Chief Operating Officer/Chief Information Officer for Warren National University. Mr. Patterson's experience includes senior leadership in brick-and-mortar and e-commerce retail, online learning, manufacturing and banking. Mr. Patterson draws upon this diverse background to lead organizational growth by empowering good people with efficient processes and strong technology. Mr. Patterson earned a Bachelors Degree from the University of California, San Diego in 1985.

  

Martin Walker. Mr. Walker became our Vice President, Marketing and Visual Merchandising on July 1, 2014. Mr. Walker has also been leading Peekay's marketing efforts as Vice President of Marketing, Visual Merchandising, and Interactive Media since February 2014, and as Director of Marketing, Visual Merchandising and Interactive Media since he joined the company in January 2011. Walker previously held director- and executive-level positions with the Seattle Sonics & Storm, professional basketball teams from December 1996 until January 2006, and Tully's Coffee, a retailer of handcrafted coffee from January 2006 until October 2010, including Vice President of Marketing an Merchandising, and Vice President of Retail Operations, and has over 20 years of experience in marketing, merchandising and retail. Blending a unique combination of creativity and analytical talent, his approach to marketing includes highly compelling brand messaging married with data-driven decision-making.

 

David Leigh. Mr. Leigh became our Vice President, Retail on July 1, 2014. Mr. Leigh brings over 15 years of experience to Peekay. Mr. Leigh joined our subsidiary, Peekay, in August 2009 as our Director of Retail Sales and leads a strong team of seven district managers and over 350 sales associates. Mr. Leigh is a lifelong retailer, having held Sales and HR Management positions for Nordstrom, Macy's (1980-86), and Pier 1 Imports (2008-09) and was a Vice President of Retail for Shane Co, a regional jewelry retailer during the period from 1986 to 2006. Mr. Leigh earned his undergraduate degree in Business Administration from Gonzaga University in 1986. He completed continuing education in Strategic Retail Management and Leadership at The Kennedy School of Government, Harvard University. In addition, he holds a certificate in Organizational Development from The Mountain States Employment Council. 

 

George Williams. Mr. Williams became our Vice President of Merchandising and Inventory on November 4, 2013. Mr. Williams is a merchant and supply chain executive who has developed a broad range of skills that are focused on bringing products from concept to consumer, profitably and at a low cost. He has led multiple teams of professionals in large organizations as well as in smaller formats. Typically in a VP role, Mr. Williams has been successful providing strong leadership, training, and direction. He is recognized as a collaborative partner and has been successful at eliminating silos and creating synergies among cross-functional teams. Unique in his background, Mr. Williams has led merchant and supply chain organizations supporting both store (brick and mortar) and direct to consumer (e-commerce and catalog) businesses. Mr. Williams previously served as VP of Inventory Management for Williams Sonoma/Pottery Barn from 1994 through 2004, Cost Plus World Market (2004-2007) and The Sharper Image (from 2008 to May 2010). Mr. Williams acted as an independent consultant for various different companies during the period from May 2010 until he joined Peekay in November 2013. Mr. Williams earned a B.S. in Accounting from San Jose State University and an MBA in Finance from the University of Southern California.

 

 
56

 

Ellery W. Roberts. Mr. Roberts became our Chairman on December 31, 2014, when we completed our reverse acquisition of Christals Acquisition. He has also been the Chairman of our subsidiary, Christals Acquisition, since December 31, 2012. Mr. Roberts brings over 20 years of private equity investing experience to our company. Mr. Roberts has been the Chairman and Chief Executive Officer 1847 Holdings LLC, a public reporting company, since its inception on January 22, 2013. Mr. Roberts has also been a director of Western Capital Resources, Inc., a public company (OTQQB: WCRS), since May 2010. In July 2011, Mr. Roberts formed The 1847 Companies LLC, a company which is no longer active, where he began investing his own personal capital and capital of high net worth individuals in select transactions. Through The 1847 Companies LLC, Mr. Roberts has operated as a fundless sponsor, covering the transaction pursuit cost and raising capital on the basis of his own personal investment. Prior to forming The 1847 Companies LLC, Mr. Roberts was the co-founder and was co-managing principal from October 2009 to June 2011of RW Capital Partners LLC, the recipient of a "Green Light" letter from the U.S. Small Business Administration (SBA) permitting RW Capital Partners LLC to raise capital in pursuit of the SBA Small Business Investment Company license with the preliminary support of the SBA. Mr. Roberts was a founding member of Parallel Investment Partners, LP (formerly SKM Growth Investors, LP), or Parallel, a Dallas-based private equity fund focused on re-capitalizations, buyouts and growth capital investments in lower middle market companies throughout the United States. During his tenure at Parallel, Mr. Roberts held the position of Managing Director from January 2004 to September 2009, Vice President from January 2003 to December 2003 and Senior Associate from January 2000 to December 2002. Mr. Roberts was responsible for approximately $400 million in invested capital across two funds. Also during his tenure with Parallel, Mr. Roberts sat on the boards of Environmental Lighting Concepts, Hat World Corporation, Senex Financial Corporation, Builders TradeSource Corporation, Action Sports, Weisman Discount Home Centers, Winnercom, Mealey's Furniture, Regional Management Corporation, Marmalade Cafes, and Diesel Service and Supply (all of which are private companies). Prior to Parallel, Mr. Roberts was a Vice President with Lazard Group LLC (NYSE: LAZ), or Lazard, from July 1997 to December 2000. While at Lazard, he focused on and also gained experience in the home building, health care, retail, industrial and lodging sectors. Prior to joining Lazard in 1997, Mr. Roberts was a Senior Financial Analyst with Colony Capital, Inc. from July 1995 to June 1996, where he analyzed and executed transactions for Colony Investors II, L.P., a $625 million private equity fund. Prior to that, he was a Financial Analyst with the Corporate Finance Division of Smith Barney Inc. (now known as Morgan Stanley Smith Barney LLC) from January 1994 to June 1995 where he participated in a wide variety of investment banking activities. During his career Mr. Roberts has been directly involved with over $3.0 billion in direct private equity investments. Mr. Roberts received his B.A. degree in English from Stanford University.

 

Edward J. Tobin. Mr. Tobin became our Director on December 31, 2014, when we completed our reverse acquisition of Christals Acquisition. For fifteen years, until November 2014, Mr. Tobin was a Director of Global Emerging Markets North America, Inc., or GEM, where he managed Special Situations and Venture investing. In this role, he oversaw structured finance transactions in industries such as clean tech, media, telecommunications, manufacturing, real estate and life sciences. Prior to joining GEM, Mr. Tobin was Managing Director of Lincklaen Partners, a private family investment office. Previously, he had been a portfolio manager with Neuberger and Berman and prior to that Vice President of Nordberg Capital, Inc. Mr. Tobin is on the Board of PPI Management LLC, GEM Holdings LLC, GEM International Ventures LLC and Christals Management LLC, all of which are privately held companies. Mr. Tobin received his MBA from the Wharton School, as well as a Master of Science in Engineering and a Bachelor of Science in Economics (cum laude) from the University of Pennsylvania.

 

David Aho. Mr. Aho became our Director on December 31, 2014, when we completed our reverse acquisition of Christals Acquisition. Mr. Aho has also served as a director of Christals Acquisition, one of our subsidiaries, since May 2014. From January 2009 through December 2010, Mr. Aho was an analyst at Colbeck Capital Management, LLC. Beginning in January 2011 through the present, Mr. Aho has been a partner at Colbeck Capital Management, LLC. Colbeck is an investment firm with a core focus of investing in and advising on secured, strategic finance transactions.

 

Section 2(a) of the Stockholder Rights Agreement (attached as Annex C to the Share Purchase Agreement attached as Exhibit 2.1 to the Form 8-K filed by the Company on January 6, 2015) provides that "CP IV shall have the right, but not the obligation, to appoint one member of the Board (the 'CP IV Designee') selected by CP IV to serve on the Board and the Governing Body of any Subsidiary (provided that such right with respect to any Subsidiary shall be subject to the creation of a board or similar Governing Body and the authorization of such body to act on behalf of the such Subsidiary in lieu of the sole member of such entity, which Dico will effect at the request of CP IV). David Aho shall be the initial CP IV Designee." There are no other arrangements or understandings known to us pursuant to which any director was or is to be selected as a director or nominee.

 

 
57

 

Directors are elected until their successors are duly elected and qualified.

 

Except as set forth in our discussion below in Item 13 "Certain Relationships and Related Transactions, and Director Independence-Transactions with Related Persons," none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.

 

Director Qualifications

 

Directors are responsible for overseeing our business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on our Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole, but not necessarily by each director. The Board considers the qualifications of directors and director candidates individually and in the broader context of the Board's overall composition and our current and future needs.

 

Qualifications for All Directors

 

In its assessment of each potential candidate, including those recommended by stockholders, the Board considers the nominee's judgment, integrity, experience, independence, understanding of our business or other related industries and such other factors the Board determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.

 

The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual's ability to ask difficult questions and, simultaneously, to work collegially.

 

The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.

 

Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole

 

The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of our current needs and business priorities. We are a U.S. public company and a retailer of lingerie, sexual health and wellness products. Therefore, the Board believes that a diversity of professional experiences in the retail industry, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and of U.S. accounting and financial reporting standards should be represented on the Board.

  

 
58

 

Summary of Qualifications of Directors

 

Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.

 

Ellery W. Roberts. Mr. Roberts brings over 20 years of private equity investing experience to our company. For several years, Mr. Roberts private equity experience also focused on small to medium sized retailers.

 

Edward J. Tobin. Mr. Tobin has extensive business and finance experience.

 

David Aho. Mr. Aho has over 10 years of investment management experience.

 

Family Relationships

 

There are no family relationships among any of our officers or directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

 

·

been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

     
 

·

had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

     
 

·

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

     
 

·

been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

     
 

·

been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

 
59

 

Committees of the Board of Directors

 

We expect that our board of directors will designate the following committees: an audit committee, a compensation committee and a nominating and corporate governance committee. Currently, our entire board of directors undertakes the functions that would otherwise be undertaken by the committees. From and after the establishment of the committees, each committee will operate pursuant to a charter that has been approved by our board of directors. In addition, our board of directors may, from time to time, designate one or more additional committees, which shall have the duties and powers granted to it by our board of directors.

 

Audit Committee

 

When established, the audit committee will be comprised of not fewer than three and not more than seven independent directors who must meet all applicable independence requirements of the NASDAQ Marketplace Rules or any other applicable stock exchange rules and must include at least one "audit committee financial expert," as defined by applicable SEC rules and regulations.

 

The audit committee will be responsible for, among other things:

 

 

·

appointing, retaining and overseeing our independent accountants;

     
 

·

assisting our board of directors in its oversight of the integrity of our financial statements, the qualifications, independence and performance of our independent auditors and our compliance with legal and regulatory requirements;

     
 

·

reviewing and approving the calculation of profit allocation when it becomes due and payable;

     
 

·

reviewing and approving the plan and scope of the internal and external audit of our financial statements;

     
 

·

pre-approving any audit and non-audit services provided by our independent auditors;

     
 

·

approving the fees to be paid to our independent auditors;

     
 

·

reviewing with our Chief Executive Officer and Chief Financial Officer and independent auditors the adequacy and effectiveness of our internal controls;

     
 

·

preparing the audit committee report included in our public filings with the SEC; and

     
 

·

reviewing and assessing annually the audit committee's performance and the adequacy of its charter.

 

 
60

 

Compensation Committee

 

The compensation committee will be comprised entirely of independent directors who meet all applicable independence requirements of the NASDAQ Marketplace Rules or any other applicable stock exchange rules. We expect that the compensation committee charter will require that all or a majority of the members must be outside directors as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, and non-employee directors within the meaning of Section 16 of the Exchange Act and the SEC rules and regulations promulgated thereunder. The responsibilities of the compensation committee will include:

 

 

·

responsibility for annually reviewing the calculation of the management fee which encompasses the compensation of our Chief Executive Officer, President and Chief Financial Officer;

     
 

·

determining and approving the compensation of employees of the company serving as executive officers;

     
 

·

granting rights to indemnification and reimbursement of costs and expenses to our manager and any seconded individuals;

     
 

·

reviewing the compensation information and compensation discussion and analysis included in our filings with the SEC;

     
 

·

preparing the compensation committee report included in our public filings with the SEC; and

     
 

·

making recommendations to our board of directors regarding equity-based and incentive compensation plans, policies and programs.

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee will be comprised entirely of independent directors who meet all applicable independence requirements of the NASDAQ Marketplace Rules or any other applicable stock exchange rules. The nominating and corporate governance committee will be responsible for, among other things:

 

 
61

 

 

·

recommending the number of directors to comprise our board of directors;

     
 

·

identifying and evaluating individuals qualified to become members of our board of directors, other than our manager's appointed directors;

     
 

·

reviewing director nominees that are nominated by shareholders;

     
 

·

reviewing conflicts of interest that may arise between the company and our manager;

     
 

·

recommending to our board of directors the director nominees for each annual shareholders' meeting, other than our manager's appointed directors;

     
 

·

recommending to our board of directors the candidates for filling vacancies that may occur between annual shareholders' meetings, other than our manager's appointed directors;

     
 

·

reviewing director compensation and processes, self-evaluations and policies;

     
 

·

overseeing compliance with our code of ethics and conduct by our officers and directors and our manager;

     
 

·

monitoring developments in the law and practice of corporate governance; and

     
 

·

approving any transactions with related persons.

 

Lead Independent Director

 

We currently do not have any independent directors, as the term "independent" is defined by the rules of the Nasdaq Stock Market. We expect that if we apply for a stock exchange listing, if at any time the Chairman of our board of directors is not an independent director, the independent directors on the board of directors will designate, by at least a majority vote, one of the independent directors then on the board of directors to serve as the lead independent director. From and after the listing date, the lead independent director will:

 

 
62

 

 

·

consult with and act as liaison between the board of directors and the Chairman;

     
 

·

coordinate the activities of the independent directors;

     
 

·

coordinate the agenda for and preside over sessions of the independent directors and other non-management directors;

     
 

·

serve as a contact for interested parties to express opinions and concerns to the independent directors and the non-management directors;

     
 

·

provide the Chairman with input as to the preparation of the agendas for the board of directors and committees of the board of directors;

     
 

·

advise the Chairman as to the quality, quantity and timeliness of the flow of information from our management that is necessary for the independent directors to effectively and responsibly perform their duties;

     
 

·

meet with any director who is not adequately performing his or her duties as a director; and

     
 

·

otherwise consult with the Chairman and our management on matters relating to corporate governance and board of directors performance matters.

 

In performing the duties described above, the lead independent director will be expected to consult with the chair of any committees of the board of directors and solicit their participation in order to avoid diluting the authority or responsibilities of such committee. If the Chairman is an independent director, then he or she shall perform the functions otherwise assigned to the lead independent director.

 

Indemnification of Officers and Directors

 

Our organizational documents allow us to indemnify our officers and directors to the fullest extent permitted by Nevada Revised Statutes.

 

In addition, we intend to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against any liability asserted against such person or incurred by such person in any such capacity, or arising out of such person's status as such, and related expenses, whether or not the company would have the power to indemnify such person against such liability under the Nevada Revised Statutes. We also have and intend to maintain director and officer liability insurance, if available on reasonable terms.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

 
63

 

Compensation of Executive Officers

 

Summary Compensation Table - Fiscal Years Ended December 31, 2014 and 2013

 

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods.

 

Name and Principal Position

  Fiscal
Year
    Salary

($)

    Bonus

($)

    Stock Awards

($)

    Option Awards

($)

    All Other
Compensation

($)

    Total

($)

 
                     

 

     

Lisa Berman

 

2014

   

-

   

-

   

-

   

-

   

70,000

   

70,000

 

Chief Executive Officer (1)

 

2013

     

-

     

-

     

-

     

-

     

150,000

     

150,000

 

Barry Soosman,

 

2014

     

400,051

     

133,330

     

-

     

-

     

9,225

     

542,606

 

Former Chief Executive Officer of Christals Acquisition (1)

 

2013

     

361,590

     

-

     

-

     

-

     

-

     

361,590

 

Edward Lazar,

 

2014

     

-

     

-

     

-

     

-

     

-

     

-

 

Former Chief Executive Officer (2)

 

2013

     

-

     

-

     

-

     

-

     

-

     

-

 

Janet Mathews, Chief Financial Officer (1)

 

2014

     

134,546

     

-

     

-

     

-

     

-

     

134,546

 

 

 

2013

     

-

     

-

     

-

     

-

     

-

     

-

 

Phyllis Abramson

 

2014

     

45,019

     

50,000

     

-

     

-

     

21,346

     

116,365

 

Former Chief Financial Officer(3)

 

2013

     

157,554

     

-

     

-

     

-

     

-

     

157,554

 

Bob Patterson,

 

2014

     

182,169

     

60,000

     

-

     

-

     

-

     

242,169

 

Chief Operating Officer (1)

 

2013

     

146,929

     

20,000

     

-

     

-

     

3,000

     

169,929

 

Martin Walker,

 

2014

     

133650

     

343

     

-

     

-

     

-

     

133,993

 

VP Marketing and Visual Merchandising (1)

 

2013

     

98,054

     

13,950

     

-

     

-

     

-

     

112,004

 

George Williams

 

2014

     

150,380

     

18,750

     

-

     

-

     

-

     

169,130

 

VP Inventory and Merchandising (4)

 

2013

     

16,779

     

-

     

-

     

-

     

-

     

16,779

 

David Leigh, VP Retail Operations(1)

 

2014

     

112,077

     

4,004

     

-

     

-

     

-

     

116,081

 

 

 

2013

     

99,732

     

14,078

     

-

     

-

     

-

     

113,810

 

____________

(1) After the close of business on December 31, 2014, we acquired Christals Acquisition in a reverse acquisition transaction that was structured as a share exchange. In connection with that transaction and effective immediately upon the closing of that transaction, Ms. Berman became our Chief Executive Officer, Ms. Mathews became our Chief Financial Officer, Mr. Patterson became our Chief Operating Officer, Mr. Leigh became our Vice President of Retail Operations, Mr. Williams became our Vice President of Merchandising and Inventory, and Mr. Walker became our Vice President Marketing and Visual Merchandising.Prior to the effective date of the reverse acquisition, each such officer, other than Ms. Berman, held the same office at our subsidiary, Christals Acquisition. The compensation received by Ms. Berman was earned and paid to her consulting firm, Insights, for advisory services rendered to the Board of Directors of Christals Acquisition during the fiscal years ended December 31, 2014 and 2013 . Prior to the reverse acquisition transaction, Barry Soosman was the Chief Executive Officer of Christals Acquisition. Mr. Soosman resigned from his position as the CEO of Christals Acquisition immediately prior to the consummation of the reverse acquisition. The annual, long-term and other compensation shown in this table include the amounts that these officers received from such subsidiary prior to the consummation of the reverse acquisition.  

 

(2) After the closing of the reverse acquisition of Christals Acquisition on December 31, 2014, Mr. Lazar resigned from his position as Chief Executive Officer effective immediately.

 

(3) Phyllis Abramson was the Chief Financial Officer of Peekay, Inc. prior to its acquisition on December 31, 2012, and was appointed Chief Financial Officer of Peekay SPA LLC on January 1, 2013. Ms. Abramson resigned her position on April 10, 2014.

 

(4) George Williams was appointed VP, Merchandising and Inventory in November 2013.

  

 
64

 

Employment Agreements

 

Lisa Berman's Consulting Agreement

 

At the close of business on December 31, 2014, we entered into a consulting agreement with Insights, LLC, a limited liability company owned by Lisa Berman, our Chief Executive Officer. Pursuant to the consulting agreement we had retained Ms. Berman to be our Chief Executive Officer and President and perform such duties as are customarily performed by the Chief Executive Officer and President of a public company like our company. The initial term of the consulting agreement was for the period ending on January 31, 2015. Pursuant to the consulting agreement we were required to pay Ms. Berman a consulting fee equal to Sixty Six Thousand, Six Hundred and Sixty Six dollars ($66,666) for all services provided during the Term. The Fee was payable in one lump sum on February 15, 2015. We were also required to reimburse Ms. Berman for expenses that she incurs in accordance with our corporate policy. Ms. Berman continues to be employed as our Chief Executive Officer on an at-will basis as we currently do not have an employment contract with Ms. Berman. We expect that we will enter into an employment agreement with Ms. Berman sometime during the second quarter of 2015. Since the termination of her consulting agreement, we have been paying Ms. Berman at a rate of $33,333 per month and we reimburse her travel and business expenses in accordance with the Company's policies.

 

Janet Mathews' Employment Agreement

 

We entered into a one-year employment agreement with our Chief Financial Officer, Janet Mathews, on December 31, 2014 when we closed the reverse acquisition of Christals Acquisition. Pursuant to the agreement, Ms. Mathews is entitled to a base salary of $200,000 per annum. Ms. Mathews is entitled to a bonus of up to 20% of her base salary based upon the achievement of performance criteria established by the board of directors. Ms. Mathews is also entitled to a special bonus in the amount of $50,000. We expect to adopt an equity incentive plan during the first half of 2015. Upon adoption of such plan and subject to board approval, we will grant to Ms. Mathews an equity award that is in line with her executive position with our company and with grants given to other executives of our company. If Ms. Mathews is terminated without cause, then she would be entitled to continue to receive her base salary for the longer of one month or the remainder of the term of his employment agreement.

 

Bob Patterson's Employment Agreement 

 

We entered into a one-year employment agreement with our Chief Operating Officer, Bob Patterson, on December 31, 2014 when we closed the reverse acquisition of Christals Acquisition. Pursuant to the agreement, Mr. Patterson is entitled to a base salary of $200,000 per annum. Mr. Patterson is entitled to a bonus of up to 20% of his base salary based upon the achievement of performance criteria established by the board of directors. We are obligated under the employment agreement to issue to Mr. Patterson within ninety (90) days of the date of the agreement a total of 23,028 shares of our common stock. We expect to adopt an equity incentive plan during the first half of 2015. Upon adoption of such plan and subject to board approval, we will grant to Mr. Patterson an equity award that is in line with his executive position with our company and with grants given to other executives of our company. If Mr. Patterson is terminated without cause, then he would be entitled to continue to receive his base salary for the longer of one month or the remainder of the term of his employment agreement.

  

All of our other employees are employed on an "at will" basis.

 

Outstanding Equity Awards at Fiscal Year End

 

For the year ended December 31, 2014, no director or executive officer has received compensation from us pursuant to any compensatory or benefit plan. There is no plan or understanding, express or implied, to pay any compensation to any director or executive officer pursuant to any compensatory or benefit plan, although we anticipate that we will compensate our officers and directors for services to us with stock or options to purchase stock, in lieu of cash.

 

Compensation of Directors

 

Our subsidiary, Peekay Acquisition entered into an Advisory Agreement, dated December 31, 2012, with each of Christals Management, LLC, or Christals Management, a limited liability company owned 50% by an affiliate of Ellery W. Roberts and 50% by Edward J. Tobin, each directors of our Company and CP IV SPV, LLC, or CP IV, an entity with which David Aho is affiliated, who is also a director of our Company. Under the Advisory Agreement, Peekay Acquisition pays annual compensation of $250,000 per year payable quarterly, to each of Christals Management and CP IV.

 

Except for compensation pursuant to the advisory agreement during fiscal year 2014, our directors have not received any compensation during the fiscal year ended December 31, 2014 for providing services to us as directors.

 

 
65

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information regarding beneficial ownership of our common stock as of August 18 , 2015 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, 901 West Main Street, Auburn, Washington98001.

 

Name and Address of Beneficial Owner

 

Office, If Any

 

Title of Class

  Amount and
Nature of Beneficial Ownership(1)

 

Percent of
Class(2)

 

Officers and Directors

Ellery W. Roberts

 

Chairman of the Board

 

Common Stock

     

249,676

     

6.97

%

Lisa Berman

 

Chief Executive Officer and President

 

Common Stock

     

0

     

*

 

Janet Mathews

Chief Financial Officer, Treasurer and Secretary

Common Stock

0

 

*

 

Bob Patterson

 

Chief Operating Officer

 

Common Stock

     

75,399

(3)    

2.10

%

Martin Walker

 

Vice President, Marketing and Visual Merchandising

 

Common Stock

     

0

     

*

 

David Leigh

 

Vice President, Retail

 

Common Stock

     

0

     

*

 

George Williams

 

Vice President, Merchandising and Inventory

 

Common Stock

     

0

     

*

 

Edward Tobin

 

Director

 

Common Stock

     

314,231

     

8.77

%

David Aho

c/o Colbeck Management

888 Seventh Avenue, 40th Floor

New York, NY 10106

 

Director

 

Common Stock

     

0

     

*

 

All officers and directors as a group (9 persons named above)

     

Common Stock

     

616,278

     

17.20

%

5% Security Holders

Christopher F. Brown

c/o GEM Ventures Ltd.

590 Madison Avenue, 27th Floor

New York, NY 10022

     

Common Stock

     

460,539

     

12.86

%

CP IV SPV, LLC(4)

c/o Colbeck Capital Management

888 Seventh Avenue, 40th Floor

New York, NY 10106

     

Common Stock

     

1,041,043

     

29.06

%

CB CA SPV, LLC(5)

c/o Colbeck Capital Management

888 Seventh Avenue, 40th Floor

New York, NY 10106

     

Common Stock

     

25,043

     

*

 

Harvest Capital Credit Corporation(6)

450 Park Avenue, Suite 500

New York, NY 10022

     

Common Stock

     

214,649

     

5.99

%

 

* Less than 1%

 

 
66

 ___________

(1) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.

 

(2) A total of 3,582,470 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of August 18 , 2015. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator

 

(3) Includes 23,028 shares of common stock to be issued to Mr. Patterson pursuant to his employment agreement.

 

(4) CP IV SPV, LLC, a Delaware limited liability company, is indirectly controlled by Colbeck Management Holdco GP, LLC, a Delaware limited liability company, or Colbeck Management. Messrs. Jason Colodne and Jason Beckman serve as the managing members of Colbeck Management. Each of CP IV SPV, LLC, Mr. Jason Colodne and Mr. Jason Beckman disclaims beneficial ownership of such shares. David Aho, a director of the Company, is a partner of CP IV SPV, LLC. Mr. Aho also disclaims beneficial ownership of such shares.

 

(5) CB CA SPV, LLC, a Delaware limited liability company, is controlled by CB CA Lending LLC, a Delaware limited liability company, or CB Lending. Messrs. Jason Colodne and Jason Beckman serve as the managing members of CB Lending. Each of CB CA SPV, LLC, Mr. Jason Colodne and Mr. Jason Beckman disclaims beneficial ownership of such shares. David Aho, a director of the Company, is a partner of CP CA SPV, LLC. Mr. Aho also disclaims beneficial ownership of such shares.

 

(6) Harvest Capital Credit Corporation (NASDAQ: HCAP), a Delaware corporation, or Harvest, is a publicly-traded business development company. The Chief Executive Officer of Harvest, Richard P. Buckanavage, has sole voting and dispositive power over the shares of Common Stock of our Company held by Harvest.

 

Changes in Control

 

Other than described below, we do not currently have any arrangements which if consummated may result in a change of control of our Company.

 

On December 31, 2014, our Company, Christals Acquisition and the members of Christals Acquisition, entered into the Exchange Agreement. The parties to the Exchange Agreement agreed to abide by the terms and provisions set forth in Annex C to such agreement. Annex C is a stockholder rights agreement that grants to certain former members of Christals Acquisition, who are now stockholders of our Company, substantially the same investor rights that such former members had as members of Christals Acquisition. These rights include, among others, certain tag-along rights. If any holder of our common stock proposes to sell or otherwise transfer shares of our common stock to one or more persons other than to a permitted transferee as described in the stockholder rights agreement, then the former members of Christals Acquisition will have the right to participate pro rata in such sale and if the prospective purchaser is not willing to purchase all of the shares of our common stock that the former members other than the transferring member propose to transfer, then each former member (including the transferring member) will be permitted to transfer a portion of the total number of shares of our common stock to be transferred to the prospective purchaser.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

We do not have any compensation plans in effect under which our equity securities are authorized for issuance.

 

 
67

 

CERTAIN RELATIONSHIPS AND RELATED PERSONS TRANSACTIONS;

DIRECTOR INDEPENDENCE

 

Transactions with Related Persons 

 

The following includes a summary of transactions since the beginning of the 2013 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under "Management - Compensation of Executive Officers" or "Management - Compensation of Directors"). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm's-length transactions.

 

 

·

On December 31, 2014, we entered into the Exchange Agreement with Christals Acquisition and its members, including certain of our officers and directors, who were also members of Christals Acquisition, pursuant to which we acquired 100% of the issued and outstanding equity capital of Christals Acquisition in exchange for 3,577,470 shares of our common stock, which constituted 70.5% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Exchange Agreement. The following table provides information regarding the name of each related party who participated in the exchange contemplated by the Exchange Agreement and the nature of the consideration received by such person in connection with such exchange.

 

Name of Related Party

 

Relation to our Company

 

Consideration or Benefit Received

Ellery W. Roberts

 

Chairman of the Board

 

249,676 shares of the Company's Common  Stock

Edward Tobin

 

Member of the Board of Directors

 

314,231 shares of the Company's Common Stock

Bob Patterson

 

Chief Operating Officer of the Company

 

75,399 shares of the Company's Common Stock

Christopher F. Brown

 

Stockholder of the Company owning greater than 10% of the outstanding common stock of the Company

 

460,539 shares of the Company's Common Stock

CP IV SPV, LLC

 

Stockholder of the Company owning greater than 10% of the outstanding common stock of the Company

 

1,041,043 shares of the Company's Common Stock

Barry Soosman

 

Former Chief Executive Officer of Christals Acquisition

 

131,684 shares of the Company's Common Stock

Phyllis Heppenstall

 

Former Chief Financial Officer of Christals Acquisition

 

35,775 shares of the Company's Common Stock

David Lazar

 

Former director and former owner of greater than 10% of the outstanding common stock of the Company.

 

Mr. Lazar received $308,436 in payment for the redemption of his 15,000,000 shares concurrent with the closing of the exchange transaction. In addition we transferred to Mr. Lazar our remaining inventory of loose diamonds pursuant to a bill of sale and assignment agreement as the balance of the consideration for the redemption of his shares.

 

 

·

Our subsidiary, Peekay Acquisition entered into an Advisory Agreement, dated December 31, 2012, with each of Christals Management, a limited liability company owned 50% by an affiliate of Ellery W. Roberts and 50% by Edward J. Tobin, each director of our Company and CP IV SPV, LLC, or CP IV, an entity with which David Aho is affiliated, who is also a director of our Company. Under the Advisory Agreement, Peekay Acquisition pays annual compensation of $250,000 per year, payable quarterly, to each of Christals Management and CP IV, as well as certain costs and expenses.

     
 

·

Subsidiaries of the Company are parties to the Financing Agreement, dated as of December 31, 2012, as amended, by and among Christals Acquisition, Peekay Acquisition, each of Peekay Acquisition's subsidiaries listed as a borrower on the signature pages thereto, each of Christals Acquisition's subsidiaries listed as a guarantor on the signature pages thereto, the lenders from time to time party thereto, and Cortland Capital Market Services LLC, as collateral agent for the lenders, and other related loan documents. The borrowers and guarantors are all jointly and severally liable for all loans and other obligations under the Financing Agreement. The loans under the Financing Agreement are secured by all or substantially all of the assets of each such borrower and guarantor. CB Agency Services, LLC, acted as origination agent under the Financing Agreement; CB Agency Services and CB CA SPV, LLC, a lender, are parties to the Financing Agreement and are affiliates of Colbeck Capital Management, LLC. David Aho is a partner of each of CB CA SPV, LLC, CB Agency Services, LLC and Colbeck Capital Management. As of December 31, 2014, the type of loan, amount, maturity date and interest rate of each of our loans under the Financing Agreement to CB CA SPV, LLC and its affiliates were as follows:

 

Notes Payable

 

Amount

 

Maturity Date

Interest Rate  

Duration

 

Tranche A Term Loan

 

$

27.0 million

 

December 27, 2015

 

12

%

 

3 years

 

Tranche B Term Loan

 

$

11.2 million

 

December 27, 2015

   

15

%

 

3 years

 

 

·

During the fiscal years ended December 31, 2014 and 2013, Mr. David Lazar, a former director and holder of more than 10% of the stock of the Company, provided advances to the Company for its working capital purposes. These advances bear no interest and are due on demand. The aggregate amounts advanced were $8,800 and $2,390 during the fiscal years ended December 31, 2014 and 2013, respectively.

 

 
68

 

Promoters and Certain Control Persons

 

We did not have any promoters at any time during the past five fiscal years.

 

Director Independence

 

We currently do not have any independent directors, as the term "independent" is defined by the rules of the Nasdaq Stock Market.

 

DESCRIPTION OF CAPITAL STOCK

 

Common Stock

 

We are currently authorized to issue 300,000,000 shares of common stock, par value $0.0001 per share, of which 3,582,470 shares are issued and outstanding as of the date of this prospectus. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of our stockholders, except on any amendment to our Amended and Restated Articles of Incorporation (including any certificate of designations relating to any series of preferred stock) that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to our Amended and Restated Articles of Incorporation (including any certificate of designations relating to any series of preferred stock) or pursuant to the Nevada Revised Statutes.

 

The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our subsidiaries and other holdings and investments. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.

 

All of the issued and outstanding shares of our common stock are duly authorized, validly issued, fully paid and non-assessable. To the extent that additional shares of our common stock are issued, the relative interests of existing stockholders will be diluted.

 

Preferred Stock

 

We are authorized to issue up to 10,000,000 shares of preferred stock, par value $0.001 per share, in one or more series as may be determined by our Board of Directors. Each such series of preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in the resolutions providing for the issue of such series of preferred stock as may be adopted from time to time by our Board of Directors. Any preferred stock so issued by the Board may rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both. Moreover, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, under certain circumstances, the issuance of preferred stock or the existence of the unissued preferred stock might tend to discourage or render more difficult a merger or other change of control. We currently do not have any preferred stock outstanding.

 

 
69

 

Stockholder Rights Agreement

 

On December 31, 2014, our company, Christals Acquisition and the members of Christals Acquisition, entered into the Exchange Agreement. The parties to the Exchange Agreement agreed to abide by the terms and provisions set forth in Annex C to such agreement. Annex C to the Exchange Agreement is a Stockholder Rights Agreement that grants to certain former members of Christals Acquisition, who are now stockholders of our company, substantially the same investor rights that such former members had as members of Christals Acquisition. These rights include, among others, the right to appoint an observer, the right to appoint a member to the board of directors of our company, tag-along rights, drag along rights, rights of first offer, preemptive rights and registration rights.

  

The Stockholder Rights Agreement and the rights granted to the former members of Christals Acquisition pursuant to such agreement terminate if (a) CP IV and its affiliates cease to hold shares of our common stock representing 10% of the total of our common stock issued to CP IV on December 31, 2014 pursuant to the Exchange Agreement plus the other shares acquired by CP IV from other stockholders of our company on December 31, 2014, or (b) our company consummates a private placement or other equity or equity linked financing transaction in which it raises at least $10 million in gross proceeds. This offering would qualify as a termination event which would terminate these rights if we receive purchase orders for at least $10 million of the common stock being offered in this offering.  

  

Following is a summary of the rights granted to the former members of Christals Acquisition under the Stockholder Rights Agreement.

 

Observer Rights

 

The holders of the unsecured subordinated promissory notes co-made by Peekay Acquisition and Peekay SPA to each of Kris Butt, Brian Barnett and Rick Barnett in the original principal amount of $9,300,000 known as the Peekay Notes, by majority vote, may appoint a non-voting observer. The initial observer appointed by the Peekay Note holders is Phyllis Heppenstall. The observer has the right to attend meetings of the board of directors of our company and receive any materials provided the board; provided, that the observer shall not be entitled to attend any executive session of the board.

 

At the request of CP IV, our board is also required to grant similar observer rights to any lender that participated in our company's last secured financing transaction that owns at least 1% of the issued and outstanding common stock of our company on a fully-diluted basis.

 

We are also restricted from granting observer rights to other persons. The observer rights of the holders of the Peekay Notes will terminate upon the repayment of the Peekay Notes.

 

Board of Directors

 

The Stockholder Rights Agreement requires us to have a board of directors that consists of no more than three people. Christals Parent or its assignee has the right to appoint two members of our board of directors. The two members appointed by Christals Parent are Edward J. Tobin and Ellery W. Roberts. Christals Parent assigned its right to appoint two members of our board of directors to Christals Management, LLC, or Christals Management. CP IV has the right to appoint one member to our board of directors and to the board of directors or other governing body of each of our subsidiaries. David Aho was appointed as the initial designee of CP IV. A member of our board of directors may be removed only by the person or their successors or assigns who appointed such member to the board. Any vacancy on the Board that is created by the death, resignation or removal of a director must be filled by the Member or Members or their successors or assigns who appointed the director whose death, resignation or removal created such vacancy. CP IV also has the right to designate a member of each committee of the board of directors of our company, if any.

 

Board of Advisors

 

The Stockholder Rights Agreement also requires us to create an advisory board. CP IV has the right to approve each member of the advisory board. The advisory board consults with the board of directors of our company and our management team regarding the maintenance of the culture and brand of our company and its subsidiaries and strategic planning for the business and affairs of our company. The initial members of the advisory board are Phyllis Heppenstall, Ellery Roberts, Edward Tobin and David Aho. The advisory board is expected to hold meetings once per quarter.

 

CP IV Approval Rights

 

The Stockholder Rights Agreement also provides CP IV with the approval rights described below.

 

At any time that there is an "underperformance condition" (but only during the continuation of such underperformance condition), our board may not consent (nor are our subsidiaries permitted) to or engage in any of the following activities without the prior written consent of CP IV. An underperformance condition is generally defined in the Stockholder Rights Agreement as any time that the trailing twelve-month consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, of our company is less than the minimum consolidated EBITDA. Minimum consolidated EBITDA under the Stockholder Rights Agreement ranges from $8.2 million to $11.5 million depending upon the date of determination.

 

 
70

 

During an underperformance condition, our company may not, without the consent of CP IV:

 

 

·

hire, appoint, terminate, remove or lower the rate or terms of compensation, bonus or severance of any senior officer;

     
 

·

open any new store or close any existing store;

     
 

·

purchase or sell any real property;

     
 

·

make aggregate capital expenditures in excess of $500,000 per fiscal year with respect to our company or its subsidiaries;

     
 

·

adopt the annual budget or alter operations or make expenditures materially in excess of or not contemplated by any approved budget;

     
 

·

commence, settle or waive any benefits or rights with respect to any litigation, arbitration proceeding or governmental proceeding (including zoning disputes) that our company or any of our subsidiaries or any officer, manager or director thereof is a party or otherwise involved or affected;

     
 

·

create any subsidiary or joint venture;

     
 

·

create, incur, guarantee or suffer to exist any indebtedness in excess of $100,000 in the aggregate other than specified permitted indebtedness;

     
 

·

designate, appoint, or dismiss accountants to audit the books and records and consolidated financial statements of our company;

     
 

·

repurchase any securities of our company or any of our subsidiaries;

     
 

·

make any acquisitions or investments, whether by purchase of securities, merger or consolidation, contributions to capital, property transfers, or purchases of properties or assets or otherwise, of or in any person, for cash consideration (individually or in the aggregate) in excess of $2,000,000 in any fiscal year; or

     
 

·

sell, transfer, license or otherwise dispose of properties or assets of our company or our subsidiaries for cash consideration (individually or in the aggregate) in excess of $2,000,000 in any fiscal year.

  

Our minimum trailing twelve month (TTM) Consolidated EBITDA has not met the required threshold since December 31, 2013, and we are currently considered to be in an underperformance condition.

 

The Stockholder Rights Agreement also provides CP IV with approval rights at times when there is no underperformance condition. Our company may not, without the consent of CP IV (whether or not an underperformance condition is continuing):

 

 

·

hire, appoint, terminate, remove or lower the rate or terms of compensation, bonus or severance of Phyllis Abramson, Jeremy Owens or David Leigh;

     
 

·

make or declare any dividends by our company other than distributions or dividends to stockholders of our company on a pro rata basis;

     
 

·

except for board approved equity incentive awards of up to 5% of the issued and outstanding common stock of our company as of December 31, 2014 under a board approved equity incentive plan, create or issue any new securities, options, warrants or other rights or agreements to acquire securities exchangeable for, or convertible into, membership or profits interests of our company or any of our subsidiaries;

 

 
71

 

 

·

enter into or permit any recapitalization of our company or any of our subsidiaries or the sale of any outstanding equity interests, options, warrants or other rights or agreements to acquire securities exchangeable for, or convertible into, equity interests owned by our company or our subsidiaries or by any of our subsidiaries in any other subsidiaries;

     
 

·

enter into any agreement or engage in any transaction among our company and our subsidiaries on the one hand and any director, employee, consultant, stockholder or affiliate of our company or its subsidiaries, holders of the Peekay Notes, or former members of Christals Parent or Christals Holding, LLC on the other hand;

     
 

·

amend or modify the Stockholder Rights Agreement or the charter and bylaws or other similar organizational documents of our company or our subsidiaries;

     
 

·

enter into or permit any reorganization, merger, sale of all or substantially all of the assets, dissolution, termination, liquidation or winding up of affairs of our company or any of our subsidiaries other than in connection with the exercise of drag along rights;

     
 

·

increase or decrease the size of our board of directors or the board or other governing body of any of our subsidiaries; appoint any person who is not a full-time employee of our company or any of our subsidiaries to the governing body or otherwise grant any person the power to manage the business of any subsidiary, grant any person observer rights or appoint any person to or remove any person from the advisory board;

     
 

·

amend, modify or extend the management agreement with Christals Management, enter into any management, consulting or other agreement for or permit director, consulting or management fees to be paid by our company or any subsidiary other than pursuant to the management agreement with Christals Management in effect as of December 31, 2014; or

     
 

·

any liquidation, dissolution or winding up, assignment for the benefit of creditors or bankruptcy of our company or any of our subsidiaries.

 

Registration Rights

 

In connection with any private placement or other financing transaction in which we give investors registration rights, we will also grant to CP IV and each other former member of Christals Acquisition (or their assignee) registration rights covering any restricted shares of our common stock held by them that cannot be sold without limitation as to volume under Rule 144 of the Securities Act. If for any reason the number of shares of common stock that may be included in such registration must be cutback as a result of a limitation on the maximum number of shares of our common stock permitted to be registered by the staff of the SEC pursuant to Rule 415 of the Securities Act, then the shares of our common stock held by the former members of Christals Acquisition will be cutback first, proportionately as to each such former member, so that the maximum number of shares of the investors in such financing may be registered.

 

Right to Remove and Appoint Officers.

 

At any time upon the occurrence of an underperformance condition, CP IV has the right to require that our board cause our chief executive officer to be removed or a chief operating officer acceptable to CP IV to be appointed.

 

Right to Appoint Chief Marketing Officer.

 

CP IV has the right to require that our board of directors appoint a chief marketing officer of our company and our subsidiaries acceptable to CP IV and reasonably acceptable to our board other than the CP IV designee.

 

 
72

 

Tag-Along Right.

 

If any holder of our common stock proposes to sell or otherwise transfer shares of our common stock to one or more persons other than to a permitted transferee as described in the Stockholder Rights Agreement, then the former members of Christals Acquisition will have the right to participate pro rata in such sale and if the prospective purchaser is not willing to purchase all of the shares of our common stock that the former members other than the transferring member propose to transfer, then each former member (including the transferring member) will be permitted to transfer a portion of the total number of shares of our common stock to be transferred to the prospective purchaser.

 

Drag-Along Right.

  

If CP IV proposes to sell or otherwise transfer pursuant to a bona fide written offer all of the common stock of our company held by CP IV to a person that is not an affiliate of CP IV (and would not be an affiliate of CP IV upon completion of such transfer) (a) after December 31, 2017 or (b) at an implied total enterprise valuation for our company in excess of ten times trailing twelve month consolidated EBITDA, CP IV will have the right to require the other members of Christals Acquisition to join in such sale by selling a pro rata portion of the shares of the common stock of our company held by such other stockholders on the same terms as CP IV.

  

Right of First Offer.

 

If any former member of Christals Acquisition desires to sell or otherwise transfer all or any portion of such former member's common stock, other than to a permitted transferee as described in the Stockholder Rights Agreement or pursuant to the tag along or drag along rights described above, then the former members will have the right to purchase their pro rata share of such shares of common stock being sold or otherwise transferred at the same price and on the same terms as those proposed and if any former member of Christals Acquisition does not exercise his right of first offer, then the other former members of Christals Acquisition may purchase their pro rata portion of the shares so declined.

 

Preemptive Rights.

 

Except with respect to certain exempt securities issuances that are described below, pursuant to the Stockholder Rights Agreement, we granted to each former member of Christals Acquisition (other than certain former members who are members of our management team) the right to purchase a pro rata portion of any future offering of any securities by us. The exceptions to the preemptive rights of the former members of Christals Acquisition are:

 

 

·

Securities issued in registered public offering;

     
 

·

Securities issued as consideration in connection with any merger, consolidation or acquisition to which our company or our subsidiaries is a party with a person that is not an affiliate of our company or of Christals Parent or its members;

     
 

·

Securities issued to a financial institution or its affiliates in connection with the incurrence of indebtedness by our company or any of our subsidiaries to any person that is not an affiliate of our company or of Christals Parent or its members;

     
 

·

Securities issued as board approved equity incentive awards of up to 5% of the issued and outstanding common stock of our company as of December 31, 2014 and a board approved equity incentive plan; and

     
 

·

securities issued upon exercise or conversion of any indebtedness or securities, provided that such indebtedness or securities were not issued in violation of this the preemptive rights.

 

 
73

 

TTM Consolidated EBITDA Statement.

 

We are required to deliver to CP IV simultaneously with filing of our annual and quarterly reports with the SEC and on a monthly basis, a schedule showing the calculation of trailing twelve months consolidated EBITDA as of the end of the period covered by such financial statements or such month, as applicable.

 

Transfers Subject to Stockholder Rights; Legends.

 

The common stock acquired by Christals Parent under the Exchange Agreement and the common stock acquired from the stockholders of our company pursuant to separate stock purchase agreements occurring on the same day were distributed by Christals Parent to its members and further distributed by its member, Christals Holding to the members of Christals Holding. The distribution of the common stock to such persons by Christals Parent and Christals Holding was made subject to the terms and provisions of the Stockholder Rights Agreement.

 

Underwriter's Warrants 

 

We have agreed to issue to the underwriter warrants to purchase up to a total of [___] shares of common stock (3% of the shares of common stock sold in this offering, including the over-allotment option). The warrants will be exercisable at any time, and from time to time, in whole or in part, during the four-year period commencing one year from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering. The warrants are exercisable at a per share price equal to $[___] per share, or 115% of the public offering price per share in the offering. In addition, the warrants provide for registration rights upon request, in certain cases. The demand registration right provided will not be greater than five years from the effective date of the offering, and the piggyback registration right provided will not be greater than seven years from the effective date of the offering. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.

 

Anti-Takeover Effects of Nevada Law and Our Articles of Incorporation and Bylaws

 

The provisions of Nevada law, our articles of incorporation and bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.

 

Anti-takeover Effects of Nevada Law

  

Business Combinations

 

The "business combination" provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS, prohibit a Nevada corporation with at least 200 stockholders from engaging in various "combination" transactions with any interested stockholder: for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; or after the expiration of the three-year period, unless:

 

 

·

the transaction is approved by the board of directors or a majority of the voting power held by disinterested stockholders, or

     
 

·

if the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value per share of common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher.

 

A "combination" is defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, with an "interested stockholder" having: (a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (c) 10% or more of the earning power or net income of the corporation.

 

 
74

 

In general, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 10% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire our company even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

Our Amended and Restated Articles of Incorporation state that we have elected not to be governed by the "business combination" provisions.

 

Control Share Acquisitions

 

The "control share" provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, which apply only to Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada, prohibit an acquirer, under certain circumstances, from voting its shares of a target corporation's stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation's disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power. Once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become "control shares" and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters' rights.

 

Our Amended and Restated Articles of Incorporation state that we have elected not to be governed by the "control share" provisions.

 

Articles of Incorporation and Bylaw Provisions

 

Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our management team, including the following:

 

 

·

Board of Directors Vacancies. Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws authorize only our board to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our board will be permitted to be set only by a resolution adopted by our board. These provisions would prevent a stockholder from increasing the size of our board and then gaining control of our board by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board but promotes continuity of management.

     
 

·

No Cumulative Voting. Nevada law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation's articles of incorporation provides otherwise. Our articles of incorporation and bylaws do not provide for cumulative voting.

 

 
75

 

Transfer Agent and Registrar

 

Our independent stock transfer agent is Globex Transfer, LLC. Their mailing address is 780 Deltona Blvd., Suite 202, Deltona, FL 32725, and their phone number is (813) 344-4490.

 

UNDERWRITING

 

We have entered into an underwriting agreement with [______________________], or [___________], with respect to this offering. Under the terms and subject to the conditions of the underwriting agreement, the underwriter has agreed to purchase, and we have agreed to sell to the underwriter, the number of shares of common stock indicated below:  

 

Underwriter 

Number of Shares 

-

-

-

Total 

-

 

The underwriter is offering the shares of common stock subject to its acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the underwriter to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by its counsel and to certain other conditions. The underwriter is obligated to take and pay for all of the shares of common stock offered hereby if any such shares are taken. However, the underwriter is not required to take or pay for the shares of common stock covered by the underwriter's over-allotment option described below.  

 

The underwriter initially proposes to offer the shares of common stock to the public at the offering price set forth on the cover page of this prospectus and to certain dealers at such offering price less a selling concession not in excess of $ [___]  per share. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the underwriter.  

 

We have granted to the underwriter an over-allotment option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional [___]  shares of common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discounts and commissions. The underwriter may exercise this option solely for the purpose of covering over-allotments, if any.  

 

 
76

 

The following table shows the public offering price, the underwriting discounts and commissions, and the proceeds to us, before expenses. These amounts are shown assuming both no exercise and full exercise of the underwriter's option to purchase up to an additional [___]  shares of common stock to cover over-allotments.  

 

Total 

Per Share 

Without Over-allotment 

With Over-allotment 

Public offering price 

    -

-

-

Underwriting discounts and commissions 

-

 

-

-

Proceeds to us, before expenses 

-

-

-

 

We have agreed to pay for all costs and expenses customarily borne by an issuer incident to the purchase, sale and delivery of the common stock offered by the underwriter, including all fees and expenses of filing with the SEC and Financial Industry Regulatory Authority, Inc. and all Blue Sky filing fees and expenses, and we will reimburse the underwriter for any such costs and expenses. Additionally, we have agreed to pay for up to $125,000 in the aggregate of certain out-of-pocket costs and expenses of the underwriter, including fees and expenses of underwriter's counsel. The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $ [___]

 

We have agreed that, subject to certain exceptions, we will not (i) offer, sell, contract to sell or otherwise issue any shares of common stock or securities exchangeable or convertible into common stock or (ii) file any registration statement with the SEC relating to the offering of any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for a period of 90 days following the date of this prospectus, without the prior written consent of [__________]. Our directors, executive officers and certain of our stockholders have also agreed that, subject to certain exceptions, they will not, directly or indirectly, offer, sell, contract to sell, pledge or otherwise dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock beneficially owned by them for a period of [90] days following the date of this prospectus, without the prior written consent of [__________]. 

 

 
77

 

The 90-day restricted period described in the preceding paragraph will be extended if:  

 

·

during the last 17 days of the [90]-day restricted period, we issue an earnings release or material news or a material event relating to us occurs; or  

 

·

prior to the expiration of the [90]-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of issuance of the earnings release or material news or the occurrence of the material event.  

 

In order to facilitate the offering of the shares of common stock, the underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of the shares of common stock. Specifically, the underwriter may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriter under the over-allotment option. The underwriter can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriter will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriter may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriter must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there may be downward pressure on the price of the shares of common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriter may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the shares of common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriter is not required to engage in these activities and may end any of these activities at any time.  

 

We have agreed to indemnify the underwriter against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriter may be required to make in respect of those liabilities. 

 

 
78

 

Offer Restrictions Outside the United States

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

State Blue Sky Information

 

We will offer and sell our common stock to retail customers only in Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Louisiana, Minnesota, Missouri, New York, Rhode Island, Utah, Virginia, and Wisconsin. In New York and Hawaii, we have relied on exemptions from the state registration requirements. In the other states listed above, we will apply to have our common stock registered for sale and will not sell our common stock to retail customers in these states unless and until such registration is effective in each of these states.

 

If you are not an institutional investor, you may purchase our common stock in this offering only in the jurisdictions described directly above. The definition of an "institutional investor" varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities.

 

The National Securities Markets Improvement Act of 1996, which is a federal statute, pre-empts the states from regulating transactions in certain securities, which are referred to as "covered securities." The resale of our common stock, from and after the effective date,  is exempt from state registration requirements under the National Securities Markets Improvement Act because we will file periodic and annual reports under the Securities Exchange Act of 1934. However, states are permitted to require notice filings and collect fees with regard to these transactions and a state may suspend the offer and sale of securities within such state if any such required filing is not made or fee is not paid. As of the date of this prospectus, Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming either do not presently require any notice filings or fee payments or have not yet issued rules or regulations indicating whether notice filings or fee payments will be required. The District of Columbia, Illinois, Maryland, Montana, New Hampshire, North Dakota, Oregon, Puerto Rico, Rhode Island, Tennessee, Texas and Vermont currently permit the resale of the securities, if we have registered the securities in the state or the proper notice filings and fees have been submitted. As of the date of this prospectus, we have not determined in which, if any, of these states we will submit the required notice filings or pay the required fee. Additionally, if any of these states that has not yet adopted a statute relating to the National Securities Markets Improvement Act adopts such a statute in the future requiring a filing or fee or if any state amends its existing statutes with respect to its requirements, we would need to comply with those new requirements in order for our common stock to continue to be eligible for resale in those jurisdictions.

 

Aside from the exemption from registration provided by the National Securities Markets Improvement Act, we believe that our common stock, from and after the effective date, will be eligible for sale on a secondary market basis in various states based on the availability of another applicable exemption from state registration requirements, in certain instances subject to waiting periods, notice filings or fee payments.

 

 
79

 

LEGAL MATTERS

 

The validity of the securities being offered by this prospectus has been passed upon for us by [___]. Certain legal matters in connection with this offering will be passed upon for the underwriter by [___].

 

EXPERTS

 

The financial statements included in this prospectus and in the registration statement have been audited by KLJ & Associates LLP,   independent registered public accounting firm, to the extent and for the periods set forth in its report appearing elsewhere herein and in the registration statement, and are included in reliance on such report, given the authority of said firm as an expert in auditing and accounting.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to the shares of common stock offered in this offering and our company, we refer you to the registration statement and to the attached exhibits. With respect to each such document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matters involved.

 

You may inspect our registration statement and the attached exhibits and schedules without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of our registration statement from the SEC upon payment of prescribed fees. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

 

Our SEC filings, including the registration statement and the exhibits filed with the registration statement, are also available from the SEC's website at www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

 
80

 

PEEKAY BOUTIQUES, INC. 

 

FINANCIAL STATEMENTS 

 

Including Independent Accountants' Audit Report 

 

For the Fiscal Years Ended 

 

December 31, 2014 and 2013 

 

Effective upon the close of business on December 31, 2014, Christals Acquisition, LLC completed a reverse merger transaction with Peekay Boutiques, Inc. (fka Dico, Inc.); that is treated as a recapitalization of Christals Acquisition. The attached financial statements have been revised to reflect the exchange of membership interests in Christals Acquisition, LLC for the common stock of Peekay Boutiques, Inc. 

 

 

Page No.

 

Report of Independent Registered Public Accounting Firm 

 

F-2

 

Consolidated Balance Sheets as of December 31, 2014 and 2013 

 

F-3

 

Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013 

 

F-4

 

Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2014 and 2013 

 

F-5

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013 

 

F-6

 

Notes to Financial Statements 

 

F-7 to F-16

 

 

 
F-1
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Peekay Boutiques, Inc.

 

We have audited the accompanying consolidated balance sheet ofPeekay Boutiques, Inc. as of December 31, 2014 and 2013 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. Peekay Boutiques, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peekay Boutiques, Inc. as of December 31, 2014 and 2013, the results of their operations, and their cash flows, for the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

/s/ KLJ & Associates, LLP

 

KLJ & Associates, LLP 

 

Edina, MN

 

August 12, 2015

 

 

 

F-2

 

PEEKAY BOUTIQUES, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,
2014 

 

 

December 31,

2013

 

ASSETS 

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

Cash and cash equivalents 

 

$ 1,126,887

 

 

$ 3,306,230

 

Accounts receivable 

 

 

141,000

 

 

 

10,351

 

Inventory, net of allowances 

 

 

4,939,998

 

 

 

4,649,910

 

Prepaid expenses and other

 

 

635,717

 

 

 

620,881

 

Total current assets 

 

 

6,843,602

 

 

 

8,587,372

 

 

 

 

 

 

 

 

 

 

Property and equipment, net 

 

 

1,912,728

 

 

 

626,551

 

Goodwill 

 

 

40,825,147

 

 

 

41,500,171

 

Finance costs, net 

 

 

2,323,714

 

 

 

3,054,026

 

Deposits 

 

 

527,975

 

 

 

185,714

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$ 52,433,166

 

 

$ 53,953,834

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY 

 

 

 

 

 

 

 

 

Current liabilities 

 

 

 

 

 

 

 

 

Accounts payable 

 

$ 1,762,014

 

 

$ 1,734,082

 

Accrued expenses 

 

 

3,059,895

 

 

 

1,739,452

 

Customer deposits 

 

 

396,541

 

 

 

366,156

 

Short-term debt, net of original issue discount 

 

 

38,012,580

 

 

 

-

 

Total current liabilities 

 

 

43,231,030

 

 

 

3,839,690

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of original issue discount 

 

 

12,700,000

 

 

 

50,491,620

 

Deferred tax liabilities, net and other 

 

 

2,543,583

 

 

 

1,154,411

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES 

 

 

58,474,613

 

 

 

55,485,721

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS EQUITY 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized; 3,582,470 issued and outstanding 

 

 

358

 

 

 

358

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares outstanding 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

 717,348

 

 

 

  1,045,018

 

Retained deficit

 

 

(6,759,153 )

 

 

(2,577,263 )

TOTAL SHAREHOLDERS' EQUITY 

 

 

(6,041,447 )

 

 

(1,531,887 )

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 

 

$ 52,433,166

 

 

$ 53,953,834

 

 

The accompanying notes are an integral part of these financial statements.

 

 
F-3
 

 

PEEKAY BOUTIQUES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the Years Ended        

 

 

 

December 31,
2014

 

 

December 31,
2013

 

REVENUE 

 

$ 39,624,783

 

 

$ 39,449,389

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

13,740,348

 

 

 

13,639,940

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT 

 

 

25,884,435

 

 

 

25,809,449

 

 

 

 

 

 

 

 

 

 

SELLING, GENERAL & ADMINSTRATIVE EXPENSES 

 

 

20,963,733

 

 

 

19,569,773

 

 

 

 

 

 

 

 

 

 

DEPRECIATION AND AMORTIZATION 

 

 

2,198,852

 

 

 

1,902,304

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME 

 

 

2,721,850

 

 

 

4,337,372

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE) 

 

 

 

 

 

 

 

 

Other expense 

 

 

(68,204 )

 

 

(104,098 )

Interest expense 

 

 

(6,633,536 )

 

 

(6,577,537 )

Total other income (expense) 

 

 

(6,701,740 )

 

 

(6,681,635 )

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE 

 

 

202,000

 

 

 

233,000

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$ (4,181,890 )

 

$ (2,577,263 )

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted: 

 

 

 

 

 

 

 

 

Loss per share attributable to common stockholders 

 

$ (1.17 )

 

$ (0.72 )

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding 

 

 

3,582,470

 

 

 

3,577,470

 

 

The accompanying notes are an integral part of these financial statements.

 

 
F-4
 

 

PEEKAY BOUTIQUES, INC. 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 

 

 

 

Shares

 

 

Common

 

 

Additional

 

 

Retained

 

 

 

 

 

 

Outstanding

 

 

Stock

 

 

Paid in Capital

 

 

Deficit

 

 

Total

 

Balance - December 31, 2012 

 

 1,043,402

 

 

104

 

 

$ 304,804

 

 

-

 

 

$ 304,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members contribution

 

    2,534,068

 

 

    254

 

 

 

  740,214

 

 

-

 

 

740,468

Net loss 

 

 

 

 

 

 

 

 

 

 

(2,577,263 )

 

 

(2,577,263 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2013 

 

3,577,470

 

 

358

 

 

 

1,045,018

 

 

 

(2,577,263 )

 

 

(1,531,887 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recapitalization 

 

 

5,000

 

 

 

 

 

 

(327,670

 

 

 

 

(327,670 )

Net loss 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

(4,181,890 )

 

 

(4,181,890 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2014 

 

 

3,582,470

 

 

$ 358

 

 

 

717,348

 

 

$ (6,759,153 )

 

$ (6,041,447 )

 

The accompanying notes are an integral part of these financial statements. 

 

 
F-5
 

 

  PEEKAY BOUTIQUES, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Year Ended      

 

 

 

December 31,

2014

 

 

December 31,

2013

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES 

 

 

 

 

 

 

Net loss 

 

$ (4,181,890 )

 

$ (2,577,263 )

Adjustments to reconcile net loss to net cash flows from operating activities: 

 

 

 

 

 

 

 

 

Depreciation and amortization 

 

 

2,198,852

 

 

 

1,902,304

 

Deferred income taxes 

 

 

144,000

 

 

 

178,000

 

Changes in operating assets and liabilities 

 

 

 

 

 

 

 

 

Net change in accounts receivable 

 

 

(130,649 )

 

 

19,645

 

Net change in inventory 

 

 

(290,083 )

 

 

757,134

 

Net change in prepaid and other assets 

 

 

(47,101 )

 

 

(73,804 )

Net change in accounts payable & accrued liabilities 

 

 

2,313,930

 

 

 

1,819,535

 

Net cash flow (used in) provided by operating activities 

 

 

7,059

 

 

 

2,025,551

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES 

 

 

 

 

 

 

 

 

Acquisitions 

 

 

(44,857 )

 

 

(480,600 )

Purchase equipment 

 

 

(1,076,437 )

 

 

(492,276 )

Net cash flow (used in) investing activities 

 

 

(1,121,294 )

 

 

(972,875 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES 

 

 

 

 

 

 

 

 

Proceeds from notes payable 

 

 

243,290

 

 

 

176,138

 

Borrowing costs associated with notes payable 

 

 

(958,398 )

 

 

-

 

Proceeds from member contributions and (shareholder disbursements) 

 

 

(350,000 )

 

 

740,468

 

Net cash flow (used in) provided by financing activities 

 

 

(1,065,108 )

 

 

916,606

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH 

 

 

(2,179,343 )

 

 

1,969,282

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period 

 

 

3,306,230

 

 

 

1,336,948

 

Cash and cash equivalents, end of period

 

$ 1,126,887

 

 

$ 3,306,230

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 

 

 

 

 

 

 

 

 

Income taxes paid 

 

$ 96,938

 

 

$ 292,839

 

Interest paid 

 

$ 5,494,256

 

 

$ 5,418,992

 

 

The accompanying notes are an integral part of these financial statements. 

 

 
F-6
 

 

PEEKAY BOUTIQUES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

At the close of business on December 31, 2014, Christals Acquisition, LLC and its members entered into a securities exchange agreement ("Exchange Agreement") with DICO, Inc. a Nevada corporation, pursuant to which DICO acquired 100% of the issued and outstanding equity capital of Christals Acquisition in exchange for 2,524,870 shares of DICO common stock, par value $0.0001 per share, which constituted 70.5% of the issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Exchange Agreement.  In addition, at the closing of the share exchange, Christals paid DICO $350,000 in cash.  This cash was immediately used for the following purposes (i) to pay down all of DICO's  outstanding liabilities, (ii) $308,436 of this cash was used as a partial payment toward the redemption of a total of 15,000,000 of DICO restricted shares from David Lazar, the former Chief Operating Officer and Secretary of DICO, pursuant to a redemption agreement entered into with Mr. Lazar on December 31, 2014, and (iii) to satisfy aggregate purchase price payable to holders of a total of 1,052,600 shares of DICO common stock, which shares were transferred to the members of Christals Acquisition as a condition to the closing of the exchange transaction.  In addition to receiving the $308,436 payment for the redemption of his 15,000,000 shares of DICO common stock, DICO also transferred to Mr. Lazar the remaining inventory of loose diamonds pursuant to a bill of sale and assignment agreement as the balance of the consideration for the redemption of his shares.   Immediately following the closing of the exchange transaction and the related transactions described above, the former members of Christals Acquisition and certain equity owners of such members who immediately received distributions of such securities, became the owners of 3,577,470 shares of our common stock, constituting 99.9% of DICO's issued and outstanding common stock as of such closing.  For accounting purposes, the exchange transaction with Christals Acquisition was treated as a reverse acquisition, with Christals Acquisition as the acquirer and DICO, Inc. as the acquired party.   In January 2015, DICO, Inc. changed its name to Peekay Boutiques, Inc. 

 

Christals Acquisition, LLC, a Delaware limited liability company, was formed in January 2012 to acquire existing limited liability companies operating retail stores in the sexual health and wellness category.  The financial statements  of Christals Acquisition, LLC and Subsidiaries ("the Company") include the following fully owned subsidiaries:   Peekay Acquisition, LLC, Peekay SPA, LLC; ZJ Gift F-2, LLC, ZJ Gift F-3, LLC,  ZJ Gifts F-4, LLC, ZJ Gifts F-5, LLC, ZJ Gifts F-6, LLC, ZJ Gifts I-1, LLC, ZJ Gifts M-1, LLC, ZJ Gifts M-2, LLC, and ZJ Gifts M- 3, LLC, which operate stores in Iowa, Texas and Tennessee under the Christals brand; and Peekay, Inc., ConRev, Inc., Condom Revolution, Inc. and Charter Smith Sanhueza Retail, Inc., which operate stores in Washington, Oregon and California under the Lovers, ConRev and A Touch of Romance brands. 

 

Basis of Presentation - Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.  During 2013 and 2014, the Company incurred net losses of $2,577,263 and $4,150,362, respectively, largely as a result of interest expense on its outstanding debt of $6.6 million annually, which exceeds the operating profits generated through the operations of its business.  Approximately $38.2 million in senior secured debt matures on December 31, 2015, and the Company does not have the resourced necessary to pay this debt as it comes due. 

 

 
F-7
 

 

PEEKAY BOUTIQUES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The ability of the Company to continue its operations and execute its business plan is dependent on its ability to refinance this debt and/or to raise sufficient capital to pay this debt and other obligations as they come due (or are extended through a refinancing) and to provide sufficient capital to operate its business as contemplated.  Management is in the process of exploring refinancing options, and raising additional equity capital through either private, public market or PIPE transactions. 

 

These factors, amount others, raise substantial doubt about the 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. 

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated during the consolidation process. 

 

Fiscal Year End

 

The Company has adopted a fiscal year end of December 31. 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  

 

The Company's most significant areas of estimation and assumption are: 

 

  · determination of the appropriate amount and timing of markdowns to clear unproductive or slow-moving retail inventory and overall inventory obsolescence;
 
  · estimation of future cash flows used to assess the recoverability of long-lived assets,
 

Cash and Cash Equivalents

 

All short-term investments with original maturities of three months or less at date of purchase are considered cash equivalents. 

 

 
F-8
 

 

PEEKAY BOUTIQUES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. The Company maintains their cash in bank deposit accounts at high credit quality financial institutions. At times, the balances maintained with Wells Fargo Bank exceed federally insured limit of $250,000 per accountholder.  The Company also maintains a certain amount of cash on hand at the retail store locations. The Company has not experienced any significant losses with respect to its cash. 

 

Receivables

 

Receivables consist primarily of amounts receivable from vendors and a wholesale trade account.  These receivables are computed based on provisions of the vendor agreements in place and the Company's completed performance.  The Company's vendors are primarily U.S. based producers of consumer products, from whom the Company purchases resale product inventory.  The Company does not require collateral on its receivables and does not accrued interest.  Credit risk with respect to receivables is limited due to the nature of the relationship with the vendors.  Receivables were $141,000 and $10,351 at December 31, 2014 and 2013, respectively.