form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December 31, 2007
¨
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number 000-33297
BLUE
HOLDINGS, INC.
(Exact
Name of Registrant as Specified in its Charter)
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Nevada
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88-0450923
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(State
or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S.
Employer Identification
No.)
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5804
East Slauson Avenue
Commerce,
California 90040
(Address
of Principal Executive Offices and Zip Code)
(323)
725-5555
(Registrant’s Telephone
Number, Including Area Code)
Securities
Registered Pursuant to Section 12(b) of the Act:
None
Securities
Registered Pursuant to Section 12(g) of the Exchange Act:
Common
Stock, $0.001 par value
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days.
Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer
¨
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Non-accelerated
Filer ¨ (Do not
check if smaller reporting company)
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Smaller
Reporting
Company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, as of the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $9,988,222.
At April
14, 2008, the issuer had 27,982,200 shares of Common Stock, $0.001 par value,
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III, Items 10, 11, 12,
13 and 14 of this Form 10-K.
2006
FORM 10-K ANNUAL REPORT
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TABLE OF
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CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This 2007
Annual Report on Form 10-K, including the sections entitled “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation” and “Business,” contains “forward-looking statements” that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of
resources. These forward-looking statements include, without
limitation, statements regarding projections, predictions, expectations,
estimates or forecasts for our business, financial and operating results and
future economic performance, statements of management’s goals and objectives;
and other similar expressions concerning matters that are not historical
facts. Words such as “may,” “will,” “should,” “could,” “would,”
“predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,”
“intends,” “plans,” “believes” and “estimates,” and similar expressions, as well
as statements in future tense, identify forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking
statements are based on information available at the time they are made and/or
management’s good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause these
differences include, but are not limited to our failure to implement our
business plan within the time period we originally planned to accomplish and
other factors discussed under the headings “Risk Factors,” “Management’s
Discussion and Analysis or Plan of Operation” and “Business.”
Forward-looking
statements speak only as of the date they are made. You should not
put undue reliance on any forward-looking statements. We assume no obligation to
update forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting forward-looking information,
except to the extent required by applicable securities laws. If we do
update one or more forward-looking statements, no inference should be drawn that
we will make additional updates with respect to those or other forward-looking
statements.
All
references to “we,” “our,” “us” and the “Company” in this Annual Report on Form
10-K refer to Blue Holdings, Inc. and its subsidiaries.
Overview
We
design, manufacture and market high-end fashion jeans, apparel and accessories
under the principal brand names Antik Denim, Taverniti So Jeans, Yanuk and Faith
Connexion. Our products include jeans, jackets, belts, purses
and T-shirts. We sell premium denim products and accessories in
high-end department stores and fashion boutiques that cater to fashion conscious
consumers. Our products are currently sold in the United States,
Canada, Japan and the European Union directly to department stores and
boutiques, including Bloomingdales, Nordstrom, Macy’s, Saks and Fred Segal, and
through distribution arrangements in a number of countries abroad.
We
operate in the high-end fashion denim industry. Our current
competitors are companies that market such brands as Joe’s Jeans, True Religion,
Seven For All Mankind and Citizens of Humanity. Our goal is to build
a broad and diversified portfolio of brands selling premium denim products and
accessories across a range of retail price points through wholesale and retail
distribution channels.
Corporate
Background
Blue
Holdings, Inc. was incorporated in the State of Nevada on February 9, 2000 under
the name Marine Jet Technology Corp. From our inception through
January 2005, we focused on developing and marketing boat propulsion
technology. Between January and February 2005, we entered into
separate transactions whereby, among other matters, Keating Reverse Merger Fund,
LLC (“KRM Fund”), one of our existing stockholders, agreed to purchase a
substantial majority of our outstanding common stock, and Intellijet Marine,
Inc., a company formed by our former majority stockholder and principal
executive officer and director, Jeff P. Jordan, acquired all of our boat
propulsion technology assets and assumed all of our then existing
liabilities.
Between
February 4, 2005 and April 29, 2005, we existed as a public “shell” company with
nominal assets.
On April
14, 2005, we entered into an Exchange Agreement (the “Antik Exchange Agreement”)
with Antik Denim, LLC, a California limited liability company formed in
September 2004 (“Antik”), the members of Antik (the “Antik Members”), and KRM
Fund. The closing of the transactions contemplated by the Antik
Exchange Agreement occurred on April 29, 2005. At the closing, we
acquired all of the outstanding membership interests of Antik (the “Antik
Interests”) from the Antik Members, and the Antik Members contributed all of
their Antik Interests to us. In exchange, we issued to the Antik
Members 843,027 shares of our Series A Convertible Preferred Stock, par value
$0.001 per share (the “Preferred Shares”), which, as a result of the approval by
a substantial majority of our outstanding stockholders entitled to vote and the
approval by our board of directors, of amendments to our Articles of
Incorporation that (i) changed our name to Blue Holdings, Inc., (ii) increased
our authorized number of shares of common stock to 75,000,000, and (iii) adopted
a 1-for-29 reverse stock split, on June 7, 2005 converted into 24,447,783 shares
of our common stock on a post-reverse stock split basis.
At the
closing, Antik became our wholly-owned subsidiary. The exchange
transaction with Antik was accounted for as a reverse merger (recapitalization)
with Antik deemed to be the accounting acquirer, while we were deemed to be the
legal acquirer.
On
October 31, 2005, we entered into an Exchange Agreement (the “Taverniti Exchange
Agreement”) with Taverniti So Jeans, LLC, a California limited liability company
formed in September 2004 (“Taverniti”), and the members of Taverniti (the
“Taverniti Members”). Under the Taverniti Exchange Agreement, we
acquired all of the outstanding membership interests of Taverniti (the
“Taverniti Interests”) from the Taverniti Members, and the Taverniti Members
contributed all of their Taverniti Interests to us. In exchange, we
issued to the Taverniti Members, on a pro rata basis, an aggregate of 500,000
shares of our common stock and paid to the Taverniti Members, on a pro rata
basis, an aggregate of Seven Hundred Fifty Thousand Dollars
($750,000). At the closing of the exchange transaction, Taverniti
became our wholly-owned subsidiary.
Significant
Developments
On
January 12, 2007, we entered into a three-year License Agreement (the “Faith
License Agreement”) with Faith Connexion S.A.R.L. (“Faith”) pursuant to which
Faith granted us an exclusive right and license to use the Faith Connexion trademark for
the manufacture, marketing, promotion, sale, distribution and other exploitation
of men’s and women’s hoodies, t-shirts, sweatshirts, sweatpants and hats in
North America, South America, Japan and Korea. Compensation for use
of the Faith Connexion
trademark will consist of a royalty of 9% of our net sales arising from products
bearing the Faith
Connexion trademark in the first two years, and 9.5% of net sales in year
three. The Faith License Agreement has a term of three
years.
On April
27, 2007, Antik executed a License Agreement (the “Mercier License Agreement”)
dated to be effective as of April 18, 2007, with Mercier SARL, a company formed
under the laws of France (“Mercier”), pursuant to which Antik granted to Mercier
an exclusive right and license to use the Antik Denim trademark for the
manufacture, marketing, promotion, sale, distribution and other exploitation of
denim and sportswear apparel in Europe. Compensation for use of the
Antik Denim trademark
will consist of a royalty calculated as 10% of Mercier’s net sales arising from
products bearing the Antik
Denim trademark. The Mercier License Agreement has an initial
term of twenty (20) months, and includes four (4) one (1)-year extension options
available to Mercier to the extent it achieves specified minimum net
sales.
On April
27, 2007, in anticipation of Antik’s entry into the Mercier License Agreement,
Antik executed Amendment No. 1 to License Agreement effective as of October 1,
2006 (the “North Star License Agreement”), dated to be effective as of April 25,
2007, with North Star International, Inc. (“North Star”), to remove the European
territory from the rights previously granted to North Star. On
February 6, 2008, Antik entered into a Termination and Release Agreement with
North Star pursuant to which the parties terminated the North Star License
Agreement, as amended. Each of Antik and North Star released the
other party from any and all claims, suits and causes of action, whether known
or unknown, arising out of the North Star License Agreement or its termination,
except in all cases for any and all obligations arising under the Termination
and Release Agreement. In consideration for the prior amendment of
the License Agreement, Antik agreed to pay North Star, or its designee, $80,000
within 90 days of the date of the Termination and Release
Agreement.
On May 1,
2007, Antik executed a License Agreement (the “Max Ray License Agreement”) with
Max Ray, Inc., a California corporation (“Max Ray”), pursuant to which Antik
granted to Max Ray an exclusive right and license to use the Antik Denim trademark for the
manufacture, marketing, promotion, sale, distribution and other exploitation of
small leather goods consisting of belts, handbags, small leather accessories and
scarves in the United States and its territories. Compensation for
use of the Antik Denim
trademark will consist of a royalty calculated as 8% of Max Ray’s net sales
arising from products bearing the Antik Denim
trademark. The Max Ray License Agreement has an initial term of
eighteen (18) months, and includes four (4) one (1)-year extension options
available to Max Ray unless earlier terminated by Max Ray.
On May 8,
2007, we elected Harry Haralambus and Leonard Hecht as new independent members
of our board of directors. Messrs Haralambus and Hecht currently
serve as members of the Audit Committee, Compensation Committee and Governance
and Nominating Committee of our board of directors.
On May
11, 2007, we entered into a Letter of Intent with William Adams, aka will.i.am,
of the Black Eyed Peas, pursuant to which the parties agreed, within 30 days of
the date of execution, to enter into (i) a co-branding agreement for the
creation of a collection of premium denim and denim-related apparel under the
name “i.am Antik” or such other similar name upon which the parties shall agree,
and (ii) a joint venture agreement pursuant to which the parties will design,
develop, market, manufacture and distribute apparel products bearing the “I.Am”
trademark subject to a license agreement. The term of each of the
co-branding agreement and the joint venture agreement shall be for five years,
with the first year commencing on the execution of the Letter of Intent and
ending on the last day of February 2008, and each year thereafter commencing on
March 1 and ending on the last day of February.
Under the
terms of the Letter of Intent, in consideration of the design, marketing and
promotional services rendered by Mr. Adams, we agreed to issue to Mr. Adams as
base compensation 175,000 shares of our common stock within 10 days of the
execution of the Letter of Intent and 81,250 shares of our common stock on each
anniversary of the effective date of the Letter of Intent for a period of 4
years, subject to the prior effectiveness of a registration statement on Form
S-8 registering the issuance of the shares to Mr. Adams. Mr. Adams
will also be entitled to receive up to an aggregate of 500,000 additional shares
of our common stock upon achieving certain milestones based on net
sales.
Mr. Adams
is permitted to terminate the co-branding agreement and/or joint venture
agreement in the event that we are delisted from the NASDAQ Capital Market, a
final and binding legal determination is made by a body with appropriate
jurisdiction that we have failed to comply with the rules and regulations
promulgated by the Securities and Exchange Commission, or the joint venture’s
failure to launch an “I.Am” collection within 12 months from the date of
execution of the definitive joint venture agreement. We are currently
involved in discussions with Mr. Adams regarding a mutual termination of the
arrangement.
On July
24, 2007, Paul Guez resigned as our Chief Executive Officer and
President. Mr. Guez remains the Chairman of our Board of Directors
and currently focuses on furthering developing our global licensing
business.
On July
24, 2007, we appointed Glenn S. Palmer as our new Chief Executive Officer and
President. Mr. Palmer commenced the implementation of a comprehensive
action plan with key strategic initiatives focused on cutting costs to reduce
our selling, general and administrative expenses by approximately 10% by the end
of fiscal 2007, selling off our excess inventory, and aggressively reviewing and
evaluating the long-term viability of our brands, licensees and retail
strategy.
On
September 24, 2007, we announced the discontinuation of our joint venture with
Life & Death LLC, a reduction in approximately 25% of our workforce and our
plans to exit our two retail stores. Subsequent to such press
release, we continue to evaluate our various options relative to our retail
strategy, which may include the possibility of exiting the retail
business.
On
November 28, 2007, we entered into a transaction with Mr. Guez pursuant to a
Preferred Stock Rescission and Purchase Agreement dated November 28, 2007,
whereby we issued to Mr. Guez 1,000,000 shares of an amended and restated form
of our Series A Convertible Preferred Stock (the “New Series A Preferred”) in
consideration for (i) the cancellation of the $2,556,682 of advances made to us
by Mr. Guez and (ii) an additional cash investment of $125,000. The
shares of New Series A Preferred are convertible into 4,623,589 shares of our
common stock based on a conversion formula equal to the price per share
($2.681682) divided by the conversion price ($0.58) multiplied by the total
number of shares of New Series A Preferred issued, subject to adjustment in
accordance with the provisions of the certificate of designations for the New
Series A Preferred.
On March
5, 2008, we entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”) with Gemini Master Fund, Ltd. (the “Investor”) pursuant to
which we issued an aggregate of $2.0 million of thirty-month senior secured
convertible notes, and five-year warrants to purchase an aggregate of 875,000
shares of our common stock at a per share exercise price of $1.00 (each subject
to adjustment as provided in the warrants, including pursuant to economic
anti-dilution adjustments), to the Investor. Pursuant to the terms of
the Securities Purchase Agreement, we may issue additional convertible notes in
the aggregate principal amount of up to $1,000,000 and additional warrants to
purchase up to an aggregate of 437,500 shares of our common stock (subject to
adjustment as provided in the warrants, including pursuant to economic
anti-dilution adjustments).
The
convertible notes carry interest at 8% per annum on the unpaid/unconverted
principal balance, and are secured on a second priority basis against all of our
assets. One-twenty-fourth of the principal amount of the convertible
notes, and accrued but unpaid interest, are due and payable monthly in 24
installments beginning on first day of each calendar month, commencing on the
first day of the first full calendar month occurring after the date which is six
months following the original issue date. These installment payments
can be made in cash or through the issuance of stock provided that certain
equity conditions are met. The convertible notes are convertible into
approximately 2,500,000 shares of our common stock, based on a conversion price
equal of $0.80 per share (each subject to adjustment as provided in the
convertible notes, including pursuant to economic anti-dilution
adjustments). The additional convertible notes issuable pursuant to
the terms of the Securities Purchase Agreement would be convertible into an
aggregate maximum of an additional 1,250,000 shares of our common stock based on
a conversion price of $0.80 per share (each subject to adjustment as provided in
the convertible notes, including pursuant to economic anti-dilution
adjustments).
In
connection with the transactions contemplated by the Securities Purchase
Agreement, on March 5, 2008, we paid our previously engaged placement agent a
cash fee of $33,600, and issued to the placement agent a convertible note in the
aggregate principal amount of $86,400 and a warrant (with the same terms as the
warrants issued to the Investor) to purchase 150,000 shares of our common stock
at a per share exercise price of $1.00 (each subject to adjustment as provided
in the convertible notes, including pursuant to economic anti-dilution
adjustments). The convertible note issued to the placement agent is
convertible into 108,000 shares of common Stock at a per share price of $0.80
(each subject to adjustment as provided in the convertible notes, including
pursuant to economic anti-dilution adjustments), and has the same terms as the
convertible notes issued to the Investor.
On March
5, 2008, we also entered into a Common Stock Purchase Agreement with Mr. Guez
pursuant to which we agreed to issue 1,750,000 shares of our common stock in
consideration of the cancellation of $1,400,000 of net advances made to us by
Mr. Guez, at a per share price of $0.80.
Business
Strategy
We strive
to build on our position in the principal markets in which we compete by
focusing on the following three core elements of our business
strategy.
Product
Strategy
Our
overall product strategy is to offer multiple brands of apparel in the premium
and better denim segments. As a result of the acquisition of Antik
and Taverniti, and the license agreements with Faith and Yanuk Jeans, LLC, a
company owned by Paul Guez (“Yanuk Jeans”), we currently market our products
under the Antik Denim,
Taverniti So Jeans,
Faith Connexion and
Yanuk brands and plan
to continue to further expand our brand portfolio by acquisition and/or license
of existing apparel companies and/or brands, as applicable, in the premium or
better segments of the industry, or the creation of new brands by our internal
design team. Although no definitive arrangement or plan is currently
in place, we expect our management to periodically review potential acquisition
and licensing opportunities to expand our product line and brands in these
targeted market segments. Our goal is to employ a multi-brand
strategy to reduce risks associated with the natural life cycle of a single
brand and to appeal to a broader customer base with different looks from
different brands. We believe the increase in demand for premium denim
products over the last couple of years and relatively high retail price points
for premium jeans, ranging from approximately $148 to $300, offers us a
significant opportunity to increase our revenues and improve our
profitability.
We also
intend to license our proprietary owned and licensed trademarks with respect to
products that we believe are not in our core line of business. Our
senior management team has significant experience in developing and marketing
multiple premium denim products and brands, which we believe demonstrates a
capability to implement our product strategy. Over the last thirty
years, Mr. Guez, our Chairman, has engaged in the design, marketing,
manufacturing and wholesale distribution of premium fashion and denim
collections, including Sasson Jeans and more recently, a growing stable of
contemporary brands, such as Duarte Jeans, Elvis, Memphis Blues and Grail
Jeans. Our principal designer, Jimmy Taverniti has previously
assisted world-renowned casual apparel companies such as Chevignon, in the
design and development of successful brands and products.
Operating
Strategy
Our
operating strategy is to continue to build on our strengths in brand
development, marketing, distribution and product sourcing capabilities to become
the leading company in the high fashion denim apparel industry. Our
goal is to leverage the expertise and relationships gained by our executive
management and product design teams’ prior experience in creating and developing
premium denim apparel brands, product sourcing and manufacturing in the United
States, Mexico and Asia, and distributing to high-end retail channels both
domestically and internationally.
Historically,
we have relied on the services and staff of companies affiliated with Mr. Guez
in several areas of our business operations. We have moved
away from this model and are in the process of building a team of professionals
with significant prior experience and established relationships in the denim
apparel industry to assume the responsibility for coordinating product
manufacturing, material sourcing, and sales and marketing.
Growth
Strategy
Our goal
is to build a broad and diversified portfolio of brands and become a leading
seller of premium denim products and accessories across a range of retail price
points through our wholesale distribution channels by focusing on the following
key elements of our growth strategy:
Add Brands and Product
Lines. We currently offer four highly differentiated,
designer-driven brands. We will continue to use our extensive
experience in the apparel industry to identify and evaluate strategic
opportunities to acquire other businesses and to develop, license or acquire new
brands. We seek to acquire or license additional businesses and
brands that will contribute to our growth through additional sales revenue, name
and brand recognition, and synergies with our existing brands. Our
goal is to build a portfolio of lifestyle brands in the premium and better
segments of the denim and apparel industry.
Expand Wholesale
Distribution. We currently sell our products directly to major
high-end department stores and boutiques in the United States, Canada, Japan and
the European Union, and through distribution arrangements in a number of
countries abroad. We plan to expand our wholesale distribution in
several ways. Domestically, we plan to add retailers of high-end
denim products that do not already sell our products. We will promote
the sale of all of our brands to retailers that currently sell only one or two
of our brands. We plan to expand the floor space and diversify the
product lines of retailers who currently sell our
products. Internationally, we will negotiate distribution agreements
for territories where we do not already have a strong presence.
Continue to Diversify Product
Lines. We have diversified our product lines, both by
increasing the price point range for our denim products and adding complementary
non-denim products. We also recently added a children’s line to our
men’s and women’s product lines. We will continue to sensibly
diversify our product lines, particularly with new denim products and by
expanding the selection of tops that we offer. We will also continue
to evaluate licensing arrangements with quality manufacturers for ancillary
products that we wish to add.
Our
Products and Brands
We offer
multiple brands of apparel in the premium and better denim
segments. As a result of the acquisitions of Antik and Taverniti and
license agreements with Faith and Yanuk Jeans, we currently market our products
under the Antik Denim,
Taverniti So Jeans,
Faith Connexion and
Yanuk
brands. Our products are sold in the United States and abroad to
upscale retailers and boutiques. We currently sell men’s and women’s
styles and have launched a children’s line for both Antik Denim and Taverniti So
Jeans. Our products are made from high quality fabrics milled
in the United States, Japan and Italy and are processed with cutting-edge
treatments and finishes. Our concepts and designs, including Antik Denim’s distinct
vintage western flair, and our extraordinary fit, embellishments, patent pending
pockets, unique finishes, hand stitching, embroidery detail and other attention
to detail and quality give our products a competitive advantage in the high-end
fashion denim and accessories market.
Our jeans
are available in multiple combinations of washes, fabrics and finishes, with as
many as 20 different combinations of colors, fabrics and finishes on certain
styles. We typically introduce new versions of our major styles each
month in different colors, washes and finishes. Although our denim
products have accounted for the substantial majority of our total sales, our
product lines include knits, woven tops and accessories, the sales of which we
anticipate will continue to increase.
Marketing,
Distribution and Sales
We
market, distribute and sell our products in the United States and
internationally in a number of other countries such as Canada, Belgium, France,
Germany, Sweden, Italy, Korea and Japan.
Our
products are sold in the United States in department stores and boutiques such
as Saks, Neiman Marcus, Nordstrom, Bloomingdales, Atrium, Fred Segal, Intermix,
Kitson and Henri Bendel, as well as smaller boutiques throughout the
country. Our products are sold internationally to department stores
and boutiques such as Lane Crawford in Hong Kong, Harrods and Harvey Nichols in
the United Kingdom, Barneys New York and Isetan in Japan, Galleries Lafayette in
France, and Holt Renfrew in Canada. Additionally, due to general
economic conditions, we expect off priced sales of our products to be in excess
of 10% of our revenues in 2008.
We market
and distribute our products by participating in industry trade shows, as well as
through our show rooms in Los Angeles and New York. We maintain
distributor relationships in the United Kingdom, France, Germany, Sweden,
Greece, Belgium, Italy, Mexico and Japan. Except for Europe, Japan
and Canada, we currently have no exclusive or long term distribution agreements
with any party covering any territory, and do not depend on any single
distributor to distribute our products. Our distributors often, but
not always, purchase products from us at a discount for resale to their
customers in their respective territories. Our distributors warehouse
our products at their expense and they ship to and collect payment from their
customers directly.
Manufacturing
and Sourcing
We
purchase our fabric, thread and other raw materials from various industry
suppliers within the United States and abroad. We do not currently
have any long-term agreements in place for the supply of our fabric, thread or
other raw materials. The fabric, thread and other raw materials we
use are available from a large number of suppliers worldwide. During
the fiscal year ended December 31, 2007, two suppliers accounted for more than
10% of our purchases. Purchases from these suppliers were 20.1% and
10.5%, respectively. We have the ability to replace our suppliers of
raw materials as needed without significantly affecting our business or
operations.
We
presently outsource all of our manufacturing needs to contract vendors to meet
our sales needs. We use a combination of sourcing with a majority of
our manufacturing production contracted in Mexico. We have been in
discussions with one of our lead manufacturers to deliver to us full package
products which we believe will reduce various costs we incur in connection with
assembling our products. We do not rely on any one manufacturer and
we believe additional manufacturing capacity is available to meet our current
and planned needs. We maintain rigorous quality control systems for
both raw and finished goods. We will continue to outsource all of our
manufacturing needs to maintain low cost of goods and higher gross
profit. We will add contract manufacturers as required to meet our
needs. During the fiscal year ended December 31, 2007, one of our
contractors accounted for approximately 50%
of our manufacturing. We believe we can realize significant cost
savings in product manufacturing because of our strong relationships with a
diverse group of U. S. and international contract manufacturers established by
our management team through their prior experience in the apparel industry and
because of the changes we intend to implement in connection with the delivery of
full package products by our manufacturers. In addition, the increase
in production volume as a result of our multi-brand strategy will give us
economies of scale to achieve further cost savings.
Competition
Our
current competitors are companies that sell premium denim and apparel brands
such as Levi Strauss, Calvin Klein, Joe’s Jeans, True Religion Apparel, Seven
For All Mankind and Citizens of Humanity. Many of these competitors
have greater financial resources, operating capacity, name recognition and
market penetration. Sales of our products are affected by style,
price, quality, brand reputation and general fashion trends.
We
believe our portfolio of premium denim brands and broad international
distribution relationships with high-end retailers position us for sustained
growth and profitability. We intend to capitalize on the following
competitive strengths to achieve these goals:
Innovative Concepts and
Designs. Our products embody innovative concepts and designs
with extraordinary fit and are made with high quality fabrics and finishes,
treatments and embellishments, including our patent pending pockets, hand
stitching and embroidery detail. Our competitive edge lies in our
ability to sell quality products at competitive price points.
Recognized Design
Teams. Each of our brands has an independent, highly talented
design team developing distinct, trend setting looks. Jimmy
Taverniti, a highly regarded Italian couture designer, heads the design team for
Taverniti So Jeans and
has over 25 years experience in the denim industry. Faith Connexion is designed
in Europe and is a full line of edge-forward contemporary
sportswear. Antik is designed by a team
of designers led by an experienced design director. Yanuk is a lifestyle brand
conceptualized and designed by an industry veteran with over 15 years of
experience in denim and sportswear.
Multi-brand
Strategy. Unlike our single-brand competitors, we own or have
exclusive licenses to four principal brands, each one overseen by an independent
design team. Antik
Denim is based on vintage western styling and incorporates a very unique
and distinctive back pocket. Taverniti So Jeans, designed
by Jimmy Taverniti, an Italian couture designer, is focused on soft fits and
unique styling. Faith Connexion is a full
line of premium junior sportswear. Yanuk is a contemporary denim
player with focus on fit and a clean, non-distressed
look. Maintaining multiple brands mitigates the risk associated with
a downturn in sales from any one brand at any given time, which is particularly
significant due to the cyclical and seasonal nature of sales and product
performance in the fashion industry.
Diversification of Product
Lines. We offer extensive lines of premium denim products and
accessories for women, men and children consistent with our brands across a
range of retail price points. Our denim bottoms range in price at
retail from $148 to $300. Non-denim products account for
approximately 25% of our total sales, which we believe gives us the ability to
transition from premium denim to luxury lifestyle brands. We recently
introduced children’s lines of our Antik Denim and Taverniti So Jeans brands,
which have been well received by retailers and consumers.
Broad Distribution
Network. We sell our products to high-end retailers and
distributors in the United States and abroad. Our key domestic
retailers include department stores such as Bloomingdale’s, Macy’s, Neiman
Marcus, Nordstrom and Saks, and boutiques such as Fred Segal. Our
products have been distributed domestically in more than 1,300
boutiques. Internationally, our lines are offered in 30 countries on
six continents. International sales accounted for approximately 27%
of sales in 2007.
Experienced Management
Team. Our senior management team has significant experience in
developing and marketing multiple premium denim products and brands, which we
believe demonstrates a capability to implement our product
strategy. Over the last thirty years, Mr. Guez, our Chairman, has
engaged in the design, marketing, manufacturing and wholesale distribution of
premium fashion and denim collections, including Sasson Jeans and more recently,
a growing stable of contemporary brands, such as Duarte Jeans, Elvis, Memphis
Blues and Grail Jeans. Prior to joining us, Mr. Palmer was at
Cerberus Capital Management, a leading private investment firm, where he served
as Chief Executive Officer and President of Rafaella Apparel Group, a $250
million apparel manufacturing company. In addition,
Mr. Palmer previously held senior management positions with various
apparel companies including Best Manufacturing Group, LLC, Liz Claiborne,
Bonaventure Textiles USA, Ellen Tracy, Foxmoor Specialty Stores Corp. and
Bloomingdales.
Trademarks
and Other Intellectual Property
Antik is
the holder of trademark applications for the Antique Denim and Antik Denim marks in the
United States and various other foreign jurisdictions. Antik also
owns several proprietary concepts and designs, including pending trademark and
patent applications on its pocket designs. Yanuk Jeans, from whom we
hold exclusive licenses to exploit products based on the Yanuk and U brands, is the holder of
several United States and foreign trademarks.
Taverniti
is the exclusive licensee for the design, development, manufacture, sale,
marketing and distribution of the Taverniti So Jeans trademark
in the denim and knit sportswear categories for men and women. It is
paying royalties to Taverniti Holdings LLC in the range of five to eight percent
depending on the net sales of the licensed products pursuant to a license
agreement with Taverniti Holdings LLC. Taverniti Holdings LLC is
jointly owned by Paul Guez (60%) and Jimmy Taverniti (40%), the designer of the
products for the brand, and Mr. Guez is the sole manager. The license
agreement was signed in May 2004 and expires on December 31, 2015.
We have
made and will continue to make efforts to minimize domestic and international
counterfeiting of Antik
Denim’s stylized pocket design and infringement of our other intellectual
property rights, including through litigation if necessary.
Government
Regulation and Supervision
We
benefit from certain international treaties and regulations, such as the North
American Free Trade Agreement (NAFTA), which allows for the duty and quota free
entry into the United States of certain qualifying
merchandise. International trade agreements and embargoes by entities
such as the World Trade Organization also can affect our business, although
their impact has historically been favorable.
We have
implemented various programs and procedures, including unannounced inspections,
to ensure that all of the apparel manufacturers with whom we contract fully
comply with employment and safety laws and regulations governing their place of
operation.
Design
and Development
Each of
our brands has an independent design team striving to develop a distinct look
and feel to the products based on an overall design
philosophy. Product mix between denim and non-denim products and
retail price points vary by brand.
Antik Denim. The
designers of Antik
Denim are led by our VP of Merchandising, Alicia Gabaldon. The
principal design philosophy is based on vintage western styling featuring a very
unique and distinctive back pocket.
Taverniti So
Jeans. The designer of the Taverniti So Jeans line is
Jimmy Taverniti, well known as an Italian couture designer with significant
experience as a denim designer. The principal design philosophy is
sportswear driven looks with a vintage attitude.
Yanuk. The
designer of Yanuk is
Lisa Palumbo. The principal design philosophy is focused less on
embroidery and more on subtle design details and fit.
Faith
Connexion. Faith Connexion is designed
in Europe and is a full line of edge-forward contemporary
sportswear.
Employees
As of
April 14, 2008, we had 108 employees, not including our Chief Executive Officer,
Glenn Palmer. Our employees are not unionized. Except for
an agreement with Mr. Palmer, no employees are subject to existing employment
agreements with us.
Available
Information
We file
annual, quarterly and current reports, proxy statements and other information
with the U.S. Securities and Exchange Commission (“SEC”). Copies of
this Annual Report on Form 10-K and each of our other periodic and current
reports, and amendments to all such reports, that we file or furnish pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free
of charge on our website (www.blueholdings.com) as soon as reasonably
practicable after the material is electronically filed with, or furnished to,
the SEC. The information contained on our website is not incorporated
by reference into this Annual Report on Form 10-K and should not be considered
part of this Annual Report on Form 10-K.
In
addition, you may read and copy any document we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the Public Reference Room. Our SEC filings are
also available to the public at the SEC’s web site at http://www.sec.gov, which
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION
CONTAINED IN THIS DESCRIPTION BEFORE PURCHASING SHARES OF OUR COMMON STOCK OR
OTHER SECURITIES. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH
DEGREE OF RISK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT
THE ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE
ARE NOT AWARE OF, OR THAT WE CURRENTLY DEEM IMMATERIAL, ALSO MAY BECOME
IMPORTANT FACTORS THAT AFFECT US. IF ANY OF THE FOLLOWING EVENTS OR
OUTCOMES ACTUALLY OCCURS, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION WOULD LIKELY SUFFER. AS A RESULT, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID
TO PURCHASE OUR COMMON STOCK.
Risks
Related to Our Business
We
may require additional capital in the future.
We may
not be able to fund our future growth or react to competitive pressures if we
lack sufficient funds. Currently, management believes we have
sufficient cash on hand and cash available through our factor to fund existing
operations for the foreseeable future. However, in the future, we may
need to raise additional funds through equity or debt financings or
collaborative relationships, including in the event that we lose our
relationship with our factor. This additional funding may not be
available or, if available, it may not be available on commercially reasonable
terms. In addition, any additional funding may result in significant
dilution to existing stockholders. If adequate funds are not
available on commercially acceptable terms, we may be required to curtail our
operations or obtain funds through collaborative partners that may require us to
release material rights to our products.
We
have a limited operating history, making it difficult to evaluate whether we
will operate profitably.
Antik and
Taverniti, our wholly-owned subsidiaries, were formed in September 2004 to
design, develop, manufacture, market, distribute and sell high end fashion
jeans, apparel and accessories. As a result, we do not have a
meaningful historical record of sales and revenues nor an established business
track record. Further, Faith Connexion, although
successful in Europe, is not fully tested in the United States. While
our management believes that we have an opportunity to be successful in the high
end fashion jean market, there can be no assurance that we will be successful in
accomplishing our business initiatives, or that we will achieve any significant
level of revenues, or continue to recognize net income, from the sale of our
products.
Unanticipated
problems, expenses and delays are frequently encountered in increasing
production and sales and developing new products, especially in the current
stage of our business. Our ability to continue to successfully
develop, produce and sell our products and to generate significant operating
revenues will depend on our ability to, among other matters:
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successfully
market, distribute and sell our products or enter into agreements with
third parties to perform these functions on our behalf;
and
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obtain
the financing required to implement our business
plan.
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Given our
limited operating history, our license agreements with Yanuk Jeans LLC, our
acquisition of Taverniti, and our lack of long-term sales history and other
sources of revenue, there can be no assurance that we will be able to achieve
any of our goals and develop a sufficiently large customer base to be
profitable.
Failure
to manage our growth and expansion could impair our business.
Management
believes that we are poised for reasonable growth in 2008 by diversifying our
sales to a higher proportion of department store business and by maintaining
focus on our core brands. However, no assurance can be given that we
will be successful in maintaining or increasing our sales in the
future. Any future growth in sales will require additional working
capital and may place a significant strain on our management, management
information systems, inventory management, sourcing capability, distribution
facilities and receivables management. Any disruption in our order
processing, sourcing or distribution systems could cause orders to be shipped
late, and under industry practices, retailers generally can cancel orders or
refuse to accept goods due to late shipment. Such cancellations and
returns would result in a reduction in revenue, increased administrative and
shipping costs and a further burden on our distribution facilities.
Additionally,
we intend from time to time to acquire and/or license other businesses and
brands, as applicable, as we deem appropriate. If we are unable to
properly integrate any business or brands we acquire and/or license, this could
adversely affect our results of operation and financial condition.
The
loss of Paul Guez, Glenn Palmer or our lead designers would have an adverse
effect on our future development and could significantly impair our ability to
achieve our business objectives.
Our
success is largely dependent upon the expertise and knowledge of our Chairman,
Paul Guez, our Chief Executive Officer and President, Glenn Palmer, our lead
designers and our ability to continue to hire and retain other key
personnel. The loss of Mr. Guez, Mr. Palmer or any of our other key
personnel could have a material adverse effect on our business, development,
financial condition, and operating results. We do not maintain “key
person” life insurance on any of our management or key personnel, including
Messrs. Guez and Palmer.
We
currently own or license, and operate, a limited number of principal
brands. If we are unsuccessful in marketing and distributing those
brands or in executing our other strategies, our results of operations and
financial condition will be adversely affected.
While our
goal is to employ a multi-brand strategy that will ultimately diversify the
fashion and other risks associated with reliance on a limited product line, we
currently operate, directly and through our wholly-owned subsidiaries Antik and
Taverniti, a limited number of principal brands, most of which are being
operated pursuant to very recent license or acquisition
agreements. If we are unable to successfully market and distribute
our branded products, or if the recent popularity of premium denim brands
decreases, or if we are unable to execute on our multi-brand strategy to acquire
and/or license additional companies and/or brands, as applicable, identified by
our management from time to time, our results of operations and financial
condition will be adversely affected.
Our
operating results may fluctuate significantly.
Management
expects that we will experience substantial variations in our net sales and
operating results from quarter to quarter. We believe that the
factors which influence this variability of quarterly results
include:
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the
timing of our introduction of new product
lines;
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the
level of consumer acceptance of each new product
line;
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general
economic and industry conditions that affect consumer spending and
retailer purchasing;
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the
availability of manufacturing
capacity;
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the
seasonality of the markets in which we
participate;
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the
timing of trade shows;
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the
product mix of customer orders;
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the
timing of the placement or cancellation of customer
orders;
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quotas
and other regulatory matters;
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the
occurrence of charge backs in excess of
reserves;
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the
timing of expenditures in anticipation of increased sales and actions of
competitors; and
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the
value of the dollar in relation to other
currencies.
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As a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is
possible that in some future quarter or quarters, our operating results will be
below the expectations of securities analysts or investors. In that
case, our common stock price could fluctuate significantly or
decline.
The
loss of business from any significant customer would affect our results of
operations.
No single
customer accounted for more than 10% of our sales for the year ended December
31, 2007. A decrease in business from or loss of any significant
customer would have a material adverse effect on our results of
operations. Additionally, certain retailers, including some of our
customers, have experienced in the past, and may experience in the future,
financial difficulties, which increase the risk of extending credit to such
retailers and the risk that financial failure will eliminate a customer
entirely. These retailers have attempted to improve their own
operating efficiencies by concentrating their purchasing power among a narrowing
group of vendors. There can be no assurance that we will remain a
preferred vendor for our existing customers. Further, there can be no
assurance that our factor will approve the extension of credit to certain retail
customers in the future. If a customer’s credit is not approved by
the factor, we could assume the collection risk on sales to the customer itself,
require that the customer provide a letter of credit, or choose not to make
sales to the customer.
Our
business is subject to risks associated with importing products.
A portion
of our import operations are subject to tariffs imposed on imported products and
quotas imposed by trade agreements. In addition, the countries in
which our products are imported may from time to time impose additional new
duties, tariffs or other restrictions on their respective imports or adversely
modify existing restrictions. Adverse changes in these import costs
and restrictions, or our suppliers’ failure to comply with customs or similar
laws, could harm our business. We cannot assure that future trade
agreements will not provide our competitors with an advantage over us, or
increase our costs, either of which could have an adverse effect on our business
and financial condition.
Our
operations are also subject to the effects of international trade agreements and
regulations such as the North American Free Trade Agreement, and the activities
and regulations of the World Trade Organization. Generally, these
trade agreements benefit our business by reducing or eliminating the duties
assessed on products or other materials manufactured in a particular
country. However, trade agreements can also impose requirements that
adversely affect our business, such as limiting the countries from which we can
purchase raw materials and setting duties or restrictions on products that may
be imported into the United States from a particular country.
Our
ability to import raw materials in a timely and cost-effective manner may also
be affected by problems at ports or issues that otherwise affect transportation
and warehousing providers, such as labor disputes. These problems
could require us to locate alternative ports or warehousing providers to avoid
disruption to our customers. These alternatives may not be available
on short notice or could result in higher transit costs, which could have an
adverse impact on our business and financial condition.
Our
dependence on independent manufacturers and suppliers of raw materials reduces
our ability to control the manufacturing process, which could harm our sales,
reputation and overall profitability.
We depend
on independent contract manufacturers and suppliers of raw materials to secure a
sufficient supply of raw materials and maintain sufficient manufacturing and
shipping capacity in an environment characterized by declining prices, labor
shortages, continuing cost pressure and increased demands for product innovation
and speed-to-market. This dependence could subject us to difficulty
in obtaining timely delivery of products of acceptable quality. In
addition, a contractor’s failure to ship products to us in a timely manner or to
meet the required quality standards could cause us to miss the delivery date
requirements of our customers. The failure to make timely deliveries
may cause our customers to cancel orders, refuse to accept deliveries, impose
non-compliance charges through invoice deductions or other charge-backs, demand
reduced prices or reduce future orders, any of which could harm our sales,
reputation and overall profitability.
We do not
have long-term contracts with any of our independent contractors and any of
these contractors may unilaterally terminate their relationship with us at any
time. While management believes that there exists an adequate supply
of contractors to provide products and services to us, to the extent we are not
able to secure or maintain relationships with independent contractors that are
able to fulfill our requirements, our business would be harmed.
We have
initiated standards for our suppliers, and monitor our independent contractors’
compliance with applicable labor laws, but we do not control our contractors or
their labor practices. The violation of federal, state or foreign
labor laws by one of our contractors could result in us being subject to fines
and our goods that are manufactured in violation of such laws being seized or
their sale in interstate commerce being prohibited. To date, we have
not been subject to any sanctions that, individually or in the aggregate, have
had a material adverse effect on our business, and we are not aware of any facts
on which any such sanctions could be based. There can be no
assurance, however, that in the future we will not be subject to sanctions as a
result of violations of applicable labor laws by our contractors, or that such
sanctions will not have a material adverse effect on our business and results of
operations.
We
may not be able to adequately protect our intellectual property
rights.
The loss
of or inability to enforce our trademarks or any of our other proprietary or
licensed designs, patents, know-how and trade secrets could adversely affect our
business. If any third party copies or otherwise gains access to our
trademarks or other proprietary rights, or develops similar products
independently, it may be costly to enforce our rights and we would not be able
to compete as effectively. Additionally, the laws of foreign
countries may provide inadequate protection of intellectual property rights,
making it difficult to enforce such rights in those countries.
We may
need to bring legal claims to enforce or protect our intellectual property
rights. Any litigation, whether successful or unsuccessful, could
result in substantial costs and diversions of resources. In addition,
notwithstanding the rights we have secured in our intellectual property, third
parties may bring claims against us alleging that we have infringed on their
intellectual property rights or that our intellectual property rights are not
valid. Any claims against us, with or without merit, could be time
consuming and costly to defend or litigate and therefore could have an adverse
affect on our business.
Our
business is growing more international and can be disrupted by factors beyond
our control.
We have
been reducing our reliance on domestic contractors and expanding our use of
offshore manufacturers as a cost-effective means to produce our
products. During the year ended December 31, 2007, we sourced a
significant majority of our finished products from suppliers located outside the
United States and we also continued to increase our purchase of fabrics outside
the United States. In addition, we have been increasing our
international sales of product primarily through our licensees and
distributors.
As a
result of our increasing international operations, we face the possibility of
greater losses from a number of risks inherent in doing business in
international markets and from a number of factors which are beyond our
control. Such factors that could harm our results of operations and
financial condition include, among other things:
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Political
instability or acts of terrorism, which disrupt trade with the countries
in which our contractors, suppliers or customers are
located;
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Local
business practices that do not conform to legal or ethical
guidelines;
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Adoption
of additional or revised quotas, restrictions or regulations relating to
imports or exports;
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Additional
or increased customs duties, tariffs, taxes and other charges on
imports;
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Significant
fluctuations in the value of the dollar against foreign
currencies;
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Increased
difficulty in protecting our intellectual property rights in foreign
jurisdictions;
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Social,
legal or economic instability in the foreign markets in which we do
business, which could influence our ability to sell our products in these
international markets; and
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Restrictions
on the transfer of funds between the United States and foreign
jurisdictions.
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Risks
Related to Our Industry
Our
sales are heavily influenced by general economic cycles.
Apparel
is a cyclical industry that is heavily dependent upon the overall level of
consumer spending. Purchases of apparel and related goods tend to be
highly correlated with cycles in the disposable income of our
consumers. Our customers anticipate and respond to adverse changes in
economic conditions and uncertainty by reducing inventories and canceling
orders. As a result, any substantial deterioration in general
economic conditions, increases in interest rates, acts of war, terrorist or
political events that diminish consumer spending and confidence in any of the
regions in which we compete, could reduce our sales and adversely affect our
business and financial condition.
Our
business is highly competitive and depends on consumer spending
patterns.
The
apparel industry is highly competitive. We face a variety of
competitive challenges including:
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anticipating
and quickly responding to changing consumer
demands;
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developing
innovative, high-quality products in sizes and styles that appeal to
consumers;
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competitively
pricing our products and achieving customer perception of value;
and
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the
need to provide strong and effective marketing
support.
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We
must successfully gauge fashion trends and changing consumer preferences to
succeed.
Our
success is largely dependent upon our ability to gauge the fashion tastes of our
customers and to provide merchandise that satisfies retail and customer demand
in a timely manner. The apparel business fluctuates according to
changes in consumer preferences dictated in part by fashion and
season. To the extent we misjudge the market for our merchandise, our
sales may be adversely affected. Our ability to anticipate and
effectively respond to changing fashion trends depends in part on our ability to
attract and retain key personnel in our design, merchandising and marketing
staff. Competition for these personnel is intense, and we cannot be
sure that we will be able to attract and retain a sufficient number of qualified
personnel in future periods.
Our
business may be subject to seasonal trends resulting in fluctuations in our
quarterly results, which could cause uncertainty about our future performance
and harm our results of operations.
In the
experience of our management, operating results in the high end fashion denim
industry have been subject to seasonal trends when measured on a quarterly
basis. These trends are dependent on numerous factors,
including:
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the
markets in which we operate;
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economic
conditions; and
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numerous
other factors beyond our control.
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Difficulty
in managing anticipated growth could have a material adverse impact on our
business and operating results.
We
anticipate growing our business in part through the acquisition of additional
companies and/or license of additional brands depending upon a company’s and/or
a brand’s sales revenues, name and brand recognition, and/or synergies with our
existing brands. The acquisition and integration of these businesses
and or brands will be complex and time and resource-consuming, and our
management will have to dedicate substantial effort to it. These
efforts could divert management’s focus and resources from other strategic
opportunities and from operational matters during the integration process, which
could adversely impact our business and operating results.
Other
Risks Related to our Stock
If
we are not able to regain compliance with the continued listing requirements,
our shares may be removed from listing on the NASDAQ Capital
Market.
On
November 12, 2007 we were advised by the NASDAQ Capital Market that we were
non-compliant with the minimum bid price listing requirement and we were
afforded an opportunity to submit a plan to the NASDAQ Capital Market regarding
the steps that we would take to regain compliance. Failure to submit
a plan that is acceptable to the NASDAQ Capital Market or failure to make
progress consistent with any accepted plan or to regain compliance with the
continued listing standards could result in our common stock being delisted from
the NASDAQ Capital Market. We have until May 12, 2008 to regain
compliance with the minimum bid price listing requirement. In addition we
have suffered recurring losses and may fail to comply with other listing
requirements of the NASDAQ Capital Market. We may not be able to
regain compliance with these matters within the time allowed by the NASDAQ
Capital Market, and our shares of common stock may be removed from listing on
the NASDAQ Capital Market.
Our
sale of securities in any equity or debt financing could result in dilution to
our stockholders and have a material adverse effect on our
earnings.
Any sale
of shares by us in future private placement or other offerings could result in
dilution to our existing stockholders as a direct result of our issuance of
additional shares of our capital stock. In addition, our business
strategy may include expansion through internal growth, by acquiring
complementary businesses, by acquiring or licensing additional brands, or by
establishing strategic relationships with targeted customers and
suppliers. In order to do so, or to fund our other activities, we may
issue additional equity securities that could dilute our stockholders’ stock
ownership. We may also assume additional debt and incur impairment
losses related to goodwill and other tangible assets if we acquire another
company and this could negatively impact our results of operations.
Insiders
own a significant portion of our common stock, which could limit our
stockholders’ ability to influence the outcome of key transactions.
As of
April 14, 2008, our executive officers and directors beneficially owned
approximately 75.8% of the outstanding shares of our common stock. As
of April 14, 2008, our chairman, Paul Guez, and his affiliates collectively
owned approximately 75.2% of the outstanding shares of our common
stock. We also issued 1,000,000 Series A convertible preferred shares
to Mr. Guez in satisfaction of $2,556,682 of advances to us by Mr.
Guez. The Series A preferred shares are convertible into 3,479,899
shares of common stock and vote with our common stock on an as-converted basis
on all matters presented to our stockholders. Accordingly, our
executive officers and key personnel have the ability to affect the outcome of,
or exert considerable influence over, all matters requiring stockholder
approval, including the election and removal of directors and any change in
control. This concentration of ownership of our common stock could
have the effect of delaying or preventing a change of control of our company or
otherwise discouraging or preventing a potential acquirer from attempting to
obtain control of our company. This, in turn, could have a negative
effect on the market price of our common stock. It could also prevent
our stockholders from realizing a premium over the market prices for their
shares of common stock.
Our
stock price has been volatile.
Our
common stock is quoted on the NASDAQ Capital Market, and there can be
substantial volatility in the market price of our common stock. The
market price of our common stock has been, and is likely to continue to be,
subject to significant fluctuations due to a variety of factors, including
quarterly variations in operating results, operating results which vary from the
expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by us or
our competitors of a material nature, loss of one or more customers, additions
or departures of key personnel, future sales of common stock and stock market
price and volume fluctuations. In addition, general political and
economic conditions such as a recession, or interest rate or currency rate
fluctuations may adversely affect the market price of our common
stock.
In
addition, the stock market in general has experienced extreme price and volume
fluctuations that have affected the market price of our common
stock. Often, price fluctuations are unrelated to operating
performance of the specific companies whose stock is affected. In the
past, following periods of volatility in the market price of a company’s stock,
securities class action litigation has occurred against the issuing
company. If we were subject to this type of litigation in the future,
we could incur substantial costs and a diversion of our management’s attention
and resources, each of which could have a material adverse effect on our revenue
and earnings. Any adverse determination in this type of litigation
could also subject us to significant liabilities.
Absence
of dividends could reduce our attractiveness to investors.
Some
investors favor companies that pay dividends, particularly in general downturns
in the stock market. We have not declared or paid any cash dividends
on our common stock. We currently intend to retain any future
earnings for funding growth, and we do not currently anticipate paying cash
dividends on our common stock in the foreseeable future. Because we
may not pay dividends, your return on an investment in our common stock likely
depends on your selling such stock at a profit.
Our
Board is authorized to issue preferred stock, which may make it difficult for
any party to acquire us and adversely affect the price of our common
stock.
Under our
articles of incorporation, our Board of Directors has the power to authorize the
issuance of up to 5,000,000 shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without further vote or action by the
stockholders. Accordingly, our Board of Directors may issue preferred
stock with terms that could have preference over and adversely affect the rights
of holders of our common stock.
On
November 28, 2007 we issued 1,000,000 shares of New Series A Preferred to Mr.
Guez in consideration for (i) the cancellation of the $2,556,682 of advances
made to us by Mr. Guez and (ii) an additional cash investment of
$125,000. The shares of New Series A Preferred are convertible into
4,623,589 shares of our common stock based on a conversion formula equal to the
price per share ($2.681682) divided by the conversion price ($0.58) multiplied
by the total number of shares of New Series A Preferred issued, subject to
adjustment in accordance with the provisions of the certificate of designations
for the New Series A Preferred. The New Series A preferred shares
accrue cumulative dividends at the annual rate of 6% of the purchase price in
preference to the common stock. Upon our liquidation or dissolution
the New Series A preferred shares are entitled to receive, prior to any
distribution to the holders of our common stock, 100% of the purchase price plus
all accrued but unpaid dividends.
The
issuance of any preferred stock may:
|
·
|
make
it difficult for any party to acquire us, even though an acquisition might
be beneficial to our stockholders;
|
|
·
|
delay,
defer or prevent a change in control of our
company;
|
|
·
|
discourage
bids for the common stock at a premium over the market price of our common
stock;
|
|
·
|
adversely
affect the voting and other rights of the holders of our common stock;
and
|
|
·
|
discourage
acquisition proposals or tender offers for our
shares.
|
The
provisions allowing the issuance of preferred stock could limit the price that
investors might be willing to pay in the future for shares of our common
stock.
ITEM
1B.
|
Unresolved Staff Comments
|
None.
On April
27, 2006, we entered into a Sublease with Azteca Production International, Inc.
(“Azteca”) to lease approximately 73,193 square feet of office and warehouse
space located at 5804 East Slauson Avenue, Commerce, California, the location of
our current principal executive offices, warehouse and distribution
center. Azteca is co-owned by Mr. Guez, our
Chairman. Although executed on April 27, 2006, the term of the
Sublease became effective as of January 1, 2006, and will continue on a
month-to-month basis with termination by either party permitted upon 90-days
prior written notice. We pay monthly rent of approximately Nineteen
Thousand Thirty Dollars ($19,030) to Azteca. The Sublease was
approved by a majority of our Board of Directors, including all of the
independent directors.
We also
maintain showrooms in both Los Angeles and New York City. We pay for
the use of these showrooms based on our actual use.
On August
27, 2005, we opened a retail store in Los Angeles, California and assumed all
the obligations of a 10-year property lease, which was previously signed by Blue
Concept, LLC, a company owned by Mr. Guez, in April, 2005. We are
paying $21,840 per month for the lease of the shop space. More
recently, On July 18, 2006, we entered into lease agreements with Emporium
Development, L.L.C. (“Emporium”) to lease approximately 3,272 square feet of
space located at 865 Market Street, San Francisco, California
94103. The term of the Sublease became effective as of July 5, 2006,
and will continue for a term expiring on January 31, 2017. We will
pay annual rent to Emporium ranging from $261,760 at the commencement of the
term to $326,902 at the end of the term. We will also pay, as
percentage rental, six percent (6%) of gross sales made in and from the premises
in excess of annual breakpoints ranging from $4,362,667 at the commencement of
the term to $5,448,373 at the end of the term.
Pursuant
to an agreement with Shipson LLC, a California Limited Liability Company,
effective on or about May 15, 2008, we will be vacating our existing space and
relocating to 4901 Zambrano Street, Commerce, California
90040. Shipson LLC will replace our warehouse distribution as an
outsourced third party logistics distributor. We will also occupy
5,000 square feet of office space at $0.75/square foot monthly rent
($3,750). The shipping costs will be $1.10 per garment and a
cafeteria menu of additional services will be available to us if
necessary.
We
believe that the facilities utilized by us are well maintained, in good
operating condition and adequate to meet our current and foreseeable
needs.
Except as
described below, we are not involved in any legal proceedings that require
disclosure in this report.
On July
17, 2006, Taverniti Holdings, LLC (THL), an independent entity not owned or
controlled by us, and Jimmy Taverniti, an individual, filed an action in the
United States District Court for the Central District of California (Case No.
CV06-4522 DDP) against Henri Levy alleging that defendant has infringed THL’s
mark “J. Taverniti” and further infringed Mr. Taverniti’s commercial publicity
rights, by defendant’s adoption and use of the mark “Taverniti.” We
have been informed that in a counter-claim against THL, defendant has also named
our company and Taverniti as purported counter defendants. As it
relates to Taverniti and our company, the counter claim seeks only a declaration
of rights, to the effect that Taverniti and our company have conspired with THL
to defeat defendant’s alleged rights in his “Tavernity” mark, and a further
declaration that as a result of such alleged misconduct, neither Taverniti nor
our company have any enforceable rights in the Taverniti So Jeans
mark. It does not seek any monetary relief against either Taverniti
or our company.
We have
taken the position that neither Taverniti nor our company can properly be added
as new parties to this lawsuit by naming us as counter defendants, and that we
can only be named as third party defendants. The defendant has not,
as yet, served either Taverniti or us with the counter claim, so we are not yet
formally parties to the case. At such time, if ever, that the
defendant takes the necessary action to formally serve us with the counter
claim, we intend to deny all the material charging allegations of the
defendant’s claim for declaratory relief and to vigorously defend against his
claims. At this time, we are unable to express an opinion whether it
is likely that the defendant will take such actions, or whether, if he does, it
is likely or unlikely that he will be able to prevail against us on his claim
for declaratory relief.
In 2007,
DF produzioni SPA filed an action in the Court of Bergamo, Italy, against
Taverniti and our company seeking to ascertain our liability for alleged serious
failures in the context of the distribution/supply agreement between the
parties; the reimbursement of approximately €660,208 in damages or such other
amount determined by the court as compensatory for amounts outstanding alleged
to equal approximately €286,008; and to reduce the price of the supply to the
plaintiff in an amount commensurate with the alleged damage caused by our
conduct. The first hearing is scheduled for June 11, 2008, and we are
required to file our appearance brief with our counterclaims at least 20 days
prior to the hearing date. While management believes that we have
successful counterclaims against the plaintiff, it is unable at this time to
express an opinion whether it is likely that the plaintiff will be able to
prevail against us on its claims.
ITEM
4.
|
Submission of Matters to a Vote of Security
Holders
|
No
matters were submitted to a vote of our stockholders in the quarter ended
December 31, 2007.
ITEM
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities
|
Our
common stock is quoted on the NASDAQ Capital Market under the symbol
“BLUE.” The following table sets forth, for the periods indicated,
the high and low closing sales prices for the common stock for each quarter
within the last two fiscal years as reported by the NASDAQ Stock
Market.
|
|
High
|
|
|
Low
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
6.21 |
|
|
$ |
4.90 |
|
Second
Quarter
|
|
$ |
6.70 |
|
|
$ |
4.92 |
|
Third
Quarter
|
|
$ |
5.45 |
|
|
$ |
4.33 |
|
Fourth
Quarter
|
|
$ |
4.46 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
2.34 |
|
|
$ |
1.52 |
|
Second
Quarter
|
|
$ |
2.04 |
|
|
$ |
1.24 |
|
Third
Quarter
|
|
$ |
1.40 |
|
|
$ |
0.72 |
|
Fourth
Quarter
|
|
$ |
0.89 |
|
|
$ |
0.56 |
|
On April
14, 2008, the closing sales price of our common stock as reported on the NASDAQ
Stock Market was $0.69 per share.
Holders
of Common Stock
As of
April 14, 2008, there were 98 record holders of our common stock, with
27,982,200 shares outstanding. The number of holders of record is
based on the actual number of holders registered on the books of our transfer
agent and does not reflect holders of shares in “street name” or persons,
partnerships, associations, corporations or other entities identified in
security position listings maintained by depository trust
companies.
Dividend
Rights
Subject
to preferences that may apply to shares of preferred stock outstanding at the
time, the holders of outstanding shares of our common stock are entitled to
receive dividends out of funds legally available at the times and in the amounts
that our board may determine. We have not paid any dividends in the
past and have no current plan to pay any dividends. We intend to
devote all funds to the operation of our businesses.
Not
applicable.
ITEM
7.
|
Management’s Discussion and Analysis of Financial Condition and
Results of Operation
|
The
following discussion and analysis should be read together with the Consolidated
Financial Statements of Blue Holdings, Inc. and the Notes to Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K. This
discussion summarizes the significant factors affecting our operating results,
financial conditions and liquidity and cash-flow for the fiscal years ended
December 31, 2007 and 2006. This discussion contains forward looking statements
that involve risks and uncertainties and are based on judgments concerning
various factors that are beyond our control. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those discussed below and elsewhere in
this Annual Report on Form 10-K, particularly under the caption “Cautionary Note
Regarding Forward Looking Statements” and in Item 1. Business under the caption
“Risk Factors.”
Overview
We
design, develop, market and distribute high end fashion jeans, apparel and
accessories under the brand name names Antik Denim, Yanuk, Faith Connexion and Taverniti So
Jeans. We plan to also design, develop, market and distribute
jeans and accessories under other brands that we may license or acquire from
time to time. Our products currently include jeans, jackets, belts,
purses and T-shirts. We currently sell our products in the United
States, Canada, and Japan directly to department stores and boutiques and
through distribution arrangements in certain foreign
jurisdictions. We are headquartered in Commerce, California and
maintain two showrooms in New York and Los Angeles. We opened a
retail store in Los Angeles during August 2005 and another in San Francisco in
September 2006. We are reviewing our strategic alternatives regarding
our retail stores. These retail strategic alternatives include no
action, sale, licensing, and/or possibly closing the stores. As of April 15,
2008, no determination has been made by our board of directors.
Strategic
Initiatives
During
the third quarter of 2007, our new Chief Executive Officer commenced the
implementation of a comprehensive action plan with the following key strategic
initiatives:
Extensive Brand and Business Segment
Review. The first initiative was an extensive brand and
business segment review. We have made significant progress and
continue to aggressively refine and improve our brands. Our top
priority is improving each product line by redefining and refocusing each
collection. We believe that our success centers on the quality of our
products and on having the most compelling and appropriate offerings for our
customer and retailers, and believe that the current re-focus will be a positive
step towards our future performance.
To that
end, we successfully re-launched at a lower price point the Yanuk brand including
categories ranging from sweats, hoodies, t-shirts, woven shirts and denim
offered at $48-$125 at retail. Based on the brand’s previous success
and opportunities within the status market, we believe the Yanuk brand will begin to
positively impact both top and bottom line growth in the third quarter of
2008. Since the collection’s debut at the Project Show in Las Vegas
on February 12, 2008, the line has been purchased by some of the country’s top
retailers including Macy’s East, Macy’s South and Dillard’s and continues to be
well received as a market opportunity.
Taverniti continues to
perform very well at our high-end specialty stores and better department stores
including Fred Segal, Intermix, Bloomingdales, and Saks Fifth
Avenue. We will continue to promote the brand with Jimmy Taverniti in
prominent events throughout the year.
During
the fourth quarter we reached an agreement for Antik Denim at Macy’s East’s
Herald Square store to sell the brand in an enhanced visual presentation with
signage and mannequins. The performance and sell thru at retail has
exceeded our expectations. We have been meeting with senior
management to plan rolling Antik Denim into additional
Macy’s doors. Additionally, our Antik Denim brand has been
well received at Dillard’s. We are now featured in all Dillard’s
divisions and are pleased with the current sell-throughs.
On
September 24, 2007, we announced the discontinuation of our joint venture with
Life & Death LLC.
Strengthen Core Business and
Increase Visibility of Brands. The second initiative focused
on our ongoing goal to strengthen our core business and increase visibility for
all of our brands. We have realigned our business model and sales
organization to ramp revenue and expand within our current distribution
channels. We implemented an EDI replenishment program with our
current department stores. This has become the underlining foundation
for our brands’ core business which is critical in order to establish a
meaningful and consistent presence in department stores. We have also
enhanced product assortment, streamlined the flow of merchandise to retail
distributors and reduced operating expenses.
Expense
Reduction. The third initiative, in which we have made
significant improvements, was a reduction in operating expenses. We
reduced annual selling, general and administrative expenses by over $3.1 million
or approximately 15%, and plan to reduce an additional $0.6 million in the first
quarter of 2008. We also made a substantial decrease in payroll
expense due to a reduction of approximately 25% of our workforce and are
continuously looking for other ways to cut costs where prudent and
feasible. Even though we reduced our overall workforce, we are
selectively hiring personnel to fill key positions, including the newly created
positions of Vice President of Merchandising and Vice President of
Marketing. We are also in the process of identifying a new CFO, and expect
to announce a replacement soon.
Excess Inventory
Reduction. The fourth initiative was the efficient sale of our
excess inventory. We are making major changes to better align
inventory with demand which should positively affect our product
margins. First, we are lowering our SKU count for each brand to
provide a more focused and cohesive offering aligned to our financial
forecast. This SKU reduction will begin to take effect with our
summer deliveries, with the full impact of the initiative evident in the second
half of 2008 when we roll out our fall collection. We also believe
that our SKU count reduction initiative will have a cascading effect in reducing
expenses throughout the entire organization, including our design, sourcing, and
creative departments, as well as inventory control and administrative
costs. We hope to achieve an inventory level of approximately $5-6
million by the second quarter of 2008, and going forward we are taking a far
more disciplined approach to inventory.
Organizational
Restructuring. The fifth initiative was a restructuring of our
organization with a focus on 2008 and beyond. We have carefully
evaluated our entire organization to determine where we can improve operational
efficiencies and are continuously working to improve our
organization. We have implemented weekly production and sales
meetings, developed improved merchandising calendars and significantly improved
our supply chain and operating procedures. The weekly meetings help
us assess delivery performance, manage inventory, reduce costs, analyze the
outbound supply chain to improve delivery costs, optimize inventory levels, and
deliver on customer demand in the most cost effective way leading to the most
effective and cost efficient supply chain. We have seen positive
results so far.
Effective
on or about May 15, 2008, we will be moving into an outsourced third party
logistics distributor warehouse which provide us with the systems we need to
obtain real-time visibility of our inventory, reporting, advanced billing
management and EDI integration. This new system will better enable us
to deliver products with greater efficiency and minimize potential department
store compliance issues. We are also continually assessing our
manufacturing and sourcing strategies, and looking at both domestic and
international opportunities that will support margin improvement and drive
achievable growth. Additionally, we have negotiated more efficient
contracts with vendors in all areas of the organization, specifically for
supplies and services, including reducing transportation expenses. We
also plan to conduct extensive research on our customers to better help
determine and confirm product needs and to lay the groundwork for our
merchandising, creative and marketing initiatives going forward.
While we
are disappointed in the lack of progress achieved in our financial internal and
external reporting procedures, we will continue to aggressively allocate
resources and capital to introduce new systems, reports and disciplines
throughout our accounting department and other back-office functions to improve
in this area.
Once the
above initiatives are fully implemented, we expect increased margins since there
will be fewer SKUs, less inventory, more direct sourcing and a significant
reduction in promotional activity and discounting. We anticipate
$1.0- $1.5 million in aggregate annual cost savings from the combination of
these initiatives.
Results
of Operations
Year
Ended December 31, 2007 Compared with Year Ended December 31, 2006
Net sales
decreased from $49.0 million for the twelve months ended December 31, 2006 to
$33.8 million for the twelve months ended December 31, 2007. The sales were less
than during the prior year for a variety of reasons. First, the
recessionary national economic climate coupled with the weak premium denim
market sales resulted in reduced sales during the year ended December 31, 2007.
Additionally, our international sales also experienced weakness, decreasing from
23% in 2006 to 18% during the year ended December 31, 2007.
Gross
profit for the year ended December 31, 2007 decreased to $11.6 million from
$13.1 million during the prior year. The decrease in gross profit was
due to reduced sales during the year ended December 31, 2007. However, the
Company’s gross margin percentage was improved, totaling 34% in 2007 as compared
to 27% in 2006, due to the Company having recorded significant inventory
writedowns and making large sales to discounters during
2006. Assuming that the Company can improve its sales into department
stores and other traditional distribution channels, we expect our gross margin
to improve to approximately 50% in the future.
Selling,
distribution and administrative expenses for the year ended December 31, 2007
totaled $15.6 million compared with $17.1 million for the same period last year.
The principal components during the year ended December 31, 2007 were payroll of
$5.1 million (compared to $6.9 million in the same period last year),
professional fee expenses of $.8 million ($1.1 million in the same period of
2006), advertising and trade show expenses of $.7 million ($.6 million in the
same period of 2006), rent expense of $.9 million ($.7 million in the same
period of 2006), royalties of $.2 million ($1.3 million in 2006) and stock-based
compensation of $.4 million ($.2 million in the same period last year). During
the last two quarters of 2007, the Company made significant reductions in its
selling, distribution, and administrative expenses which, based upon the
Company’s calculations, will result in annual savings of approximately
$3,100,000. The Company anticipates that it will be making additional
reductions during 2008.
For the
year ended December 31, 2007, the Company recognized income tax provision of
$0.02 million compared to the benefit from income taxes of $0.68 million for the
year ended December 31, 2006. This significant change was due to the
Company providing a reserve against deferred income tax assets generated in
2007, while such deferred income tax assets were not reserved against in
2006.
Net
Income (loss) after provision for taxes during the year ended December 31, 2007
was $(5.6 million) or (16.6)% of net sales compared to $(4.8 million) or (9.7)%
of net sales during 2006. Basic and diluted earnings (loss) per share decreased
to $(0.21) from $(0.18) in the same period of last year.
Liquidity
and Capital Resources
We
believe we currently have adequate resources to fund our anticipated cash needs
through 2008. However, an adverse business development could require
us to raise additional financing sooner than anticipated.
Our
primary source of liquidity is expected to be cash flow generated from
operations, cash and cash equivalents currently on hand, and working capital
attainable through both our factor and our majority stockholder. We
have already in 2008 sought to, and may continue to seek to, finance future
capital needs through various means and channels, such as issuance of long-term
debt or sale of equity securities.
On March
5, 2008, we entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”) with an institutional investor pursuant to which we issued
an aggregate of $2.0 million of thirty-month senior secured convertible notes,
and five-year warrants to purchase an aggregate of 875,000 shares, to the
investor. Pursuant to the terms of the Securities Purchase Agreement,
we may issue additional convertible notes in the aggregate principal amount of
up to $1,000,000 and additional warrants to purchase up to an aggregate of
437,500 shares of common stock. The convertible notes carry interest
at 8% per annum on the unpaid/unconverted principal balance, and are secured on
a second priority basis against all of our assets. One-twenty-fourth
of the principal amount of the convertible notes, and accrued but unpaid
interest, are due and payable monthly in 24 installments beginning on first day
of each calendar month, commencing on the first day of the first full calendar
month occurring after the date which is six months following the original issue
date. These installment payments can be made in cash or through the
issuance of stock provided that certain equity conditions (as further set forth
in the convertible notes) are met. The convertible notes are
convertible into approximately 2,500,000 shares of common stock, based on a
conversion price equal to $0.80 per share. The additional convertible
notes issuable pursuant to the terms of the Securities Purchase Agreement would
be convertible into an aggregate maximum of an additional 1,250,000 shares of
common stock based on a conversion price of $0.80 per share.
In
conjunction with the issuance of the senior secured convertible notes discussed
above, our majority stockholder converted $1.4 million of net advances made to
us, subsequent to December 31, 2007, into 1,750,000 shares of our common
stock. The conversion price was $0.80 per share, which represented
the market price on the date of conversion.
From time
to time, our majority stockholder, Mr. Paul Guez, made advances to us to support
our working capital needs. These advances were non-interest
bearing. On July 1, 2006, Mr. Guez converted the advances to a line
of credit in an agreement with us. The line of credit allows us to
borrow from him up to a maximum of $3 million at an annual interest rate of
6%. We may repay the advances in full or in part at any time until
the credit line expires. On April 15, 2008, we agreed with Mr. Guez
to extend the expiration date of the credit line to December 31,
2008. As of December 31, 2007, the balance of these advances was
$0.
For the
year ended December 31, 2007, net cash used in operating activities was $(2.6
million). The deficit was primarily due to an increase of $3.9
million in inventory and a net loss of $5.6 million, which was partially offset
by a decrease in accounts receivables of $6.0 million. Net cash
provided by financing activities was $3.2 million due to an increase in
short-term borrowings by $2.5 million and advances from our majority stockholder
of $0.7 million.
Taverniti
is the exclusive licensee for the design, development, manufacture, sale,
marketing and distribution of the Taverniti So Jeans trademark
in the denim and knit sportswear categories for men and women. It is
obligated to pay royalties to Taverniti Holdings, LLC in the ranges of 5-8
percent depending on the net sales of the licensed products pursuant to a
license agreement with Taverniti Holdings, LLC. Taverniti Holdings,
LLC is jointly owned by Paul Guez (60%) and Jimmy Taverniti (40%), the designer
of the products for the brand, and Mr. Guez is the sole manager. The
license agreement was signed in May 2004 and expires on December 31,
2015. No royalties were paid or payable for the year ended December
31, 2007, as Taverniti Holdings, LLC waived royalties for that
year. Royalties paid or payable for the year ended December 31, 2006
were $1,053,263, of which total $98,000 was forgiven during 2007 and was
credited to Additional Paid in Capital. We are also currently in
negotiations with our majority stockholder to sell to us his interest in the
trademarks Yanuk and
Taverniti So
Jeans.
We use a
factor, FTC Commercial Corp., for working capital and credit administration
purposes. Under the various factoring agreements entered into
separately by our company, Antik and Taverniti, the factor purchases all the
trade accounts receivable assigned by us and assumes all credit risk with
respect to those accounts approved by it.
The
factor agreements provide that we can obtain an amount up to 90% of the value of
our purchased customer invoices, less a reserve of 10% of unpaid accounts
purchased and 100% of all accounts that are disputed. The factor
agreements provide for the automatic renewal of the agreements The
factor also makes available to all three companies a combined line of credit up
to the lesser of $2.4 million and 50% of the value of eligible raw materials and
finished goods. As of December 31, 2007, advances under this line of
credit were $12.6 million, of which we drew down $2.4 of this credit line
against inventory, $4.3 million against accounts receivable and $5.9 million
against personal guarantees of Paul Guez, our Chairman and majority stockholder,
and the living trust of Paul and Elizabeth Guez. We have pledged to
the factor an anticipated income tax refund of approximately $1,400,000 and
purchase orders in the amount of approximately $2,500,000, and have agreed to
make monthly payments of $250,000 to reduce amounts outstanding under our factor
agreements.
As of
December 31, 2007, the factor held $2,067,997 of accounts receivable purchased
from us on a without recourse basis and has made advances to us of $1,800,000
against those receivables, resulting in a net balance amount Due from Factor of
$94,194, net of reserves of $173,803, as of December 31, 2007. We
have accounted for the sale of receivables to the factor in accordance with SFAS
No. 140, “Accounting for the Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.”
As of
December 31, 2007, the factor also held as collateral $2,191,841 of accounts
receivable that were subject to recourse, against which we have provided
reserves of $523,343 and as of December 31, 2007, we received advances totaling
$12,582,129 against such receivables, eligible inventory, intangibles, and on
the personal guarantee of Mr. Paul Guez our Chairman and majority stockholder,
and the living trust of Paul and Elizabeth Guez. We have included the
$1,668,498 in accounts receivable, and have reflected the $12,582,129 as short
term borrowings on the accompanying balance sheet. The factor
commission against such receivables is 0.4% and interest is charged at the rate
of 1% over the factor’s prime lending rate per annum.
The
factor commission on receivables purchased on a without recourse basis is 0.75%
if the aggregate amount of approved invoices is below $10 million per annum,
0.70% if between $10 million and $20 million and 0.65% if between $20 million
and $30 million. We are contingently liable to the factor for
merchandise disputes, customer claims and the like on receivables sold to the
factor. To the extent that we draw funds prior to the deemed collection date of
the accounts receivable sold to the factor, interest is charged at the rate of
1% over the factor’s prime lending rate per annum. Factor advances are
collateralized by the non-factored accounts receivable, inventories and the
personal guarantees of Paul Guez, our Chairman and majority stockholder, and the
living trust of Paul and Elizabeth Guez (see note 6).
Critical
Accounting Policies
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 revenues. On an
ongoing basis, we evaluate estimates, including those related to returns,
discounts, bad debts, inventories, intangible assets, income taxes,
contingencies and litigations. We base our estimates on historical
experience and on various assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue
Revenue
is recognized when merchandise has been shipped against a customer’s written
purchase order, the risk of ownership has passed, selling price has been fixed
and determined and collectibility is reasonably assured either through payment
received, or fulfillment of all the terms and conditions of the particular
purchase order. Revenue is recorded net of estimated returns, charge
backs and markdowns based on management’s estimates and historical
experience.
Accounts
Receivable - Allowance for Returns, Discounts and Bad Debts
We
evaluate our ability to collect accounts receivable and the circumstances
surrounding chargebacks (disputes from the customer) based upon a combination of
factors. In circumstances where we are aware of a specific customer’s
inability to meet its financial obligations (such as in the case of bankruptcy
filings or substantial downgrading by credit sources), a specific reserve for
bad debts is taken against amounts due to reduce the net recognized receivable
to the amount reasonably expected to be collected. For all other
customers, we recognize reserves for bad debts and uncollectible chargebacks
based on our historical collection experience. If our collection
experience deteriorates (for example, due to an unexpected material adverse
change in a major customer’s ability to meet its financial obligations to us),
the estimates of the recoverability of amounts due could be reduced by a
material amount.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined on the
first-in, first-out (“FIFO”) method.
Recent
Accounting Pronouncements and Developments
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and to interim periods within those
fiscal years.
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities * Including an amendment of FASB Statement No. 115” (SFAS
159). SFAS 159, which becomes effective for the Company on January 1,
2008, permits companies to choose to measure many financial instruments and
certain other items at fair value and report unrealized gains and losses in
earnings. Such accounting is optional and is generally to be applied
instrument by instrument.
In
December 2007, the FASB issued FASB Statement No. 141 (R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income; and changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently. SFAS No. 160 also requires that any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value
when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
requirements to identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure
requirements are applied retrospectively for all periods presented.
Off-Balance
Sheet Arrangements
Financial
instruments that potentially subject the Company to off-balance sheet risk
consist of factored accounts receivable. The Company sells certain of
its trade accounts receivable to a factor and is contingently liable to the
factor for merchandise disputes and other customer claims.
As of
December 31, 2007, the factor holds $2,007,947 of accounts receivable purchased
from us on a without recourse basis and has made advances to us of $1,800,000
against those receivables, resulting in a net balance amount Due from Factor of
$94,194 net of reserves of $173,803, as of December 31, 2007. The
Company has accounted for the sale of receivables to the factor in accordance
with SFAS No. 140, “Accounting for the Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.”
ITEM
7A.
|
Quantitative and Qualitative Disclosures about Market
Risk
|
Not
applicable.
ITEM
8.
|
Financial Statements and Supplementary
Data
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
30
|
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
31
|
|
|
Consolidated
Statements of Operations for the Years EndedDecember 31, 2007 and
2006
|
32
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years EndedDecember 31, 2007
and 2006
|
33
|
|
|
Consolidated
Statements of Cash Flows for the Years EndedDecember 31, 2007 and
2006
|
34
|
|
|
Notes
to the Consolidated Financial Statements for the Years EndedDecember 31,
2007 and 2006
|
35
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Blue
Holdings, Inc.
Commerce,
California
We have
audited the consolidated balance sheets of Blue Holdings, Inc. and Subsidiaries
as of December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 audits 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
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 consolidated financial position of Blue Holdings,
Inc. and Subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Weinberg & Company,
P.A.
Weinberg
& Company, P.A.
Los
Angeles, California
April 8,
2008
BLUE
HOLDINGS INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
|
|
|
|
ASSETS
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Note
15
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
3,394,842 |
|
|
$ |
74,842 |
|
|
$ |
109,031 |
|
Due
from factor, net of reserves of $173,803 and $178,801,
respectively
|
|
|
|
|
|
|
94,194 |
|
|
|
1,366,588 |
|
Accounts
receivable, net of reserves of $1,138,664 and $901,941
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Purchased by factor with recourse
|
|
|
|
|
|
|
1,668,498 |
|
|
|
7,662,198 |
|
-
Others
|
|
|
|
|
|
|
548,548 |
|
|
|
19,312 |
|
Inventories,
net of reserves of $0 and $1,742,893 respectively
|
|
|
|
|
|
|
9,328,581 |
|
|
|
5,394,006 |
|
Due
from related parties
|
|
|
|
|
|
|
331,257 |
|
|
|
- |
|
Income
taxes receivable
|
|
|
|
|
|
|
28,047 |
|
|
|
2,030,919 |
|
Deferred
income taxes
|
|
|
|
|
|
|
978,217 |
|
|
|
2,488,082 |
|
Prepaid
expenses and other current assets
|
|
|
1,450,390 |
|
|
|
1,283,990 |
|
|
|
396,810 |
|
Total
current assets
|
|
|
17,822,574 |
|
|
|
14,336,174 |
|
|
|
19,466,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
|
|
|
|
1,765,719 |
|
|
|
- |
|
Property
and equipment, less accumulated depreciation
|
|
|
|
|
|
|
1,771,868 |
|
|
|
1,611,171 |
|
Total
assets
|
|
$ |
21,360,161 |
|
|
$ |
17,873,761 |
|
|
$ |
21,078,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
|
|
|
$ |
75,764 |
|
|
$ |
266,788 |
|
Accounts
payable
|
|
|
|
|
|
|
2,577,454 |
|
|
|
2,820,024 |
|
Short-term
borrowings
|
|
|
|
|
|
|
12,582,129 |
|
|
|
10,026,814 |
|
Due
to related parties
|
|
|
|
|
|
|
- |
|
|
|
710,153 |
|
Advances
from majority shareholder
|
|
|
|
|
|
|
- |
|
|
|
1,876,991 |
|
Current
portion of liability for unrecognized tax benefits
|
|
|
|
|
|
|
48,100 |
|
|
|
- |
|
Current
portion of convertible debt
|
|
$ |
696,667 |
|
|
|
|
|
|
|
|
|
Accrued
expenses and other current liabilities
|
|
|
|
|
|
|
1,620,954 |
|
|
|
2,133,932 |
|
Total
current liabilities
|
|
|
17,601,068 |
|
|
|
16,904,401 |
|
|
|
17,834,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
portion of liability for unrecognized tax benefits
|
|
|
|
|
|
|
286,337 |
|
|
|
- |
|
Non-current
portion of convertible debt
|
|
|
794,133 |
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,681,538 |
|
|
|
17,190,738 |
|
|
|
17,834,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock $0.001 stated value, 5,000,000 shares authorized, 1,000,000Series A
convertible shares issued with 6% cumulative dividend of the designated
purchase price and initial conversion price of $0.7347
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
Common
stock $0.001 par value, 75,000,000 shares authorized, 26,232,200 and
26,232,200 and 26,057,200 shares issued and outstanding,
respectively
|
|
|
27,982 |
|
|
|
26,232 |
|
|
|
26,057 |
|
Additional
paid-in capital
|
|
|
10,053,498 |
|
|
|
8,059,648 |
|
|
|
4,964,091 |
|
Accumulated
deficit
|
|
|
|
|
|
|
(7,403,857 |
) |
|
|
(1,746,733 |
) |
Total
stockholders' equity
|
|
|
2,678,623 |
|
|
|
683,023 |
|
|
|
3,243,415 |
|
Total
liabilities and stockholders' equity
|
|
|
21,360,161 |
|
|
$ |
17,873,761 |
|
|
$ |
21,078,117 |
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE
HOLDINGS INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
33,756,184 |
|
|
$ |
48,996,375 |
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
22,137,143 |
|
|
|
35,921,394 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
11,619,041 |
|
|
|
13,074,981 |
|
|
|
|
|
|
|
|
|
|
Selling,
distribution & administrative expenses
|
|
|
15,562,030 |
|
|
|
17,082,936 |
|
|
|
|
|
|
|
|
|
|
Loss
before other expenses and provision for income
taxes
|
|
|
(3,942,989 |
) |
|
|
(4,007,955 |
) |
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,639,222 |
|
|
|
993,814 |
|
|
|
|
|
|
|
|
|
|
Expenses
relating to acquisition of Long Rap, Inc.
|
|
|
- |
|
|
|
437,010 |
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
1,639,222 |
|
|
|
1,430,824 |
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(5,582,211 |
) |
|
|
(5,438,779 |
) |
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
22,448 |
|
|
|
(678,270 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,604,659 |
) |
|
$ |
(4,760,509 |
) |
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
$ |
(0.21 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
26,173,867 |
|
|
|
26,057,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
BLUE
HOLDINGS INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares Issued
|
|
|
Common
Shares Issued
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value
|
|
|
|
|
|
Par
Value
|
|
|
Paid
In
|
|
|
Accumulated
|
|
|
|
|
|
|
Number
|
|
|
0.001
|
|
|
Number
|
|
|
0.001
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
-
|
|
|
|
- |
|
|
|
26,057,200 |
|
|
$ |
26,057 |
|
|
$ |
4,996,752 |
|
|
$ |
3,013,776 |
|
|
$ |
8,036,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of vested stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
200,684 |
|
|
|
- |
|
|
|
200,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finalization
of deferred tax benefit arising from combination with
Taverniti
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(233,345 |
) |
|
|
- |
|
|
|
(233,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,760,509 |
) |
|
|
(4,760,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
- |
|
|
|
- |
|
|
|
26,057,200 |
|
|
$ |
26,057 |
|
|
$ |
4,964,091 |
|
|
$ |
(1,746,733 |
) |
|
$ |
3,243,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of vested stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
337,050 |
|
|
|
- |
|
|
|
337,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of FIN 48
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(52,465 |
) |
|
|
(52,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foregiveness
of debt from majority stockholder
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
98,000 |
|
|
|
- |
|
|
|
98,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for services
|
|
|
- |
|
|
|
- |
|
|
|
175,000 |
|
|
|
175 |
|
|
|
104,825 |
|
|
|
- |
|
|
|
105,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
shares issued upon conversion of debt
|
|
|
1,000,000 |
|
|
$ |
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
2,555,682 |
|
|
|
- |
|
|
|
2,556,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,604,659 |
) |
|
|
(5,604,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
1,000,000 |
|
|
$ |
1,000 |
|
|
|
26,232,200 |
|
|
$ |
26,232 |
|
|
$ |
8,059,648 |
|
|
$ |
(7,403,857 |
) |
|
$ |
683,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
BLUE
HOLDINGS INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,604,659 |
) |
|
$ |
(4,760,509 |
) |
Adjustments
to reconcile net income to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
460,544 |
|
|
|
219,220 |
|
Fair
value of vested stock options
|
|
|
337,050 |
|
|
|
200,684 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,464,464 |
|
|
|
(3,391,843 |
) |
Due
from factor
|
|
|
1,272,394 |
|
|
|
(673,114 |
) |
Income
taxes receivable
|
|
|
2,002,872 |
|
|
|
(2,030,919 |
) |
Inventories
|
|
|
(3,934,575 |
) |
|
|
4,531,156 |
|
Due
to related parties
|
|
|
(612,153 |
) |
|
|
337,842 |
|
Due
from related parties
|
|
|
(331,257 |
) |
|
|
15,974 |
|
Deferred
income taxes
|
|
|
26,118 |
|
|
|
(557,718 |
) |
Prepaid
expenses and other current assets
|
|
|
(782,179 |
) |
|
|
(44,891 |
) |
Income
tax payable
|
|
|
- |
|
|
|
(650,468 |
) |
Bank
overdraft
|
|
|
(191,024 |
) |
|
|
(349,232 |
) |
Accounts
payable
|
|
|
(242,571 |
) |
|
|
(91,574 |
) |
Due
to customers
|
|
|
- |
|
|
|
605,578 |
|
Other
current liabilities
|
|
|
(512,978 |
) |
|
|
929,188 |
|
Net
cash used in operating activities
|
|
|
(2,647,954 |
) |
|
|
(5,710,626 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(621,241 |
) |
|
|
(1,631,464 |
) |
Net
cash used in investing activities
|
|
|
(621,241 |
) |
|
|
(1,631,464 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
2,555,315 |
|
|
|
5,442,878 |
|
Advances
from majority shareholder
|
|
|
679,691 |
|
|
|
1,780,116 |
|
Net
cash provided by financing activities
|
|
|
3,235,006 |
|
|
|
7,222,994 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(34,189 |
) |
|
|
(119,096 |
) |
Cash
at beginning of period
|
|
|
109,031 |
|
|
|
228,127 |
|
Cash
at end of period
|
|
$ |
74,842 |
|
|
$ |
109,031 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,639,222 |
|
|
$ |
993,814 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for income tax
|
|
$ |
- |
|
|
$ |
2,551,605 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
|
|
Cumulative
effect of adoption of FIN 48
|
|
$ |
52,465 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Increase
in prepaid for fair value of stock issued under co-branding
agreement
|
|
$ |
105,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Forgiveness
of debt from majority stockholder
|
|
$ |
98,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset realized from the combination of Taverniti
|
|
$ |
- |
|
|
$ |
233,345 |
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred shares to majority shareholder in satisfaction of advances
from majority shareholder
|
|
$ |
2,556,682 |
|
|
$ |
- |
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
NOTE
1 – BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
(a) Organization:
Blue
Holdings, Inc. (a Nevada corporation formerly known as Marine Jet Technology
Corp.) was incorporated in the State of Nevada on February 9,
2000. On April 14, 2005, Blue Holdings entered into an Exchange
Agreement with Antik Denim, LLC (“Antik”). At
the closing of the transactions contemplated by the Exchange Agreement, which
occurred on April 29, 2005, Blue Holdings acquired all of the outstanding
membership interests of Antik (the “Interests”) from the members of Antik, and
the members contributed all of their Interests to Blue Holdings. In
exchange, Blue Holdings issued to the members 843,027 shares of Series A
Convertible Preferred Stock, par value $0.001 per share, of Blue Holdings
(“Preferred Shares”), which, on June 7, 2005, as a result of a change to Marine
Jet Technology Corp.’s name to Blue Holdings, Inc. and a 1 for 29 reverse stock
split, were converted into 24,447,783 shares of Blue Holding’s common stock on a
post-reverse stock split basis.
As such,
immediately following the closing and upon the conversion of the Preferred
Shares, the Antik members and Elizabeth Guez, our former Chief Operating Officer
and wife of Paul Guez, owned approximately 95.8% of the total issued and
outstanding common stock of Blue Holdings on a fully-diluted
basis. Following completion of the exchange transaction, Antik became
a wholly-owned subsidiary of Blue Holdings. The acquisition was
accounted for as a reverse merger (recapitalization) in the accompanying
financial statements with Antik deemed to be the accounting acquirer, and Blue
Holdings deemed to be the legal acquirer. As such the financial statements
herein include those of Antik since September 13, 2004 (the date of its
inception). All assets and liabilities of Marine Jet Technology Corp.
were assumed by the major stockholder of Blue Holdings, Inc. prior to the
exchange transaction and were inconsequential to the merged
companies.
On June
7, 2005, Marine Jet Technology Corp. changed its name to Blue Holdings, Inc.,
and increased its authorized number of shares of common stock to
75,000,000. On October 31, 2005, the Company entered into an exchange
agreement with Taverniti So Jeans, LLC, a California limited liability company
(“Taverniti”), and the members of Taverniti (the “Taverniti
Members”). Under the exchange agreement, the Company acquired all of
the outstanding membership interests of Taverniti (the “Taverniti Interests”)
from the Taverniti Members, and the Taverniti Members contributed all of their
Taverniti Interests to the Company. In exchange, the Company issued
to the Taverniti Members, on a pro rata basis, an aggregate of 500,000 shares of
the Common Stock, par value $0.001 per share, of the Company, and paid to the
Taverniti Members, on a pro rata basis, an aggregate of Seven Hundred Fifty
Thousand Dollars ($750,000). At the closing of the exchange
transaction, Taverniti became a wholly-owned subsidiary of the
Company. Paul Guez, the Company’s Chairman, Chief Executive Officer,
President and majority stockholder, was and remains the sole manager and was a
member of Taverniti. Elizabeth Guez, Paul Guez’s spouse and the
Company’s former Chief Operating Officer, was a member of
Taverniti. Two other members of Mr. and Mrs. Guez’s family, including
Gregory Abbou, the former President of Taverniti, were the remaining members of
Taverniti. The transaction has been accounted for as a combination of entities
under common control. As such, the consolidated financial statements herein have
been presented to include the operations of Taverniti since September 13, 2004,
the date of its inception, and the $750,000 payment was considered as a deemed
distribution to the members of Taverniti upon the closing of the
combination.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
(b) Nature
of Operations:
The
Company operates exclusively in the wholesale apparel industry. The Company
designs, develops, markets and distributes high fashion jeans and accessories
under the brand names Antik
Denim, Yanuk,
Faith Connexion, and
Taverniti So
Jeans. The Company’s products currently include jeans,
jackets, belts, purses and T-shirts. The Company currently sells its
products in the United States, Canada, Japan and the European Union directly to
department stores and boutiques and through distribution arrangements in certain
foreign jurisdictions. The Company is headquartered in Commerce,
California and maintains showrooms in New York and Los Angeles. The Company
opened a retail store in Los Angeles during August 2005 and another store in San
Francisco in July 2006. The retail operations are not yet significant to the
consolidated operations.
(c) Liquidity
The
Company has suffered losses from its operations during 2006 and 2007, and has an
accumulated deficit of approximately $7,400,000 at December 31,
2007. Additionally, as of December 31, 2007, the Company had a
working capital deficiency of approximately $2,600,000. However, the
Company believes it currently has adequate resources to fund its anticipated
cash needs through 2008. However, an adverse business development
could require the Company to raise additional financing sooner than
anticipated.
The
Company’s primary source of liquidity is expected to be cash flow generated from
operations, cash and cash equivalents currently on hand, and working capital
attainable through both its factor and its majority stockholder. The
Company has already in 2008 sought to, and may continue to seek to, finance
future capital needs through various means and channels, such as issuance of
long-term debt or sale of equity securities.
On March
5, 2008, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with an institutional investor pursuant to
which it issued an aggregate of $2.0 million of thirty-month senior secured
convertible notes, and five-year warrants to purchase an aggregate of 875,000
shares, to the investor (see Note 15). In conjunction with the
issuance of the senior secured convertible notes discussed above, the Company’s
majority stockholder converted $1.4 million of net advances made to the Company,
subsequent to December 31, 2007, into 1,750,000 shares of the Company’s common
stock. The conversion price was $0.80 per share, which represented
the market price on the date of conversion (see Note 15).
From time
to time, the Company’s majority stockholder, Mr. Paul Guez, made advances to it
to support its working capital needs. These advances were
non-interest bearing. On July 1, 2006, Mr. Guez converted the
advances to a line of credit in an agreement with the Company. The
line of credit allows the Company to borrow from him up to a maximum of $3
million at an annual interest rate of 6%. The Company may repay the
advances in full or in part at any time until the credit line
expires. The Company has agreed with Mr. Guez to extend the
expiration date of the credit line to December 31, 2008. As of
December 31, 2007, the balance of these advances was $0.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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 revenues. On an
ongoing basis, we evaluate estimates, including those related to returns,
discounts, bad debts, inventories, intangible assets, income taxes, stock
compensation, contingencies and litigation. We base our estimates on historical
experience and on various assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
(b) Revenue
Recognition:
Revenue
is recognized when merchandise has been shipped against a customer’s written
purchase order, the risk of ownership has passed, selling price has been fixed
and determined and collectibility is reasonably assured either through payment
received, or fulfillment of all the terms and conditions of the particular
purchase order. Revenue is recorded net of estimated returns, charge
backs and markdowns based on management’s estimates and historical
experience.
(c) Inventory
Valuation:
Inventories
are stated at the lower of cost (first-in, first-out method) or
market.
(d) Advertising:
Advertising
costs are expensed as of the first date the advertisements take
place. Advertising expenses included in selling, general and
administrative expenses in the accompanying statements of operations amounted to
approximately $385,000 and $561,000 in 2007 and 2006,
respectively.
(e) Shipping
and Handling Costs:
Freight
charges are included in selling, distribution and administrative expenses in the
statement of operations and were approximately $631,000 and $630,000 for 2007
and 2006, respectively.
(f) Property
and Equipment:
Property
and equipment is stated at cost. Depreciation is provided by the
straight-line method at rates calculated to amortize cost over the estimated
useful lives of the respective assets which range from 2 to 5 years. Leasehold
improvements are amortized over the shorter of the lease term, or the expected
lives of the assets.
Upon sale
or retirement of such assets, the related cost and accumulated depreciation are
eliminated from the accounts and gains or losses are reflected in operations.
Repairs and maintenance expenditures not anticipated to extend asset lives are
charged to operations as incurred.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
(g) Impairment
of Long-Lived Assets and Intangibles:
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. There were no indicators of
impairment of long lived assets or intangibles based upon management’s
assessment at December 31, 2007 or 2006.
(h) Concentration
of Credit Risk:
Financial
instruments, which potentially expose us to concentration of credit risk,
consist primarily of cash, trade accounts receivable, and amounts due from our
factor. Concentration of credit risk with respect to trade accounts
receivable at December 31, 2007 and 2006 is limited due to the number of
customers comprising the Company’s customer base and their dispersion throughout
the United States and abroad. The Company extends unsecured credit to its
customers in the normal course of business.
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be
exposed to risk for the amounts of funds held in one bank in excess of the
insurance limit. In assessing the risk, the Company’s policy is to
maintain cash balances with high quality financial institutions.
The
Company’s products are primarily sold to department stores and specialty retail
stores. The Company may at times sell its excess inventories to off price
discounters. These customers can be significantly affected by changes in
economic, competitive or other factors. The Company makes substantial
sales to a relatively few, large customers. In order to minimize the
risk of loss, the Company assigns certain amount of domestic accounts receivable
to a factor without recourse or requires letters of credit from its customers
prior to the shipment of goods. For non-factored receivables,
account-monitoring procedures are utilized to minimize the risk of
loss. Collateral is generally not required.
(i) Major
Customers:
During
2007 no single customer accounted for more than 10% of the Company’s total
sales. International sales accounted for approximately 18% of total sales for
the year, including Japan which accounted for 10% of total sales. As of December
31, 2007, three customers accounted for 15%, 13% and 11% of total accounts
receivable.
During
2006 two customers accounted for more than 10% of the Company’s sales. Sales to
those customers were 16% and 12%, respectively. International sales
accounted for approximately 23% of the Company’s sales during year ended
December 31, 2006, including Japan which accounted for 14% of our total
sales. As of December 31, 2006, one customer accounted for 42% of
total accounts receivable.
(j) Major
Suppliers:
We
purchase fabric, thread and other raw materials from various industry suppliers
within the United States and abroad. We do not currently have any
long-term agreements in place for such raw materials, which are available from a
large number of suppliers worldwide. During 2007 two suppliers,
individually, accounted for more than 10% of total
purchases. Purchases from these suppliers totaled 20% and 11%,
respectively. As of December 31, 2007 and 2006 accounts payable to
these two suppliers totaled $500,758 and $213,410,
respectively.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
During
2006 one supplier accounted for more than 10% of our purchases. Purchases from
that supplier were 10% and the amount due to that supplier was $144,842 as of
December 31, 2006.
(k) Merchandise
Risk:
The
Company’s success is largely dependent upon its ability to gauge the fashion
tastes of its targeted consumers and provide merchandise that satisfies consumer
demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company’s business, operating results and financial condition.
(l)
Accounts Receivable - Allowance for Returns, Discounts and Bad
Debts:
The Company evaluates its
ability to collect accounts receivable and the circumstances surrounding
chargebacks (disputes from the customer) based upon a combination of
factors. In circumstances where the Company is aware of a specific
customer’s inability to meet its financial obligations (such as in the case of
bankruptcy filings or substantial downgrading by credit
sources), a
specific reserve for bad debts is taken against amounts due to reduce the net
recognized receivable to the amount reasonably expected to be
collected. For all other customers, the Company recognizes reserves
for bad debts and uncollectible chargebacks based on its historical collection
experience. If collection experience deteriorates (for example, due
to an unexpected material adverse change in a major customer’s ability to meet
its financial obligations to the Company), the estimates of the recoverability
of amounts due could be reduced by a material amount.
(m) Cash
and Bank Overdraft:
Bank
overdrafts of $75,764 and $266,788 as of December 31, 2007 and 2006,
respectively, were comprised of issued but unpresented checks, and were offset
by cash at bank of $74,842 and $109,031, respectively.
(n)
Income Tax:
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes” Under SFAS No. 109, income taxes are recognized for the amount
of taxes payable or refundable for the current year and deferred tax liabilities
and assets are recognized for the future tax consequences of transactions that
have been recognized in the Company’s financial statements or tax
returns. A valuation allowance is provided when it is more likely
than not that some portion or the entire deferred tax asset will not be
realized.
(o)
Stock-Based Compensation:
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS
123R”). This statement requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. This
statement establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership
plans. Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123R, using the modified prospective
method. Under this method, the provisions of SFAS 123R apply to all awards
granted or modified after the date of adoption and all previously granted awards
not yet vested as of the date of adoption. Prior periods have not been
restated.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18: "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18: “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
(p) Earnings
(Loss) Per Share
Statement
of Financial Accounting Standards No. 128, “Earnings per Share”, requires
presentation of basic earnings per share (“Basic EPS”) and diluted earnings per
share (“Diluted EPS”). Basic earnings (loss) per share is computed by dividing
earnings (loss) available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution, using the treasury stock method, that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. In computing diluted earnings per
share, the treasury stock method assumes that outstanding options and warrants
are exercised and the proceeds are used to purchase common stock at the average
market price during the period. Options and warrants will have a dilutive effect
under the treasury stock method only when the average market price of the common
stock during the period exceeds the exercise price of the options and
warrants.
Options
to purchase 1,084,500 and 335,500 shares of common stock were outstanding during
the years ended December 31, 2007 and 2006 but were not included in the
computation of diluted earnings per share for these periods because the Company
incurred a loss during those periods, and their effect would be
anti-dilutive.
(q) Fair
Value of Financial Instruments:
The
carrying amounts of cash, due from factor, accounts
receivable, accounts payable, due to (from) related parties,
income-tax payable, accrued expenses and other current liabilities approximate
fair value because of the short maturity of these items. The carrying amounts of
short-term borrowings and amounts due majority stockholder approximate fair
value, because the related effective rates on those advances approximate rates
currently available to the Company.
(r) Off-Balance
Sheet Risk:
Financial
instruments that potentially subject the Company to off-balance sheet risk
consist of factored accounts receivable. As described in Note 3, the
Company sells certain of its trade accounts receivable to a factor and is
contingently liable to the factor for merchandise disputes and other customer
claims. As of December 31, 2007, the factor holds $2,067,997 of
accounts receivable purchased from us on a without recourse basis and has made
advances to us of $1,800,000 against those receivables, resulting in a net
balance Due from Factor of $94,194, net of reserves of $173,803. As
of December 31, 2006, the factor held $3,467,752 of accounts receivable
purchased from us on a without recourse basis and has made advances to us of
$1,922,363 against those receivables, resulting in a net balance amount Due from
Factor of $1,366,588 net of reserves of $178,801.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
(s) Retail
Sales:
During
the years ended December 31, 2007 and 2006, retail store sales were $859,694 and
$663,700, respectively.
(t) Recent
Accounting Pronouncements
References
to the “FASB”, “SFAS” and “SAB” herein refer to the “Financial Accounting
Standards Board”, “Statement of Financial Accounting Standards”, and the “SEC
Staff Accounting Bulletin”, respectively.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and to interim periods within those
fiscal years.
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities * Including an amendment of FASB Statement No. 115” (SFAS
159). SFAS 159, which becomes effective for the Company on January 1,
2008, permits companies to choose to measure many financial instruments and
certain other items at fair value and report unrealized gains and losses in
earnings. Such accounting is optional and is generally to be applied
instrument by instrument.
In
December 2007, the FASB issued FASB Statement No. 141 (R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141 (R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Earlier adoption is prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS
No. 160 establishes accounting and reporting standards that require that the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity; the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of the
consolidated statement of income; and changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently. SFAS No. 160 also requires that any
retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value when a subsidiary is deconsolidated. SFAS No.
160 also sets forth the disclosure requirements to identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. SFAS No. 160 must be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for the
presentation and disclosure requirements. The presentation and
disclosure requirements are applied retrospectively for all periods
presented.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
NOTE
3 – DUE FROM FACTOR
The
Company uses a factor for working capital and credit administration
purposes. Under the various factoring agreements entered into
separately by Blue Holdings, Antik Denim, LLC and Taverniti So Jeans, LLC, the
factor purchases all the trade accounts receivable assigned by the Company and
its subsidiaries and assumes all credit risk with respect to those accounts
approved by it.
The
factor agreements provide that the Company can borrow up to 90% of the value of
uncollected customer invoices, less a reserve 100% of all such accounts disputed
by customers. The factor agreements renew automatically, subject to
120 days’ termination notice from any party. The factor also makes available to
a combined line of credit up to the lesser of $2.4 million and 50% of
the value of eligible raw materials and finished goods. As of December 31, 2007,
borrowings under this line of credit were $12.6 million of which, the Company
drew down $2.4 million of this credit line against inventory, $4.3 million
against accounts receivable and $5.9 million against personal guarantees of Paul
Guez, our Chairman and majority stockholder, and the living trust of Paul and
Elizabeth Guez. The Company has also pledged to the factor an
anticipated income tax refund of approximately $1,200,000 and approximately
$2,500,000 in purchase orders, and has agreed to make monthly payments of
$250,000 to reduce amounts outstanding under the factor agreements.
As of
December 31, 2007, the factor holds $2,067,997 of accounts receivable purchased
from us on a without recourse basis and has made advances to us of $1,800,000
against those receivables, resulting in a net balance Due from Factor of
$94,194, net of $173,803 of reserves. The Company has accounted for the sale of
receivables to the factor in accordance with SFAS No. 140, “Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” Also, as of December 31, 2007, the factor held as
collateral $2,191,841 of accounts receivable that were subject to recourse,
against which the Company has provided reserves of $523,343. As of December 31,
2007, the Company had received advances totaling $12,582,129 against such
receivables, eligible inventory, and on the personal guarantee of the Company’s
majority stockholder. The Company has included the net amount of $1,668,498 in
accounts receivable, and has reflected the $12,582,129 as short term borrowings
on the accompanying balance sheet.
As of
December 31, 2006, the factor held $3,467,752 of accounts receivable purchased
from us on a without recourse basis and has made advances to us of $1,922,363
against those receivables, resulting in a net balance amount Due from Factor of
$1,366,588 net of reserves of $178,801 as of December 31, 2006. As of
December 31, 2006, the factor also held as collateral $8,525,421 of accounts
receivable that were subject to recourse, against which the Company has provided
reserves of $863,223 and as of December 31, 2006, the Company received advances
totaling $10,026,814 against such receivables and against eligible inventory.
The Company has included the $7,662,198 in accounts receivable, and has
reflected the $10,026,814 as short term borrowings on the accompanying balance
sheet.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
The
factor commission on receivables purchased on a without recourse basis is 0.75%
if the aggregate amount of approved invoices is below $10 million per
annum 0.70% if between $10 million and $20 million and 0.65% if
between $20 million and $30 million. The Company is contingently liable to the
factor for merchandise disputes, customer claims and the like on receivables
sold to the factor. To the extent that the Company draws funds prior to the
deemed collection date of the accounts receivable sold to the factor, interest
is charged at the rate of 1% over the factor’s prime lending rate per annum,
which was 7.5% as of December 31, 2007. Factor advances are
collateralized by the non-factored accounts receivable, inventories and the
personal guarantees of Paul Guez, our Chairman and majority stockholder, and the
living trust of Paul and Elizabeth Guez (see note 6).
NOTE
4 - INVENTORIES
|
|
Inventories
at December 31, 2007 and December 31, 2006 are summarized as
follows:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
$ |
2,717,085 |
|
|
$ |
3,583,019 |
|
Work-in-Process
|
|
|
962,781 |
|
|
|
991,775 |
|
Finished
Goods
|
|
|
3,450,454 |
|
|
|
2,562,105 |
|
Finished
Goods - Held for Sale for customer
|
|
|
2,198,261 |
|
|
|
- |
|
|
|
|
9,328,581 |
|
|
|
7,136,899 |
|
|
|
|
|
|
|
|
|
|
Less:
Inventory valuation allowance
|
|
|
- |
|
|
|
(1,742,893 |
) |
TOTAL
|
|
$ |
9,328,581 |
|
|
$ |
5,394,006 |
|
During
2006 the Company provided a general reserve for significant components of its
finished goods and raw material inventory. During 2007 the Company
reviewed the specific components of its inventory and applied such reserves to
specific items that were marked down to their net realizable
value. The Finished Goods – Held for Sale for customer relate to
inventory segregated at year end for one customer on a bill and hold transaction
that does not qualify for sales treatment until a future
period.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
NOTE
5 - PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment at December 31, 2007 and December 31, 2006 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Furniture
|
|
$ |
33,317 |
|
|
$ |
14,294 |
|
Leasehold
Improvements
|
|
|
1,312,498 |
|
|
|
1,219,094 |
|
Computer
Equipment
|
|
|
1,125,365 |
|
|
|
616,551 |
|
|
|
|
2,471,180 |
|
|
|
1,849,939 |
|
Less:
Accumulated depreciation and amortization
|
|
|
(699,312 |
)
|
|
|
(238,768 |
)
|
|
|
$ |
1,771,868 |
|
|
$ |
1,611,171 |
|
Depreciation
expense totaled $460,544 and $219,220 and the years ended December 31, 2007 and
2006, respectively.
NOTE
6 – RELATED PARTY TRANSACTIONS
The Company purchased
fabric at cost from Blue Concept, LLC, an entity which is owned by Paul Guez,
the Company’s Chairman, for $0 and $294,925, respectively, during the years
ended December 31, 2007 and 2006. On January 1, 2006, the
Company leased its facility at Commerce, California from Azteca Production
International Inc., as a sub-tenant and is paying it $19,030 per month. Azteca
is a company that is co-owned by Paul Guez. Rent expense includes $228,360 and
$249,180 for payment under this lease for the years ended December 31, 2007 and
2006, respectively.
On July
5, 2005 the Company entered into a ten-year license agreement with Yanuk Jeans,
LLC, an entity that is solely owned by Paul Guez. Under the terms of
the agreement, the Company became the exclusive licensor for the design,
development, manufacture, sale, marketing and distribution of the Yanuk brand
products to the wholesale and retail trade. The Company pays to Yanuk Jeans, LLC
a royalty of six percent of all net sales of the licensed products and a
guaranteed minimum royalty on an annual basis. Yanuk has agreed to waive such
royalties for the years ending 2007 and 2008. Additionally, during the term of
the license agreement, the Company has the option to purchase from Yanuk Jeans,
LLC the property licensed under the agreement. Related royalties paid and
payable for the years ended December 31, 2007 and 2006 were $0 and $277,139,
respectively.
On
October 6, 2005, the Company entered into a five-year license agreement with
Yanuk Jeans, LLC. Under the terms of the agreement, the Company became the
exclusive licensor for the design, development, manufacture, sale, marketing and
distribution of Yanuk Jeans, LLC’s U brand products to the wholesale and retail
trade. The Company pays to Yanuk Jeans, LLC a royalty of five percent of all net
sales of the licensed products and shall pay a guaranteed minimum royalty on an
annual basis. In addition, during the term of the license agreement,
the Company has the option to purchase from Yanuk Jeans, LLC the property
licensed under the agreement. No royalties were paid or payable to Yanuk Jeans,
LLC for the U brand products for the years ended December 31, 2007 or
2006.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
Paul Guez
and the living trust of Paul and Elizabeth Guez have guaranteed all advances and
ledger debt due to the Company’s factor (see Note 3).
On August
27, 2005, the Company opened a retail store on Melrose Avenue, Los Angeles,
California and took over all the obligations of a 10-year property lease which
was entered into by Blue Concept, LLC in April 2005. The lease will expire on
March 15, 2015.
Taverniti
is the exclusive licensee for the design, development, manufacture, sale,
marketing and distribution of the Taverniti So Jeans trademark in the denim and
knit sports wear categories for men and women. It is paying royalties
to Taverniti Holdings, LLC in the ranges of 5-8 percent depending on the net
sales of the licensed products pursuant to a license agreement with Taverniti
Holdings, LLC. Taverniti Holdings, LLC is jointly owned by Paul Guez
(60%) and Jimmy Taverniti (40%), the designer of the products for the brand, and
Mr. Guez is the sole manager. The license agreement was signed in May
2004 and expires on December 31, 2015. No royalties were paid or
payable for the year ended December 31, 2007, royalties for that year having
been waived by Licensor. Royalties paid or payable for the year ended
December 31, 2006 were $1,053,263, of which total $98,000 was forgiven during
2007 and was credited to Additional Paid in Capital.
NOTE
7 – DUE FROM/TO RELATED PARTIES
The
related parties are the Company’s majority stockholder (who is also the
Company’s Chairman) and limited liability companies that are either owned or
co-owned by the majority stockholder. These amounts are all unsecured
and non-interest bearing. All non-trade related advances from related
parties have been repaid as of December 31, 2007. Trade-related
outstanding items follow regular payment terms as invoiced. As of December 31,
2007 and December 31, 2006, total trade-related items due to related parties
amounted to $103,222 and $710,153, respectively. As of December 31,
2007, total trade-related items due from related parties amounted to
$331,257.
From time
to time, the Company’s majority stockholder, Mr. Paul Guez, made advances to the
Company to support its working capital needs. These advances were non-interest
bearing and unsecured, with no formal terms of repayment. On July 1, 2006, Mr.
Guez converted the advances to a line of credit in an agreement with the
Company. The line of credit allows the Company to borrow from him up to a
maximum of $3 million at an interest rate of 6% per annum. The Company may repay
the advances in full or in part at any time until the credit line expires and
repayment is required, on December 31, 2008. On November 13, 2007 the
Company issued convertible preferred shares valued at $2,556,682 to Mr. Guez in
satisfaction of $2,556,682 of these advances (see Note 11). As of December 31, 2007
and 2006 the balance of these advances was $0 and $1,876,991, respectively, and
accrued interest thereon was $0 and $68,190. Interest expense of $108,087 and
$68,190, respectively, relates to advances made against this facility during the
years ended December 31, 2007 and 2006.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
NOTE 8 – ABANDONED ACQUISITION OF
LONG RAP, INC.
On June
19, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with LR Acquisition Corporation, a District of Columbia corporation
and our wholly-owned subsidiary (“LR Acquisition”) Long Rap, Inc., a District of
Columbia corporation (“Long Rap”), the stockholders of Long Rap and Charles
Rendelman, as the Long Rap stockholders’ representative, pursuant to which LR
Acquisition would merge (the “Merger”) with and into Long Rap with Long Rap
surviving the Merger as our wholly-owned subsidiary. On October 10,
2006, the Company mutually agreed with Long Rap to terminate the Merger
Agreement. Costs incurred of $437,010 relating to the potential acquisition were
expensed upon termination of the agreement and included in the accompanying
consolidated statement of operations for the year ended December 31,
2006.
NOTE
9 – INCOME TAX
The
Company accounts for income taxes and the related accounts under the liability
method. Deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted rates expected to be in effect during the year in
which the basis differences reverse.
The
Company’s provision (benefit) for income taxes was $22,448 for the year ended
December 31, 2007, compared to $(678,270) for the same period of the prior
year.
The
provision for income taxes consists of the following for the years ended
December 31:
|
|
2007
|
|
|
2006
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$ |
4,371 |
|
|
$ |
(160,360 |
)
|
State
|
|
|
18,077 |
|
|
|
39,808 |
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(417,989 |
)
|
|
|
(387,312 |
)
|
State
|
|
|
417,989 |
|
|
|
(170,406 |
)
|
Provision
for income tax expense
|
|
$ |
22,448 |
|
|
$ |
(678,270 |
)
|
A
reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows for the years ended December 31:
|
|
2007
|
|
|
2006
|
|
Statutory
federal rate
|
|
|
34.0 |
%
|
|
|
(34.0 |
)%
|
State
taxes, net of federal benefit
|
|
|
6.5 |
|
|
|
(5.6 |
)
|
Change
in valuation allowance
|
|
|
(39.0 |
)
|
|
|
25.4 |
|
Permanent
differences
|
|
|
(0.9 |
)
|
|
|
.4 |
|
Unrecognized
tax benefits
|
|
|
(0.3 |
)
|
|
|
- |
|
Other
|
|
|
.1 |
|
|
|
1.3 |
|
Effective
tax rate
|
|
|
(0.4 |
)%
|
|
|
(12.5 |
)%
|
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
The tax
effects of temporary differences that give rise to significant portions of the
net deferred tax asset at December 31 are as follows:
|
|
2007
|
|
|
2006
|
|
Deferred
tax asset:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
460,814 |
|
|
$ |
362,920 |
|
State
taxes
|
|
|
6,185 |
|
|
|
4,510 |
|
Reserve
for chargebacks
|
|
|
70,337 |
|
|
|
71,945 |
|
Inventory
adjustment
|
|
|
279,258 |
|
|
|
2,037,662 |
|
Net
Operating Loss Carryovers
|
|
|
1,420,000 |
|
|
|
11,045 |
|
Other
|
|
|
27,559 |
|
|
|
- |
|
Net
current deferred tax assets
|
|
$ |
2,264,153 |
|
|
$ |
2,488,082 |
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Taverniti
combination goodwill
|
|
|
1,246,976 |
|
|
|
1,336,440 |
|
Other
|
|
|
438,532 |
|
|
|
43,735 |
|
State
taxes
|
|
|
18,411 |
|
|
|
- |
|
Net
Operating Loss Carryovers
|
|
|
2,382,959 |
|
|
|
- |
|
Net
non-current defered tax assets
|
|
$ |
4,086,878 |
|
|
$ |
1,380,175 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
$ |
(3,607,095 |
)
|
|
$ |
(1,380,175 |
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$ |
2,743,936 |
|
|
$ |
2,488,082 |
|
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal or state and local income tax
examinations by tax authorities for years before 2003. The Internal
Revenue Service (IRS) commenced an examination of the Company’s U.S. income tax
return for 2005 in the first quarter of 2007 that is anticipated to be completed
early in 2008.
The
Company adopted the provisions of FASB Interpretation No.48, Accounting for
Uncertainty in income taxes, on January 1, 2007. As a result of the
implementation of Interpretation 48, the Company recognized a $32,288 increase
in the liability for unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained earnings. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
Balance
at January 1, 2007
|
|
$ |
(310,458 |
)
|
Additions
based on tax positions related to the current year
|
|
|
- |
|
Additions
for tax positions of prior years
|
|
|
(23,979 |
)
|
Reductions
for tax positions of prior years
|
|
|
- |
|
Settlements
|
|
|
- |
|
Balance
|
|
$ |
(334,437 |
)
|
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
Included
in the balance at December 31, 2007 are $266,930 of tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Because of the impact of
deferred tax accounting, other than interest and penalties, the disallowance of
the shorter deductibility period would not affect the annual effective tax rate
but would accelerate the payment of cash to the taxing authority to an earlier
period.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income tax expense. During the year ended December 31,
2007, the Company recognized in income tax expense $23,979 for interest and
penalties. The Company included in its balance for unrecognized tax
benefits at December 31, 2007 $85,468 for the payment of interest and
penalties.
The
Company expects to file a federal carryback claim with its 2007 tax
return for approximately $1.4 million of taxes paid with previous filings, with
it expects to collect in 2008.
NOTE
10 – STOCK OPTIONS
Under the
Company’s 2005 Stock Incentive Plan (the “Company Plan”), the Company may grant
qualified and nonqualified stock options and stock purchase rights to selected
employees. The Company reserved 2,500,000 shares of common stock for
issuance under the Company Plan.
At December 31, 2007 and 2006, options outstanding are as
follows:
|
|
Number
of
options
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
427,000 |
|
|
$ |
7.18 |
|
Granted
|
|
|
270,000 |
|
|
$ |
5.20 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
(361,500 |
)
|
|
$ |
5.20 |
|
Balance
at December 31, 2006
|
|
|
335,500 |
|
|
$ |
5.75 |
|
Granted
|
|
|
925,000 |
|
|
$ |
1.59 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
(176,000 |
)
|
|
$ |
5.53 |
|
Balance
at December 31, 2007
|
|
|
1,084,500 |
|
|
$ |
2.24 |
|
Additional
information regarding options outstanding as of December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
Options
exercisable
|
|
|
|
Exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
|
Number
exercisable
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8.10 |
|
|
|
32,000 |
|
|
|
7.58 |
|
|
$ |
8.10 |
|
|
|
22,000 |
|
|
$ |
8.10 |
|
|
|
$ |
5.30 |
|
|
|
43,500 |
|
|
|
8.00 |
|
|
$ |
5.30 |
|
|
|
33,500 |
|
|
$ |
5.30 |
|
|
|
$ |
5.20 |
|
|
|
84,000 |
|
|
|
8.92 |
|
|
$ |
5.20 |
|
|
|
25,500 |
|
|
$ |
5.20 |
|
|
|
$ |
1.98 |
|
|
|
300,000 |
|
|
|
9.42 |
|
|
$ |
1.98 |
|
|
|
100,000 |
|
|
$ |
1.98 |
|
|
|
$ |
1.40 |
|
|
|
625,000 |
|
|
|
9.58 |
|
|
$ |
1.40 |
|
|
|
125,000 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1.40
- $8.10 |
|
|
|
1,084,500 |
|
|
|
9.36 |
|
|
$ |
2.21 |
|
|
|
306,000 |
|
|
$ |
2.81 |
|
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
The total
stock based compensation expense for the years ended December 31, 2007 and 2006
was $337,050 and $200,684, respectively. The aggregate intrinsic value of
outstanding shares at December 31, 2007 was $-0- as the exercise price of all
vested shares exceeded the market price as of that date. As of December 31, 2007,
the unamortized value of these option awards was $475,476 which will be
amortized as stock based compensation cost over the average of approximately
three years as the options vest. The fair value of options was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 2007 and
2006:
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
— |
|
|
|
— |
|
Risk-free
interest rate
|
|
|
4.50 |
% |
|
|
4.50 |
% |
Expected
volatility
|
|
|
48.20 |
% |
|
|
46.01 |
% |
Expected
life of options
|
|
6 years
|
|
|
5
years
|
|
NOTE
11 – PREFERRED STOCK
On
November 13, 2007, the Company agreed to
issue 1,000,000 shares of a newly formed Series A Convertible Preferred Stock
(the “Series A Preferred”) in satisfaction of $2,556,682 of advances made to the
Company by Paul Guez, the Company’s Chairman of the Board and majority
stockholder. The shares of Series A Preferred were convertible into 3,479,899
shares of the common stock of the Company based on a conversion formula equal to
the price per share ($2.556682) divided by the conversion price ($0.7347)
multiplied by the total number of shares of Series A Preferred issued
(1,000,000). The conversion price equaled the average closing price of a share
of the Company's common stock as quoted on the NASDAQ Capital Market, over the
20 trading days immediately preceding November 13, 2007, the closing date of the
transaction.
Subsequent
to the transaction, and in connection with the Company’s application for
additional listing of the shares of common stock underlying the Series A
Preferred, the Company was advised orally by NASDAQ Listing Qualifications that
the terms of the Series A Preferred did not comply with specified NASDAQ
Marketplace Rules relating to stockholder approval and voting
rights.
As a
result of the discussions with the NASDAQ Listing Qualifications Department, and
as a result of subsequent negotiations with Mr. Guez, on November 28, 2007, the
Company rescinded the purchase transaction of the Series A Preferred (effective
as of November 13, 2007, the date that the transaction originally closed) and
entered into a new transaction with Mr. Guez pursuant to a Preferred Stock
Rescission and Purchase Agreement dated November 28, 2007, whereby the Company
issued 1,000,000 shares of an amended and restated form of the Series A
Convertible Preferred Stock (the “New Series A Preferred”) in consideration for
(i) the cancellation of the $2,556,682 of advances made to the Company by Mr.
Guez (which again became due and owing to the Company as a result of the
rescission of the prior transaction), and (ii) an additional cash investment
equal to $125,000. The shares of New Series A Preferred are convertible into
4,623,589 shares of the common stock of the Company based on a conversion
formula equal to the price per share ($2.681682) divided by the conversion price
($0.58) multiplied by the total number of shares of New Series A Preferred
issued (1,000,000), subject to adjustment in accordance with the provisions of
the certificate of designations for the New Series A Preferred. The conversion
price equals the consolidated closing bid price for a share of the Company's
common stock prior to the signing of the definitive agreement governing the
transaction.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
The
additional terms of the New Series A Preferred are as follows:
|
·
|
The
shares of New Series A Preferred accrue cumulative dividends at the annual
rate of 6% of the purchase price in preference to the common stock, and
are payable when, as and if declared by the
Board;
|
|
·
|
Upon
the liquidation or dissolution of the Company, or any merger or sale of
all or substantially all of the assets, the shares of New Series A
Preferred are entitled to receive, prior to any distribution to the
holders of common stock, 100% of the purchase price plus all accrued but
unpaid dividends;
|
|
·
|
The
New Series A Preferred plus all declared but unpaid dividends thereon
automatically will be converted into common stock, at the then applicable
conversion rate, upon the affirmative vote of 50% of the outstanding
shares of New Series A
Preferred;
|
|
·
|
Each
share of New Series A Preferred will carry a number of votes equal to
the number of shares of common stock then issuable upon its conversion
into common stock. The New Series A Preferred generally will vote
together with the common stock and not as a separate class, except as
provided below;
|
|
·
|
Consent
of the holders of the outstanding New Series A Preferred will be
required in order for the Company to: (i) amend or change the rights,
preferences, privileges or powers of, or the restrictions provided for the
benefit of, the New Series A Preferred; (ii) authorize, create or
issue shares of any class of stock having rights, preferences, privileges
or powers superior to the New Series A Preferred; (iii) reclassify
any outstanding shares into shares having rights, preferences, privileges
or powers superior to the New Series A Preferred; or (iv) amend the
Company’s Articles of Incorporation or Bylaws in a manner that adversely
affects the rights of the New Series A Preferred;
and
|
|
·
|
Holders
of New Series A Preferred will be entitled to unlimited “piggyback”
registration rights on registrations by the Company, subject to pro rata
cutback at any underwriter’s discretion. The registration rights may be
transferred to a transferee who acquires all of the New Series A
Preferred.
|
NOTE
12 – CO-BRANDING AGREEMENT
On May
11, 2007, the Company entered into a Letter of Intent with William Adams, aka
will.i.am, of the Black Eyed Peas, pursuant to which the parties agreed to,
within 30 days of the date of execution, enter into (i) a co-branding agreement
for the creation of a collection of premium denim and denim-related apparel
under the name “i.am Antik” or such other similar name upon which the parties
shall agree, and (ii) a joint venture agreement pursuant to which the parties
will design, develop, market, manufacture and distribute apparel products
bearing the “I.Am” trademark subject to a license agreement. The term of each of
the co-branding agreement and the joint venture agreement shall be for five
years, with the first year commencing on the execution of the Letter of Intent
and ending on the last day of February 2008, and each year thereafter commencing
on March 1 and ending on the last day of February. Prior to their entry into the
Letter of Intent, the parties had no material relationship with each other. The
Letter of Intent was effective May 11, 2007 and was approved and certified by
the stockholders of the Company on June 21, 2007.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
Mr. Adams
is required to perform specific design, marketing and promotional services under
the term of Letter of Intent. In consideration of such services rendered by Mr.
Adams, the Company issued to Mr. Adams as base compensation 175,000 shares of
its common stock on May 21, 2007 and will issue to Mr. Adams 81,250 shares on
each anniversary of the effective date of the Letter of Intent for a period of 4
years, subject to the prior effectiveness of a registration statement on Form
S-8 registering the issuance of the shares to Mr. Adams. Mr. Adams will also be
entitled to receive up to an aggregate of 500,000 additional shares of common
stock from the Company upon achieving certain milestones based on net
sales.
Mr. Adams
is permitted to terminate the co-branding agreement and/or joint venture
agreement in the event that the Company is delisted from the NASDAQ Capital
Market, a final and binding legal determination is made by a body with
appropriate jurisdiction that the Company has failed to comply with the rules
and regulations promulgated by the Securities and Exchange Commission, or the
joint venture’s failure to launch an “I.Am” collection within 12 months from the
date of execution of the definitive joint venture agreement. The
Company is currently involved in discussions with Mr. Adams regarding a mutual
termination of the arrangement.
The
Company determined that since the shares contain performance requirements and
specific services to be performed, and the shares would be returned if such
services were not preformed, it is appropriate to recognize as expense the value
of the issued shares that are earned each month. As such, the Company
determined that the 175,000 shares that were issued in May 2007 were valued at $
$108,356 and will be amortized as earned over a one year period. The shares
earned will be valued at the end of each month based on the fair value of those
shares in accordance with EITF 96-18. Amortization of the value of the shares
issued resulted in the recognition of compensation expense during the year ended
December 31, 2007 of $58,948.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
License
agreements:
On July
5, 2005 the Company entered into a ten-year license agreement with Yanuk Jeans,
LLC. Under the terms of the agreement, the Company became the
exclusive licensor for the design, development, manufacture, sale, marketing and
distribution of the “Yanuk” brand products to the wholesale and retail
trade. On October 6, 2005, the Company entered into a five-year
license agreement with Yanuk Jeans, LLC. Under the terms of the agreement, the
Company became the exclusive licensor for the design, development, manufacture,
sale, marketing and distribution of Yanuk Jeans, LLC’s “U” brand products to the
wholesale and retail trade.
On
January 12, 2007, the Company entered into a License Agreement with Faith
Connexion S.A.R.L., a company formed under the laws of France (“Faith”).
Pursuant to the License Agreement, Faith granted an exclusive right and license
to use the Faith Connexion trademark for the manufacture, marketing, promotion,
sale, distribution and other exploitation of men’s and women’s hoodies,
t-shirts, sweatshirts, sweatpants and hats in North America (including Canada),
South America, Japan and Korea. Compensation for use of the Faith Connexion
trademark will consist of a royalty calculated as 9% of the Company’s net sales
arising from products bearing the Faith Connexion trademark in the first two
years, and 9.5% of net sales in year three. The License Agreement has a term of
three years as follows: the first year is comprised of 18 months, year two is
comprised of the next six months, and year three is comprised of the following
12 months. Per the agreement, the Company has agreed to a guarantee payment of
royalties on identified minimum net sales amounts ranging from $3.5 to $10
million over each of the three years (equal to minimum royalties of $450,000,
$315,000, and $950,000, in each of years one (first eighteen months), two (next
6 months) and three (next twelve months), respectively, and to spend at least 3%
of actual net sales amounts on marketing and advertising the Faith Connexion
trademarked products in the territory. During the year ended December 31, 2007,
the Company recorded royalty expense of $300,000.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
On April
27, 2007, Antik Denim, LLC (“Antik”), a California limited liability company and
our wholly-owned subsidiary, executed a License Agreement (the “Mercier License
Agreement”) dated to be effective as of April 18, 2007, by and between Antik and
Mercier SARL, a company formed under the laws of France
(“Mercier”). Pursuant to terms of the Mercier License
Agreement, Antik granted an exclusive right and license to use the Antik Denim
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of denim and sportswear apparel in
Europe. Compensation for use of the Antik Denim trademark will
consist of a royalty calculated as 10% of Mercier’s net sales arising from
products bearing the Antik Denim trademark. The Mercier License
Agreement has an initial term of twenty (20) months, and includes four (4) one
(1)-year extension options available to Mercier to the extent it achieves
specified minimum net sales. Mercier has agreed to guarantee payment
of royalties on an identified minimum net sales amount of $2.5 million during
the initial twenty (20) month term, and on identified minimum net sales amounts
ranging from $2.5 million to $10 million over the eligible extension
terms. In connection with these minimum net sales, the Mercier
License Agreement provides for an upfront minimum guarantee advance of $250,000
which has been received by the Company and of which $150,000 is recorded as
deferred revenue as of December 31, 2007, and an aggregate of minimum royalty
payments of $2.5 million for the years 2009 though 2012 assuming the Mercier
License Agreement is renewed at the end of 2008.
On May 1,
2007, Antik executed a License Agreement (the “Max Ray License Agreement”) dated
to be effective as of May 1, 2007, by and between Antik and Max Ray, Inc., a
California corporation (“Max Ray”). Pursuant to the Max Ray License
Agreement, Antik granted an exclusive right and license to use the Antik Denim
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of small leather goods consisting of belts, handbags, small
leather accessories and scarves in the United States and its
territories. Compensation for use of the Antik Denim trademark will
consist of a royalty calculated as 8% of Max Ray’s net sales arising from
products bearing the Antik Denim trademark. The Max Ray License
Agreement has an initial term of eighteen (18) months, and includes four (4) one
(1)-year extension options available to Max Ray unless earlier terminated by Max
Ray. Max Ray has agreed to guarantee payment of royalties on an
identified minimum net sales amount of $1.1 million during the initial eighteen
(18) month term, and on identified minimum net sales amounts ranging from $3
million to $10 million over the eligible extension terms. In
connection with these minimum net sales, the Max Ray License Agreement provides
for an upfront minimum guarantee advance of $20,000 to be applied against the
minimum guaranty for the aggregate initial term, and an aggregate of minimum
royalty payments of $2.1 million for the years 2009 though 2012 assuming the Max
Ray License Agreement is renewed at the end of 2008.
Blue
Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007 and 2006
Minimum
future aggregated guaranteed royalty payments under the royalty agreements with
Yanuk Jeans, LLC are as follows:
Guaranteed
Minimum Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
"Yanuk"
|
|
|
"U"
|
|
|
"Faith"
|
|
|
Total
|
|
2008
|
|
|
137,500 |
|
|
|
|