Table of
Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended
August 31, 2009
|
|
|
OR
|
|
|
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 0-18926
JOES JEANS INC.
(Exact name of registrant as specified in its charter)
Delaware
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11-2928178
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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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5901 South Eastern Avenue, Commerce, California
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90040
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(Address of principal executive offices)
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(Zip Code)
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(323) 837-3700
(Registrants telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files).
o
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
o
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Accelerated filer
o
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|
|
|
Non-accelerated filer
o
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Smaller reporting company
x
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(Do not check if a smaller reporting company)
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|
Indicate
by check mark whether the registrant is a shell company (as defined by Rule 12b-2
of the Exchange Act). Yes
o
No
x
The
number of shares of the registrants common stock outstanding as of October 15,
2009 was 60,455,256.
Table of
Contents
PART I FINANCIAL
INFORMATION
Item 1. Financial Statements.
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
August 31, 2009
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November 30, 2008
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(unaudited)
|
|
|
|
ASSETS
|
|
|
|
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Current
assets
|
|
|
|
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Cash
and cash equivalents
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$
|
9,545
|
|
$
|
3,465
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|
Accounts
receivable, net of allowance for customer credits and returns of $865 (2009)
and $660 (2008)
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1,219
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865
|
|
Inventories,
net
|
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21,521
|
|
22,271
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|
Due
from related parties
|
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203
|
|
|
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Prepaid
expenses and other current assets
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273
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|
301
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|
Total
current assets
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32,761
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26,902
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|
|
|
|
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Property
and equipment, net
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2,825
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2,825
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Goodwill
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3,836
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3,836
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Intangible
assets
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24,000
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24,000
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Other
assets
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108
|
|
106
|
|
|
|
|
|
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Total
assets
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$
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63,530
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$
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57,669
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|
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LIABILITIES AND STOCKHOLDERS
EQUITY
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Current
liabilities
|
|
|
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Accounts
payable and accrued expenses
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$
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7,421
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$
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8,628
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Due
to factor
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4,232
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2,900
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Deferred
licensing revenue
|
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866
|
|
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Due
to related parties
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184
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|
205
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|
Total
current liabilities
|
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12,703
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|
11,733
|
|
|
|
|
|
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Long
term deferred rent
|
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474
|
|
251
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|
Deferred
tax liability
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9,600
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9,600
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Total
liabilities
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22,777
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|
21,584
|
|
|
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Commitments
and contingencies
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|
|
|
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Stockholders
equity
|
|
|
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Common
stock, $0.10 par value: 100,000 shares authorized, 60,595 shares issued and
60,455 outstanding (2009) and 59,946 shares issued and 59,806 outstanding
(2008)
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6,061
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5,996
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|
Additional
paid-in capital
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103,403
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102,859
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Accumulated
deficit
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(65,911
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)
|
(69,970
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)
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Treasury
stock, 140 shares
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(2,800
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)
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(2,800
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)
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Total
stockholders equity
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40,753
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36,085
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|
|
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|
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Total
liabilities and stockholders equity
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$
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63,530
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$
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57,669
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|
The accompanying
notes are an integral part of these financial statements.
1
Table of
Contents
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
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Three months ended
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Nine months ended
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August 31, 2009
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August 31, 2008
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August 31, 2009
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August 31, 2008
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(unaudited)
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|
(unaudited)
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Net
sales
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|
$
|
21,238
|
|
$
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18,248
|
|
$
|
54,899
|
|
$
|
51,413
|
|
Cost
of goods sold
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10,864
|
|
9,303
|
|
27,576
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|
27,242
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|
Gross
profit
|
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10,374
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8,945
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27,323
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24,171
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Operating
expenses
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Selling,
general and administrative
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7,394
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6,544
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21,383
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|
19,042
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|
Depreciation
and amortization
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|
132
|
|
70
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|
401
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|
244
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7,526
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|
6,614
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|
21,784
|
|
19,286
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|
Operating
income
|
|
2,848
|
|
2,331
|
|
5,539
|
|
4,885
|
|
Interest
expense
|
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90
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|
133
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|
290
|
|
492
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|
Income
before provision for taxes
|
|
2,758
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|
2,198
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|
5,249
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|
4,393
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|
Income
taxes
|
|
824
|
|
368
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|
1,190
|
|
631
|
|
Net
income
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|
$
|
1,934
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|
$
|
1,830
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$
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4,059
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$
|
3,762
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|
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|
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Earnings per common share - basic
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$
|
0.03
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$
|
0.03
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$
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0.07
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$
|
0.06
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|
|
|
|
|
|
|
|
|
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Earnings per common share - diluted
|
|
$
|
0.03
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|
$
|
0.03
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|
$
|
0.07
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|
$
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0.06
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|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
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Basic
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60,177
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|
59,477
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|
59,935
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|
59,360
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|
Diluted
|
|
61,462
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|
60,063
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|
60,800
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|
59,752
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|
The accompanying
notes are an integral part of these financial statements.
2
Table of Contents
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
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Nine months ended
|
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|
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August 31, 2009
|
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August 31, 2008
|
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|
|
(unaudited)
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|
CASH FLOWS FROM OPERATING ACTIVITIES
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|
|
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Net
cash provided by operating activities
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$
|
5,251
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$
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2,398
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CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
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Purchases
of property and equipment
|
|
(401
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)
|
(411
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)
|
Other
|
|
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|
125
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|
Net
cash used in investing activities
|
|
(401
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)
|
(286
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)
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|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
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Proceeds
from factor borrowing, net
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1,332
|
|
(301
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)
|
Proceeds
from issuance of common stock
|
|
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|
13
|
|
Payment
of taxes on restricted stock units
|
|
(102
|
)
|
(38
|
)
|
Net
cash provided by (used in) financing activities
|
|
1,230
|
|
(326
|
)
|
|
|
|
|
|
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NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
6,080
|
|
1,786
|
|
|
|
|
|
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CASH
AND CASH EQUIVALENTS, at beginning of period
|
|
3,465
|
|
1,331
|
|
|
|
|
|
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|
CASH AND CASH EQUIVALENTS, at end of period
|
|
$
|
9,545
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|
$
|
3,117
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|
The accompanying notes are an integral part
of these financial statements.
3
Table of Contents
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
(in thousands)
|
|
|
|
|
|
|
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|
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Total
|
|
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|
Common Stock
|
|
Additional
|
|
Accumulated
|
|
Treasury
|
|
Stockholders
|
|
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|
Shares
|
|
Par Value
|
|
Paid-In Capital
|
|
Deficit
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 25, 2007
|
|
59,862
|
|
$
|
5,988
|
|
$
|
102,056
|
|
$
|
(74,872
|
)
|
$
|
(2,776
|
)
|
$
|
30,396
|
|
Net
income (unaudited)
|
|
|
|
|
|
|
|
3,762
|
|
|
|
3,762
|
|
Issuance
of restricted stock (unaudited)
|
|
64
|
|
6
|
|
(6
|
)
|
|
|
|
|
|
|
Issuance
of common stock (unaudited)
|
|
13
|
|
1
|
|
12
|
|
|
|
|
|
13
|
|
Stock-based
compensation (unaudited)
|
|
|
|
|
|
617
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2008 (unaudited)
|
|
59,939
|
|
$
|
5,995
|
|
$
|
102,679
|
|
$
|
(71,110
|
)
|
$
|
(2,776
|
)
|
$
|
34,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2008
|
|
59,946
|
|
$
|
5,996
|
|
$
|
102,859
|
|
$
|
(69,970
|
)
|
$
|
(2,800
|
)
|
$
|
36,085
|
|
Net
income (unaudited)
|
|
|
|
|
|
|
|
4,059
|
|
|
|
4,059
|
|
Issuance
of restricted stock (unaudited)
|
|
649
|
|
65
|
|
(65
|
)
|
|
|
|
|
|
|
Stock-based
compensation, net of withholding taxes (unaudited)
|
|
|
|
|
|
609
|
|
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2009 (unaudited)
|
|
60,595
|
|
$
|
6,061
|
|
$
|
103,403
|
|
$
|
(65,911
|
)
|
$
|
(2,800
|
)
|
$
|
40,753
|
|
The accompanying notes are an integral part of these financial
statements.
4
Table of
Contents
JOES JEANS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements of Joes Jeans Inc., or
Joes, which include the accounts of its wholly-owned subsidiaries, for the
three and nine months ended August 31, 2009 and 2008 and the related footnote
information have been prepared on a basis consistent with Joes audited
consolidated financial statements as of November 30, 2008 contained in Joes
Annual Report on Form 10-K, or the Annual Report.
Joes
principal business activity involves the design, development and worldwide
marketing of apparel products. Joes
primary current operating subsidiary is Joes Jeans Subsidiary Inc., or Joes
Jeans Subsidiary. All significant
inter-company transactions have been eliminated. Currently, Joes has only one segment of
operations, primarily apparel, which includes an immaterial amount of revenue
from its retail operations and license agreements. On October 12, 2007, Joes filed an amended
and restated certificate of incorporation in Delaware to change its corporate
name from Innovo Group Inc. to Joes Jeans Inc. and to increase the shares of
common stock authorized for issuance to 100,000,000. Joes fiscal year end is November 30.
These
unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes thereto contained in
Joes Annual Report. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments), which management
considers necessary to present fairly Joes financial position, results of
operations and cash flows for the interim periods presented. The results for the three and nine months
ended August 31, 2009 are not necessarily indicative of the results anticipated
for the entire year ending November 30, 2009.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those
estimates.
NOTE 2 ADOPTION OF ACCOUNTING PRINCIPLES
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, or SFAS No. 141(R). New
requirements under the revised standard include: (i) the fair value of stock
provided as consideration be measured as of the acquisition date instead of the
announcement date; (ii) acquisition-related costs be recognized separately from
the acquisition, generally as an expense, instead of treated as a part of the
cost of the acquisition that was allocated to the assets acquired and the
liabilities assumed; (iii) restructuring
costs that the acquirer expected, but was not obligated to incur, be recognized
separately from the acquisition instead of recognized as if they were a
liability assumed at the acquisition date; (iv) contingent consideration be
recognized at the acquisition date, measured at its fair value at that date,
instead of recognized when the contingency was resolved and consideration was
issued or became issuable; (v) recognizing a gain when the fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred instead of allocating the negative goodwill amount as a pro rata
reduction of the amounts that otherwise would have been assigned to particular
assets acquired; (vi) research and development assets acquired in a business
combination will be recognized at their acquisition-date fair values as assets
acquired in a business combination instead of being measured at their
acquisition-date fair values and then immediately charged to expense; and (vii)
changes in the amount of deferred tax benefits created in a business
combination, outside of the valuation period, will be recognized either in income
from continuing operations or directly in contributed capital, depending on the
circumstances, instead of recognized through a corresponding reduction to
goodwill or certain noncurrent assets or an increase in so-called negative
goodwill. SFAS No. 141(R) is effective
for Joes for transactions consummated during annual periods beginning after December
15, 2008, which is the year beginning December 1, 2009 for Joes. Joes does not expect that SFAS No. 141(R) will
have any impact on its financial statements unless it enters into an applicable
transaction in the future.
5
Table of Contents
In
April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life
of Intangible Assets, or FSP 142-3. FSP
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, or
SFAS 142, in order to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R). FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, is the
year beginning December 1, 2009 for Joes, and interim periods within that
fiscal year. The adoption of FSP 142-3
did not have a material impact on the Joes financial position or results from
operations.
In
May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS No. 165. SFAS No. 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for selecting that date, that is, whether that
date represents the date the financial statements were issued or were available
to be issued. SFAS No. 165 is effective
for interim or annual financial periods ending after June 15, 2009. Joes adopted SFAS No. 165 in the third
fiscal quarter of 2009 and the related disclosure can be found in Note 12
Subsequent Events.
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162, or SFAS No. 168. SFAS 168 replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, to establish the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
preparation of financial statements in conformity with generally accepted
accounting principles in the United States.
SFAS No. 168 is effective for interim and annual periods ending after September
15, 2009. The adoption of SFAS No. 168
will not impact Joes financial position or results of operations.
NOTE 3 ACCOUNTS RECEIVABLE, INVENTORY ADVANCES AND DUE TO FACTOR
Joes
primary method to obtain the cash necessary for operating needs was through the
sale of accounts receivable pursuant to factoring agreements and obtaining
advances under inventory security agreements with its factor, CIT Commercial
Services, Inc., a unit of CIT Group Inc., or CIT.
As
a result of these agreements, amounts due to factor consist of the following
(in thousands):
|
|
August 31, 2009
|
|
November 30, 2008
|
|
Non-recourse
receivables assigned to factor
|
|
$
|
11,877
|
|
$
|
9,954
|
|
Client
recourse receivables
|
|
108
|
|
1,444
|
|
Total
receivables assigned to factor
|
|
11,985
|
|
11,398
|
|
|
|
|
|
|
|
Allowance
for customer credits
|
|
(2,454
|
)
|
(2,087
|
)
|
Net
loan balance from factored accounts receivable
|
|
(9,950
|
)
|
(9,903
|
)
|
Net
loan balance from inventory advances
|
|
(3,813
|
)
|
(2,308
|
)
|
Due
to factor
|
|
$
|
(4,232
|
)
|
$
|
(2,900
|
)
|
|
|
|
|
|
|
Non-factored
accounts receivable
|
|
$
|
2,084
|
|
$
|
1,525
|
|
Allowance
for customer credits
|
|
(300
|
)
|
$
|
(120
|
)
|
Allowance
for doubtful accounts
|
|
(565
|
)
|
(540
|
)
|
Accounts
receivable, net of allowance
|
|
$
|
1,219
|
|
$
|
865
|
|
Of
the total amount of receivables sold as of August 31, 2009 and November 30,
2008, Joes bears the risk of payment of $108,000 and $1,444,000, respectively,
in the event of non-payment by its customers.
6
Table of Contents
CIT
Commercial Services
On
June 1, 2001, the Joes Jeans Subsidiary entered into an accounts receivable
factoring agreement and an inventory security agreement with CIT. In prior years, Joes other active subsidiaries
also entered into substantially identical agreements. These agreements give Joes the ability to
obtain cash by selling to CIT certain of its accounts receivable and to obtain
advances for up to 50 percent of the value of certain eligible inventory. The accounts receivable are sold for up to 85
percent of the face amount on either a recourse or non-recourse basis depending
on the creditworthiness of the customer.
CIT currently permits Joes to sell its accounts receivable at the
maximum level of 85 percent and allows advances of up to $6,000,000 for
eligible inventory. CIT has the ability,
in its discretion at any time or from time to time, to adjust or revise any
limits on the amount of loans or advances made to Joes pursuant to these
agreements and to impose surcharges on our rates for certain of our
customers. As further assurance to CIT,
cross guarantees were executed by and among Joes and all of its subsidiaries
to guarantee each subsidiarys obligations.
As
of August 31, 2009, Joes cash availability with CIT was approximately
$720,000. This amount fluctuates on a
daily basis based upon invoicing and collection related activity by CIT for the
receivables sold. In connection with the
agreements with CIT, certain assets are pledged to CIT, including all of the
inventory, merchandise and/or goods, including raw materials through finished
goods and receivables. However, the
Joes trademarks are not encumbered.
The
agreements may be terminated by CIT upon 60 days written notice or immediately
upon the occurrence of an event of default as defined in the agreement. The agreements may be terminated by Joes
upon 60 days written notice prior to June 30, 2010, or earlier provided that
the minimum factoring fees have been paid for the respective period.
The
factoring rate that Joes pays to CIT to factor accounts is 0.6 percent for
accounts which CIT bears the credit risk, subject to discretionary surcharges,
and 0.4 percent for accounts which Joes bears the credit risk. The interest rate associated with borrowings
under the inventory lines and factoring facility is 0.25 percent plus the Chase
prime rate. As of August 31, 2009, the
Chase prime rate was 3.25 percent.
In
addition, Joes has also established a letter of credit facility with CIT to allow
it to open letters of credit for a fee of 0.25 percent of the letter of credit
face value with international and domestic suppliers, subject to cash
availability on our inventory line of credit.
At August 31, 2009, Joes did not have any letters of credit
outstanding.
NOTE 4 INVENTORIES
Inventories
are valued at the lower of cost or market with cost determined by the first-in,
first-out method. Inventories consisted
of the following (in thousands):
|
|
August 31, 2009
|
|
November 30, 2008
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
13,283
|
|
$
|
9,346
|
|
Finished
goods consigned to others
|
|
60
|
|
84
|
|
Work
in progress
|
|
2,081
|
|
1,744
|
|
Raw
materials
|
|
7,319
|
|
12,141
|
|
|
|
22,743
|
|
23,315
|
|
Less
allowance for obsolescence and slow moving items
|
|
(1,222
|
)
|
(1,044
|
)
|
|
|
$
|
21,521
|
|
$
|
22,271
|
|
Joes
recorded a charge to its inventory reserve allowance of $28,000 for the three
months ended August 31, 2009 and did not record any charges for the three
months ended August 31, 2008. For the nine months ended August 31, 2009 and
2008, Joes recorded charges of $28,000 and $22,000 to its inventory reserve
allowance, respectively.
7
Table of Contents
NOTE 5 - MERGER TRANSACTION
Merger
Agreement
Joes,
Joes Subsidiary, JD Holdings, Inc., or JD Holdings, and Joseph Dahan, the sole
stockholder of JD Holdings, entered into an initial definitive Agreement and
Plan of Merger on February 6, 2007, and amended it on June 25, 2007, or the
Merger Agreement. JD Holdings primary
assets included all rights, title and interest in all intellectual property,
including the trademarks related to the Joes®, Joes Jeans and JD brand and
marks, or the Joes Brand. JD Holdings
was the successor to JD Design, the entity from whom Joes licensed the Joes
Brand. The license agreement terminated
automatically upon completion of the merger.
Joes acquired JD Holdings in order to acquire the Joes Brand which
allowed it to expand its product offerings and the brand in the marketplace,
including opening Joes retail stores and entering into licenses for additional
product categories. Joes believed that
the combined company created synergies to allow it to generate additional
revenue from the brand recognition established by the denim business and
increased market opportunity. Joes also
believed that the combined company and complete ownership of the Joes Brand
enhanced the value of Joes from a stockholder and market participant point of
view. Joes believes that these factors
support the amount of goodwill recorded.
Under
the terms and subject to the conditions set forth in the Merger Agreement, on October
25, 2007, Joes and JD Holdings completed the merger. In connection with the merger, Joes
Subsidiary merged with and into JD Holdings, with Joes Subsidiary as the
surviving entity. In addition, Joes
issued 14,000,000 shares of its common stock, made a cash payment of $300,000
to JD Holdings in exchange for all of its outstanding shares and incurred
$93,000 of merger related expenses. As a result of the merger, Joes now owns
all outstanding stock of JD Holdings and all rights, title and interest in the
Joes Brand.
Under
the revised Merger Agreement, Mr. Dahan is entitled to, for a period of 120
months following October 25, 2007, a certain percentage of the gross profit
earned by Joes in any applicable fiscal year.
See Note 10 Commitments and Contingencies Contingent Consideration
Payments for further discussion of the contingent consideration
obligation. In addition, the Merger
Agreement contains a restrictive covenant relating to non-competition and
non-solicitation for one year following the termination of Mr. Dahans service.
Upon
completion of the merger, on October 25, 2007, Mr. Dahan became an officer,
director and greater than 10 percent stockholder of Joes and an Employment
Agreement and Investor Rights Agreement became effective.
The
merger has been accounted for as a business combination under U.S. generally
accepted accounting principles. Accordingly, management has allocated the
purchase price to the assets and liabilities of JD Holdings in Joes financial
statements as of the completion of the merger at their respective fair
values. At November 30, 2007, the
valuations of intangible assets, income taxes and certain other items were
preliminary. Management completed the
initial purchase price allocation during the second quarter of fiscal
2008. In March 2009, management
performed a new allocation as a result of the restatement of its first three
quarter financial statements for fiscal 2008.
The
assets acquired in this merger consisted of all outstanding stock of JD
Holdings and intangible assets. JD
Holdings had an immaterial amount of other assets, including incidental office
equipment that was distributed to Mr. Dahan as the sole stockholder prior to
the closing of the transaction. Pursuant
to the SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142,
Joes has determined that the useful life of the acquired assets is indefinite
and therefore no amortization expense needs to be recognized. However, Joes tests the assets for
impairment annually and/or if events or changes in circumstances indicate that
the assets might be impaired.
Additionally, a deferred tax liability has been established in the
allocation of the purchase price with respect to the identified indefinite long
lived intangible assets acquired and contingent consideration payments are
recorded as an expense. Contingent
consideration payments recorded as an operating expense were $422,000 and
$411,000, respectively, for the three months ended August 31, 2009 and 2008,
and $1,238,000, and $1,337,000, respectively, for the nine months ended August 31,
2009 and 2008.
8
Table of Contents
Employment
Agreement
After
completion of the merger, Joes entered into an employment agreement for Mr. Dahan
to serve as Creative Director for the Joes Brand.
The
initial term of employment is five years with automatic renewals for successive
one year periods thereafter, unless terminated earlier in accordance with the
agreement. Under the employment agreement, Mr. Dahan is entitled to an annual
salary of $300,000 and other discretionary benefits that the Compensation
Committee of the Board of Directors may deem appropriate in its sole and
absolute discretion.
Under
the terms of the employment agreement, Joes may terminate Mr. Dahan for cause
or if he becomes disabled, as defined in the agreement. Should Joes terminate Mr. Dahans employment
for cause or disability, Joes would only be required to pay him through the
date of termination. Joes may terminate
Mr. Dahans employment without cause at any time upon two weeks notice,
provided that it pays to him the present value of the annual salary amounts
otherwise due to him for the remainder of the initial term of employment or any
renewal term. Mr. Dahan may terminate his employment for good reason at any
time with 30 days written notice. In the
event that Mr. Dahan terminates his employment for good reason, then he will be
entitled to the present value of the annual salary amounts otherwise due to him
for the remainder of the term of employment. Further, Mr. Dahan may terminate
his employment for any reason upon ten business days notice and only be
entitled to his salary as of the date of termination on a pro rata basis.
The
employment agreement contains customary terms and conditions related to
confidentiality of information, ownership by Joes of all intellectual
property, including future designs and trademarks, alternative dispute
resolution and Mr. Dahans duties and responsibilities to Joes and the Joes
Brand as Creative Director.
Investor
Rights Agreement
Upon
the closing of the merger, Joes also entered into an investor rights
agreement. Pursuant to the investor
rights agreement, Joes agreed to register for resale, on a periodic basis at
the request of Mr. Dahan, the shares of common stock eligible for resale issued
in connection with the merger. The
shares of common stock issued as merger consideration become eligible for
resale beginning on the six month anniversary of the closing date of the merger
at an initial rate of 1/6 of the shares issued and every six months thereafter
at the same rate until all the shares are fully released on the third
anniversary of the closing date. Joes
agreed to bear all expenses associated with registering these shares for resale
and have granted to Mr. Dahan certain piggyback rights with respect to future
registration statements filed by Joes. The investor rights agreement contains
customary terms and conditions related to registration procedures, trading
suspensions and indemnification of the parties.
On March 24, 2008, a registration statement on Form S-3 was declared
effective for the resale of up to 2,333,333 shares where the contractual restrictions
on resale lapsed on April 25, 2008. Mr.
Dahan has not requested the filing of any additional registration statements.
NOTE 6 RELATED PARTY TRANSACTIONS
As of August 31, 2009 and November 30, 2008, Joes
related party balance consisted of amounts due to and due from certain related
parties, as further described below, as follows:
|
|
August 31, 2009
|
|
November 30, 2008
|
|
|
|
|
|
|
|
Due
from Related Parties
|
|
|
|
|
|
Kids
Jeans, LLC
|
|
$
|
203
|
|
$
|
|
|
Total
due from related parties
|
|
$
|
203
|
|
$
|
|
|
|
|
|
|
|
|
Due to
Related Parties
|
|
|
|
|
|
Joe
Dahan
|
|
143
|
|
196
|
|
Albert
Dahan
|
|
32
|
|
|
|
Commerce
Investment Group and affliates
|
|
9
|
|
9
|
|
Total
due to related parties
|
|
$
|
184
|
|
$
|
205
|
|
9
Table of Contents
Joe
Dahan/JD Holdings Inc.
On
February 7, 2001, Joes acquired a license for the rights to the Joes® brand
from JD Design LLC, which was subsequently merged with and into JD
Holdings. Under the license agreement,
JD Holdings was entitled to a royalty of three percent on net sales of licensed
products. In October 2005, Joes granted
JD Holdings the right to develop the childrens branded apparel line under an
amendment to its master license agreement in exchange for a five percent
royalty on net sales of those products.
On October 25, 2007, in connection with the acquisition of JD Holdings
by Joes, the license agreement terminated.
As
part of the consideration paid in connection with the merger, Mr. Dahan is
entitled to a certain percentage of the gross profit earned by Joes in any
applicable fiscal year until October 2017.
See Note 5 Merger Transaction for a further discussion on the merger
agreement and the contingent consideration payments.
Victor Dahan
Victor
Dahan, brother of Joe Dahan, is the managing member of Shipson LLC, or Shipson,
and Joes previously outsourced its E-shop on the Joes Jeans website to his
company. Joes ceased doing business
with Shipson in February 2008. As of the
termination date of the relationship, Shipson owed Joes approximately
$192,000, for outstanding purchase orders that were fully reserved for in Joes
year end financial statements for fiscal 2008.
During May 2009, Shipson returned $51,000 in goods and agreed to pay
$141,000 for the outstanding purchase orders pursuant to a settlement
agreement.
Albert Dahan
In
April 2009, Joes has entered into a commission-based sales agreement with
Albert Dahan, brother of Joe Dahan, for the sale of its products into the
off-price channels of distribution.
Under the agreement, Mr. Albert Dahan is entitled to a commission for
purchase orders entered into by Joes where he acts as a sales person for
Joes. The agreement may be terminated
at any time for any reason or no reason with or without notice. For the three months ended August 31, 2009,
payments made to Mr. Albert Dahan under this arrangement totaled $180,000.
Effective
as of June 1, 2009, Joes entered into a license agreement for the license of
the childrens product line with Kids Jeans LLC, or Kids LLC, an entity which Mr.
Albert Dahan holds an interest where he has voting control over the entity. Under the terms of the license, Kids LLC has
an exclusive right to produce, distribute and sell childrens products bearing
the Joes® brand on a worldwide basis, subject to certain limitations on the
channels of distribution. In exchange
for the license, Kids LLC will pay to Joes a royalty payment of 20 percent on
the first $5,000,000 in net sales and 10 percent thereafter. The initial term of the agreement is for
three years until June 30, 2012 and is subject to certain guaranteed minimum
net sales and royalty payment requirements during the initial term and for
renewal. Kids LLC advanced $1,000,000 as
a payment against the first years guaranteed minimum royalties. This amount has been reflected under the
caption of Deferred Licensing Revenue on the Condensed Consolidated Balance
Sheets. Joes expects to recognize the
royalty revenue based upon a percentage as set forth in the agreement of the
licensees actual net sales or minimum net sales, whichever is greater. Payments received in consideration of the
grant of the license or advanced royalty payments are recognized ratably as
revenue over the term of the license agreement.
The revenue recognized ratably over the term of the license agreement
will not exceed royalty payments received.
The unrecognized portion of the upfront payments are included in
deferred royalties and accrued expenses depending on the long or short term
nature of the payments to be recognized.
As of August 31, 2009, $225,000 of the advanced payment has been
recognized as income.
FameCast, Inc.
In
the first quarter of fiscal 2009, Joes entered into an agreement with FameCast,
Inc., or FameCast, an entity which Kent Savage, a member of Joes Board of
Directors, serves as CEO and a founder.
The agreement with FameCast is for web hosting and management for an
integrated contest site within the www.joesjeans.com site. Under the terms of the agreement, the
aggregate amount of the transaction with FameCast was $175,000.
10
Table of Contents
Commerce Investment Group and affiliates
Prior
to 2007, Joes entered into certain transactions with Commerce Investment Group
and its affiliates, or collectively, Commerce.
Commerce is no longer considered a related party nor has Joes engaged
in any current transactions with them in fiscal 2008 or fiscal 2009. However, a balance of $9,000 remains owed to
Commerce that is included in the due to balance.
NOTE 7 EARNINGS PER SHARE
Earnings per share are
computed using weighted average common shares and dilutive common equivalent
shares outstanding. Potentially dilutive securities consist of outstanding
options and warrants. A reconciliation of the numerator and denominator of
basic earnings per share and diluted earnings per share is as follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
(in thousands, except per share data)
|
|
(in thousands, except per share data)
|
|
|
|
August 31, 2009
|
|
August 31, 2008
|
|
August 31, 2009
|
|
August 31, 2008
|
|
Basic earnings per share computation:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,934
|
|
$
|
1,830
|
|
$
|
4,059
|
|
$
|
3,762
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
60,177
|
|
59,477
|
|
59,935
|
|
59,360
|
|
Income per common share - basic
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.07
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share computation:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,934
|
|
$
|
1,830
|
|
$
|
4,059
|
|
$
|
3,762
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
60,177
|
|
59,477
|
|
59,935
|
|
59,360
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options
and warrants
|
|
1,285
|
|
586
|
|
865
|
|
392
|
|
Dilutive
potential common shares
|
|
61,462
|
|
60,063
|
|
60,800
|
|
59,752
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share - dilutive
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.07
|
|
$
|
0.06
|
|
Potentially
dilutive options, warrants, restricted stock and restricted stock units in the
aggregate of 4,117,340 and 3,007,885 for the three months ended August 31,
2009 and 2008, respectively, and 4,242,340 and 3,007,885 for the nine months
ended August 31, 2009 and 2008, respectively, have been excluded from the
calculation of the diluted income per share, as their effect would have been
anti-dilutive.
Shares Reserved for Future
Issuance
As
of August 31, 2009, shares reserved for future issuance include (i) 3,226,046
shares of common stock issuable upon the exercise of stock options granted
under the incentive plans; (ii) 2,908,038 shares of common stock issuable
upon the vesting of RSUs; (iii) an aggregate of 580,030 shares of common
stock available for future issuance under the 2004 Stock Incentive Plan; and (iv) 667,500
shares of common stock issuable upon the exercise of outstanding warrants.
NOTE 8
INCOME TAXES
Joes
utilizes the liability method of accounting for income taxes in accordance with
SFAS No. 109. Under the liability
method, deferred taxes are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates.
11
Table of Contents
Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized. The likelihood of a material change in
Joes expected realization of these assets depends on its ability to generate
sufficient future taxable income. Joes ability to generate enough taxable
income to utilize its deferred tax assets depends on many factors, among which
is Joes ability to deduct tax loss carry-forwards against future taxable
income, the effectiveness of tax planning strategies and reversing deferred tax
liabilities.
In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes An Interpretation of FASB Statement 109, or
FIN No. 48. FIN No. 48
establishes a single model to address accounting for uncertain tax
positions. FIN No. 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN No. 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. Joes adopted the provisions of FIN No. 48
on December 1, 2007. Upon adoption,
Joes did not recognize an adjustment in the amount of unrecognized tax
benefits. As of the date of adoption,
Joes had no unrecognized tax benefits.
Joes policy is to recognize interest and penalties that would be
assessed in relation to the settlement value of unrecognized tax benefits as a
component of income tax expense.
Joes
and its subsidiaries are subject to U.S. federal income tax as well as income
tax in multiple state jurisdictions. To
the extent allowed by law, the tax authorities may have the right to examine
prior periods where net operating losses were generated and carried forward,
and make adjustments up to the amount of the net operating loss carryforward
amount. Joes is not currently under an
Internal Revenue Service tax examination or an examination by any other state,
local or foreign jurisdictions for any tax year. Joes has identified its federal tax return
and its state tax return in California as major tax jurisdictions. The only
periods subject to examination for Joes federal tax returns are years 2006
through 2008. The periods subject to examination for Joes state tax returns in
California are years 2004 through 2007.
Joes
currently has a net operating loss carryforward of $48,372,000 for federal tax
purposes expiring through 2026. Joes also has $18,341,000 of net operating
loss carryforwards available for California which begin to expire in 2014. Joes recorded an income tax expense of
$824,000 and $368,000 for the three months ended August 31, 2009 and 2008,
respectively and $1,190,000 and $631,000 for the nine months ended August 31,
2009 and 2008, respectively. Joes
effective tax rate was 30 percent and 23 percent for the three and nine months
ended August 31, 2009, respectively, and 17 percent and 14 percent for the
three and nine months ended August 31, 2008, respectively.
Certain
limitations may be placed on net operating loss carryforwards as a result of
changes in control as defined in Section 382 of the Internal Revenue
Code. In the event a change in control
occurs, it will have the effect of limiting the annual usage of the
carryforwards in future years.
Additional changes in control in future periods could result in further
limitations of Joes ability to offset taxable income. Management believes that certain changes in
control have occurred which resulted in limitations on its net operating loss
carryforwards. Management has determined
that realization of the net deferred tax assets does not meet the more likely
than not criteria. As a result, a
valuation allowance has been provided for.
The difference between the effective tax rate and the statutory rate is
primarily attributable to the utilization of net operating loss tax
carryforwards against which a full valuation allowance has been established.
NOTE 9
STOCKHOLDERS EQUITY
Warrants
Joes
has issued warrants in conjunction with various private placements of its
common stock, and debt to equity conversions.
All warrants are currently exercisable.
As of August 31, 2009, outstanding common stock warrants are as
follows:
Exercise
price
|
|
Shares
|
|
Issued
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
$
|
2.28
|
|
62,500
|
|
October 2004
|
|
October 2009
|
|
0.66
|
|
125,000
|
|
December 2006
|
|
December 2011
|
|
1.36
|
|
480,000
|
|
June 2007
|
|
June 2012
|
|
|
|
667,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Table of Contents
Stock Incentive Plans
In
March 2000, Joes adopted the 2000 Employee Stock Option Plan, or the 2000
Employee Plan. In connection with
stockholder approval of the 2004 Stock Incentive Plan, Joes stated that it
would no longer grant options pursuant to the 2000 Employee Plan. In December 2007, the outstanding
options remaining under the 2000 Employee Plan expired and the 2000 Employee
Plan automatically terminated.
In
September 2000, Joes adopted the 2000 Director Stock Incentive Plan, or
the 2000 Director Plan, under which nonqualified stock options were granted to
members of the Board of Directors in lieu of cash director fees. After the adoption of the 2004 Stock
Incentive Plan in June 2004, Joes no longer granted options pursuant to
the 2000 Director Plan; however, it remains in effect for awards outstanding as
of the adoption of the 2004 Stock Incentive Plan. As of August 31, 2009, options to
purchase up to 203,546 shares of common stock remained outstanding under the
2000 Director Plan.
On
June 3, 2004, Joes adopted the 2004 Stock Incentive Plan, or the 2004
Incentive Plan, and has subsequently amended it to increase the number of
shares authorized for issuance to 12,265,172 shares of common stock as of October 8,
2009. Under the 2004 Incentive Plan,
grants may be made to employees, officers, directors and consultants under a
variety of awards based upon underlying equity, including, but not limited to,
stock options, restricted common stock, restricted stock units or performance
shares. The 2004 Incentive Plan limits
the number of shares that can be awarded to any employee in one year to
1,250,000. Exercise price for incentive
options may not be less than the fair market value of Joes common stock on the
date of grant and the exercise period may not exceed ten years. Vesting periods, terms and types of awards
are determined by the Board of Directors and/or its Compensation and Stock
Option Committee, or Compensation Committee.
The 2004 Incentive Plan includes a provision for the acceleration of
vesting of all awards upon a change of control as well as a provision that
allows forfeited or unexercised awards that have expired to be available again
for future issuance. Since fiscal 2008, Joes has issued both restricted common
stock and restricted common stock units, or RSUs, to its officers, directors
and employees pursuant to the 2004 Stock Incentive Plan. The RSUs represent the right to receive one
share of common stock for each unit on the vesting date provided that the employee
continues to be employed by Joes. On the vesting date of the RSUs, Joes expects
to issue the shares of common stock to each participant upon vesting and
expects to withhold an equivalent number of shares at fair market value on the
vesting date to fulfill tax withholding obligations. Any RSUs withheld or forfeited will be shares
available for issuance in accordance with the terms of the 2004 Incentive Plan.
The
shares of common stock issued upon exercise of a previously granted stock
option or a grant of restricted common stock or RSUs are considered new
issuances from shares reserved for issuance in connection with the adoption of
the various plans. Joes requires that
the option holder provide a written notice of exercise in accordance with the option
agreement and plan to the stock plan administrator and full payment for the
shares be made prior to issuance. All
issuances are made under the terms and conditions set forth in the applicable
plan. As of August 31, 2009,
580,030 shares remained available for issuance under the 2004 Incentive Plan.
For
all stock compensation awards that contain graded vesting with time-based
service conditions, Joes has elected to apply a straight-line recognition
method to account for all of these awards.
For existing grants that were not fully vested at November 30,
2008, there was a total of $711,000 of stock based compensation expense
recognized in the nine months ended August 31, 2009.
The
following summarizes option grants, restricted common stock and RSUs issued to
members of the Board of Directors for the fiscal years 2002 through the third
quarter of fiscal 2009 (in actual amounts) for service as a member:
|
|
August 31, 2009
|
|
|
|
As of:
|
|
Number of options
|
|
Exercise price
|
|
2002
|
|
40,000
|
|
$
|
1.00
|
|
2002
|
|
31,496
|
|
$
|
1.27
|
|
2003
|
|
30,768
|
|
$
|
1.30
|
|
2004
|
|
320,000
|
|
$
|
1.58
|
|
2005
|
|
300,000
|
|
$
|
5.91
|
|
2006
|
|
450,000
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
Number
of restricted
stock/RSUs isssued
|
|
2007
|
|
|
|
320,000
|
|
2008
|
|
|
|
473,455
|
|
2009
|
|
|
|
|
|
13
Table of Contents
Stock
activity in the aggregate for the periods indicated are as follows (in actual
amounts):
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2008
|
|
3,313,146
|
|
$
|
1.76
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(87,100
|
)
|
(1.02
|
)
|
|
|
|
|
Outstanding
and exercisable at August 31, 2009
|
|
3,226,046
|
|
$
|
1.78
|
|
4.9
|
|
$
|
64,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2007
|
|
3,626,046
|
|
$
|
1.80
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(12,900
|
)
|
1.02
|
|
|
|
|
|
Expired
|
|
(200,000
|
)
|
2.40
|
|
|
|
|
|
Forfeited
|
|
(100,000
|
)
|
1.98
|
|
|
|
|
|
Outstanding
at August 31, 2008
|
|
3,313,146
|
|
$
|
1.76
|
|
5.9
|
|
$
|
823,667
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and vested at August 31, 2008
|
|
3,306,896
|
|
$
|
1.77
|
|
5.9
|
|
$
|
817,855
|
|
As of August 31, 2009,
there was $1,674,000 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the 2004
Incentive Plan. That unrecognized
compensation cost is expected to be recognized over a weighted-average period
of 2.5 years. The total fair value of
shares of stock options that vested during the three months ended August 31,
2009 and 2008 was $0 and $5,000, respectively.
The total fair value of shares of stock options that vested during the
nine months ended August 31, 2009 and 2008 was $0 and $17,000,
respectively.
14
Table of Contents
Exercise
prices for options outstanding as of August 31, 2009 are as follows:
|
|
Options Outstanding and Exercisable
|
|
Exercise Price
|
|
Number of Shares
|
|
Weighted-Average
Remaining Contractual
Life
|
|
|
|
|
|
|
|
$0.39 - $0.41
|
|
190,064
|
|
4.0
|
|
$1.00 - $1.02
|
|
1,915,000
|
|
4.8
|
|
$1.27 - $1.30
|
|
60,982
|
|
3.5
|
|
$1.58 - $1.63
|
|
610,000
|
|
4.9
|
|
$5.91
|
|
450,000
|
|
5.8
|
|
|
|
|
|
|
|
|
|
3,226,046
|
|
4.9
|
|
The
following table summarizes the stock option activity by plan:
|
|
Total Number
of Shares
|
|
2004 Incentive
Plan
|
|
2000 Director
Plan
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2008
|
|
3,313,146
|
|
3,109,600
|
|
203,546
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Forfeited
/ Cancelled
|
|
(87,100
|
)
|
(87,100
|
)
|
|
|
Outstanding
and exercisable at August 31, 2009
|
|
3,226,046
|
|
3,022,500
|
|
203,546
|
|
15
Table of Contents
A summary of the status of
restricted common stock and RSUs as of November 30, 2008, and changes
during the three and nine months ended August 31, 2009, are presented
below:
|
|
|
|
|
|
|
|
Weighted-Average Grant-Date Fair
Value
|
|
|
|
Restricted
Shares
|
|
Restricted Stock
Units
|
|
Total Shares
|
|
Restricted
Shares
|
|
Restricted Stock
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2008
|
|
157,233
|
|
2,503,526
|
|
2,660,759
|
|
$
|
1.59
|
|
$
|
0.75
|
|
Granted
|
|
|
|
1,197,856
|
|
1,197,856
|
|
|
|
0.41
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
(648,580
|
)
|
(648,580
|
)
|
|
|
0.70
|
|
Cancelled
|
|
|
|
(144,764
|
)
|
(144,764
|
)
|
|
|
0.77
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at August 31, 2009
|
|
157,233
|
|
2,908,038
|
|
3,065,271
|
|
$
|
1.59
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2007
|
|
529,182
|
|
|
|
529,182
|
|
$
|
1.59
|
|
$
|
|
|
Granted
|
|
|
|
745,600
|
|
745,600
|
|
|
|
1.46
|
|
Vested
|
|
(240,000
|
)
|
|
|
(240,000
|
)
|
(1.59
|
)
|
|
|
Issued
|
|
|
|
(63,870
|
)
|
(63,870
|
)
|
|
|
1.46
|
|
Cancelled
|
|
|
|
(31,455
|
)
|
(31,455
|
)
|
|
|
1.46
|
|
Forfeited
|
|
|
|
(60,000
|
)
|
(60,000
|
)
|
|
|
(1.46
|
)
|
Outstanding
at August 31, 2008
|
|
289,182
|
|
590,275
|
|
879,457
|
|
$
|
1.59
|
|
$
|
1.46
|
|
In
the three months ended August 31, 2009, there were no options granted or
exercised or RSUs granted. In the nine
months ended August 31, 2009, Joes issued 648,580 shares of its common
stock to holders of RSUs and withheld or cancelled 144,764 RSUs.
NOTE 10 COMMITMENTS AND CONTINGENCIES
Contingent Consideration Payments
As
part of the consideration paid in connection with the completion of the merger,
Mr. Dahan will be entitled to a certain percentage of the gross profit
earned by Joes in any applicable fiscal year until October 2017. Mr. Dahan will be entitled to the
following: (i) 11.33 percent of the gross profit from $11,251,000 to
$22,500,000; (ii) three percent of the gross profit from $22,501,000 to
$31,500,000; (iii) two percent of the gross profit from $31,501,000 to
$40,500,000; (iv) one percent of the gross profit above $40,501,000. The
payments will be paid in advance on a monthly basis based upon estimates of
gross profit after the assumption has been reached that the payments will
likely be paid. At the end of each
quarter, any overpayments will be offset against future payments and any
significant underpayments will promptly be made. No payment will be made if the gross profit
is less than $11,250,000. Gross Profit
is defined as net sales of the Joes® brand less cost of goods sold as reported
in periodic filings with the SEC.
Contingent consideration payments recorded as operating expense were
$422,000 and $411,000 for the three months ended August 31, 2009, and
2008, respectively, and $1,238,000 and $1,337,000 for the nine months ended August 31,
2009 and 2008, respectively.
Retail Leases
Joes leases retail store locations under operating lease agreements
expiring on various dates through 2019 or 10 years from the rent commencement
date. Some of these leases require Joes to make periodic payments for property
taxes, utilities and common area operating expenses. Certain retail store
leases provide for rents based upon the minimum annual rental amount and a
percentage of annual sales volume, generally ranging from 6% to 8%, when
specific sales volumes are exceeded.
Some leases include lease incentives, rent abatements and fixed rent
escalations, which are amortized and recorded over the initial lease term on a
straight-line basis.
16
Table of Contents
As
of August 31, 2009, the future minimum rental payments under non-cancelable
retail operating leases with lease terms in excess of one year were as follows:
2009
Remainder of the year
|
|
$
|
307
|
|
2010
|
|
1,535
|
|
2011
|
|
1,647
|
|
2012
|
|
1,707
|
|
2013
|
|
1,770
|
|
Thereafter
|
|
10,423
|
|
|
|
$
|
17,389
|
|
NOTE
11 SEASONALITY
The
market for apparel products is seasonal.
The majority of Joes sales activities take place from late fall to
early spring and the greatest volume of shipments and sales are generally made
from late spring through the summer.
This time period coincides with Joes second and third fiscal quarters
and its cash flow is generally strongest in its third and fourth fiscal
quarters when a significant amount of its net sales are realized as a result of
shipping orders taken during earlier months.
In the second quarter in order to prepare for peak sales that occur
during the second half of the year, Joes builds its inventory levels, which
results in higher liquidity needs compared to other quarters.
Due
to the seasonality of its business, as well as the evolution and changes in its
business and product mix, Joes quarterly or yearly results are not necessarily
indicative of the results for the next quarter or year.
NOTE
12 SUBSEQUENT EVENTS
As
of October 15, 2009, the date of issuance of this Form 10-Q for the quarter
ended August 31, 2009, there were no items deemed to be reportable as a
subsequent event.
17
Table of
Contents
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
When
used in this Quarterly Report on Form 10-Q, or Quarterly Report, the words
may, will, expect, anticipate, intend, estimate, continue,
believe and similar expressions are intended to identify forward-looking
statements. Similarly, statements that
describe our future expectations, objectives and goals or contain projections
of our future results of operations or financial condition are also
forward-looking statements. Statements
looking forward in time are included in this Quarterly Report pursuant to the
safe harbor provision of the Private Securities Litigation Reform Act of
1995. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially, including, without limitation, continued acceptance of our product,
product demand, competition, capital adequacy and the potential inability to
raise additional capital if required, and the risk factors contained in our
reports filed with the Securities and Exchange Commission, or SEC, pursuant to
the Securities Exchange Act of 1934, as amended, or Exchange Act, including our
Annual Report on Form 10-K for the year ended November 30, 2008. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Our future results, performance
or achievements could differ materially from those expressed or implied in
these forward-looking statements. We do
not undertake and specifically decline any obligation to publicly revise these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
Introduction
This
discussion and analysis summarizes the significant factors affecting our results
of operations and financial conditions during the three and nine month periods
ended August 31, 2009 and 2008. This
discussion should be read in conjunction with our Condensed Consolidated
Financial Statements, Notes to Condensed Consolidated Financial Statements and
supplemental information contained in this quarterly report.
Executive
Overview
Our
principal business activity has evolved into the design, development and
worldwide marketing of our Joes® products, which include denim jeans, related
casual wear and accessories. Since
Joes® was established in 2001, the brand is recognized in the premium denim
industry, an industry term for denim jeans with price points of $120 or more,
for its quality, fit and fashion-forward designs. Because we focus on design, development and
marketing, we rely on third parties to manufacture our apparel products and for
distribution and product fulfillment services.
We sell our products through our own retail stores, to numerous
retailers, which include major department stores, specialty stores and
distributors around the world.
Historically, we sold other branded apparel products, such as indie,
Betsey Johnson®, Fetish and Shago®, private label denim and denim related products
and craft and accessory products.
The
focus of our operations has been on our Joes® brand. Our transition plan, which began in 2006,
included selling the assets or ceasing operations of our other branded and
private label apparel products. To
enhance our ability to capitalize on the Joes® brand, on February 6, 2007, we
entered into a merger agreement to merge with JD Holdings, the successor in
interest to JD Design LLC, or JD Design, the entity from whom we licensed the
Joes® brand. We also entered into our
first license agreement for other product categories for handbags and small
leather goods bearing the Joes® brand.
In October 2007, we completed the merger and acquired JD Holdings. In exchange for JD Holdings, we issued
14,000,000 shares of our common stock and $300,000 in cash. As part of the merger consideration, we are
obligated to pay Mr. Dahan a percentage of our gross profits above $11,251,000
until 2017. Mr. Dahan will be entitled
to the following: (i) 11.33 percent of the gross profit from $11,251,000 to
$22,500,000; (ii) 3 percent of the gross profit from $22,501,000 to
$31,500,000; (iii) 2 percent of the gross profit from $31,501,000 to
$40,500,000; and (iv) 1 percent of the gross profit above $40,501,000. Concurrently, we entered into an employment
agreement with Joe Dahan to be one of our executive officers. Mr. Dahan is our largest stockholder. He owns approximately 23 percent of our total
shares outstanding and is a member of our Board of Directors.
18
Table of Contents
Our
strategic plan for 2009 has included and continues to include a focus on our
retail stores performance, continuing improvement in international and mens
sales, evaluating licensing opportunities for other product categories and
continuing enhancements to the products available in our collection. We opened our first full price retail store
in October 2008 in Chicago, Illinois. By
the end of the fourth quarter of fiscal 2008, we opened one additional full
price store in San Francisco, California and two outlets, one located in
Central Valley, New York and one in Orlando, Florida. We also entered into two additional leases
during fiscal 2008 one for a full price retail store in Santa Monica Place in
Santa Monica, California and one for an outlet store in Camarillo,
California. We opened our Camarillo
store in July 2009 and expect to open the Santa Monica Place store in
2010. We believe that the retail stores
will enhance our net sales and gross profit and the outlet stores will allow us
to sell our overstock or slow moving items at higher profit margins. We continue to look for other retail leases,
but remain cautious about our retail store plans.
In
addition, we have engaged licensing agents to bring licensing opportunities to
us for evaluation. We recently announced
that we entered into license agreements for the license of belts and childrens
products. In exchange for the exclusive
right to these product lines, the licensees paid to us non-refundable advances
on the first years royalties and will pay us additional amounts on net sales
in future years. We continue to have our
license agreement for handbags and small leather goods as well and we are
actively looking for additional licensees to expand our product offerings. In addition, at the end of July 2009, we
began shipping a new collection of unisex woven shirts in various fabrications
that has been met with success in the marketplace.
Our
business is seasonal. The majority of
the marketing and sales activities take place from late fall to early
spring. The greatest volume of shipments
and sales are generally made from late spring through the summer, which
coincides with our second and third fiscal quarters and our cash flow is
strongest in our third and fourth fiscal quarters. Due to the seasonality of our business, as
well as the evolution and changes in our business and product mix, often our
quarterly or yearly results are not necessarily indicative of the results for
the next quarter or year.
Comparison of Three Months Ended August 31, 2009 to Three Months Ended August
31, 2008
|
|
Three months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2009
|
|
August 31, 2008
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
21,238
|
|
$
|
18,248
|
|
$
|
2,990
|
|
16
|
%
|
Cost
of goods sold
|
|
10,864
|
|
9,303
|
|
1,561
|
|
17
|
%
|
Gross
profit
|
|
10,374
|
|
8,945
|
|
1,429
|
|
16
|
%
|
Gross
margin
|
|
49
|
%
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
7,394
|
|
6,544
|
|
850
|
|
13
|
%
|
Depreciation
& amortization
|
|
132
|
|
70
|
|
62
|
|
89
|
%
|
Operating
income
|
|
2,848
|
|
2,331
|
|
517
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
90
|
|
133
|
|
(43
|
)
|
(32
|
)%
|
Income
before provision for taxes
|
|
2,758
|
|
2,198
|
|
560
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
824
|
|
368
|
|
456
|
|
124
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,934
|
|
$
|
1,830
|
|
$
|
104
|
|
6
|
%
|
Three Months Ended August 31, 2009 Overview
For
the three months ended August 31, 2009, or the third quarter of fiscal 2009,
our net sales increased to $21,238,000 from $18,248,000 for the three months
ended August 31, 2008, or the third quarter fiscal 2008, a 16 percent
increase. We generated net income in the
amount of $1,934,000 for the third quarter of fiscal 2009 compared to
$1,830,000 for the third quarter of fiscal 2008.
19
Table of Contents
Net Sales
Our
net sales increased to $21,238,000 for the third quarter of fiscal 2009 from
$18,248,000 for the third quarter of fiscal 2008, a 16 percent increase. This increase can be primarily attributed to
an increase of 13 percent in womens domestic net sales and the addition of
sales from our retail stores and the woven shirts in the third quarter of
fiscal 2009 that we did not have in the third quarter of fiscal 2008.
Gross Profit
Our
gross profit increased to $10,374,000 from $8,945,000 for the third quarter of
fiscal 2008, a 16 percent increase. Our
overall gross margins were consistent at 49 percent for both the third quarter
of fiscal 2009 and the third quarter of fiscal 2008. Our gross profit increased by 16 percent
primarily as a result of our increase in net sales.
Selling, General and Administrative Expense
Selling,
general and administrative, or SG&A, expenses increased to $7,394,000 for
the third quarter of fiscal 2009 from $6,544,000 for the third quarter of
fiscal 2008, a 13 percent increase.
The
SG&A increase in the third quarter of fiscal 2009 compared to the third
quarter of fiscal 2008 is largely a result of the following factors: (i) an
increase of $358,000 in employee and employee-related expenses due to a higher
headcount in the third quarter of fiscal 2009 compared to fiscal 2008 to
support our growth, including personnel to support our retail strategy; (ii) an
increase of $319,000 in facilities and retail operating related expenses
primarily due to the addition of four retail stores in the fourth quarter of
fiscal 2008 and one in the third quarter of fiscal 2009; (iii) an increase of
$183,000 in commission expense due to higher net sales; (iv) an increase of
$70,000 in factor and bank fees due to the increase in net sales; (v) an increase of $37,000 in advertising and
tradeshow expenses; and (vi) an increase of $18,000 in stock-based compensation
expense due to the issuance of restricted stock units in the fourth quarter of
fiscal 2008 and first quarter of fiscal 2009, respectively. These increases were partially offset by a
decrease of $112,000 in professional fees primarily due termination of certain
litigation in the ordinary course of business
Depreciation and Amortization Expenses
Our
depreciation and amortization expenses increased to $132,000 for the third
quarter of fiscal 2009 from $70,000 for the third quarter of fiscal 2008, an 89
percent increase. The increase was attributable
to additional depreciation for our retail stores leasehold improvements in the
third quarter of fiscal 2009 which we did not have in the third quarter of
fiscal 2008 due to the addition of four retail stores in the fourth quarter of
fiscal 2008 and one in the third quarter of fiscal 2009.
Interest Expense
Our
combined interest expense decreased to $90,000 for the third quarter of fiscal
2009 from $133,000 for the third quarter of fiscal 2008, a 32 percent
decrease. Our interest expense is primarily
associated with interest expense from our factoring and inventory lines of
credit and letters of credit from CIT used to help support our working capital
needs. The decrease in interest expense
is mostly due to a lower average interest rate on our factoring and inventory
lines of credit as compared to the prior year period as a result of interest
rate cuts by the Federal Reserve.
Income
Tax
For
the third quarter of fiscal 2009, our income tax expense was $824,000 compared
to $368,000 for the third quarter of fiscal 2008. Our effective tax rate was 30 percent for the
third quarter of fiscal 2009 compared to 17 percent for the third quarter of
fiscal 2008. We expect our effective tax
rate to be approximately 21 percent for fiscal 2009. For the three months ended August 31, 2009
and 2008, the difference between the effective tax rate and the statutory rate
is primarily attributable to the utilization of net operation loss
carryforwards against which a full valuation allowance has been established and
our increase in net income.
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Table of Contents
Net Income
We generated net income of $1,934,000 in the third
quarter of fiscal 2009 compared to $1,830,000 for the third quarter of fiscal
2008. The increase in net income for our
third quarter of fiscal 2009 compared to our third quarter of fiscal 2008 is
largely the result of our increase of $1,429,000, or 16 percent, in gross profit,
which was offset by an increase of $850,000, or 13 percent, in SG&A and an
increase of $456,000, or 124 percent, in income tax expense due to continued
profitability.
Comparison
of Nine Months Ended August 31, 2009 to Nine Months Ended August 31, 2008
Nine
Months Ended August 31, 2009 Overview
The
following table sets forth certain statements of operations data for the
periods as indicated:
|
|
Nine months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2009
|
|
August 31, 2008
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
54,899
|
|
$
|
51,413
|
|
$
|
3,486
|
|
7
|
%
|
Cost
of goods sold
|
|
27,576
|
|
27,242
|
|
334
|
|
1
|
%
|
Gross
profit
|
|
27,323
|
|
24,171
|
|
3,152
|
|
13
|
%
|
Gross
margin
|
|
50
|
%
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
21,383
|
|
19,042
|
|
2,341
|
|
12
|
%
|
Depreciation
& amortization
|
|
401
|
|
244
|
|
157
|
|
64
|
%
|
Operating
income
|
|
5,539
|
|
4,885
|
|
654
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
290
|
|
492
|
|
(202
|
)
|
(41
|
)%
|
Income
before provision for taxes
|
|
5,249
|
|
4,393
|
|
856
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
1,190
|
|
631
|
|
559
|
|
89
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,059
|
|
$
|
3,762
|
|
$
|
297
|
|
8
|
%
|
Net
Sales
Our
net sales increased to $54,899,000 for the nine months ended August 31, 2009
compared to $51,413,000 for the nine months ended August 31, 2008, a 7 percent
increase. The increase can be attributed
to a 17 percent increase in our mens domestic net sales, the addition of
retail store sales and sales from our woven shirts in the nine months ended August
31, 2009 that we did not have in the nine months ended August 31, 2008. The increase in our mens domestic net sales
was offset by a decrease in our womens domestic net sales and a decrease in
our childrens net sales as we entered into a license agreement for that
product line.
Gross
Profit
Our
gross profit increased to $27,323,000 for the nine months ended August 31, 2009
from $24,171,000 for the nine months
ended August 31, 2008, a 13 percent increase.
Our gross margin percentage increased to 50 percent for the nine months
ended August 31, 2009 from 47 percent for the nine months ended August 31,
2008, a three percentage point increase.
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Table of Contents
The
increase in our gross profit and gross margin percentage was primarily due to (i)
88 percent of our products during the nine months ended August 31, 2009
compared to 74 percent during the nine month period ended August 31, 2008 that
were manufactured outside of the United States where we have lower costs of production
and (ii) the positive impact of the gross margins realized from sales by our
retail stores where we capture the difference between our cost and the retail
sales price rather than our cost and wholesale sales price. As a result, our gross profit and gross
margins improved from the nine months ended August 31, 2008 to 2009.
Selling,
General and Administrative Expenses
Selling,
general and administrative, or SG&A, expenses increased to $21,383,000 for
the nine months ended August 31, 2009 from $19,042,000 for the nine months
ended August 31, 2008, a 12 percent increase.
The
SG&A increase in the nine months ended August 31, 2009 compared to the nine
months ended August 31, 2008 is mostly due to (i) an increase of $907,000 in
employee and employee-related expenses due to a higher headcount in the nine
months ended August 31, 2009 compared to the nine months ended August 31, 2008
to support our growth, including personnel to support our retail strategy; (ii)
an increase of $969,000 in facilities and retail operating related expenses
primarily due to the addition of four retail stores in the fourth quarter of
fiscal 2008 and one in the third quarter of fiscal 2009; (iii) an increase of
$321,000 in professional fees primarily due to increases legal fees associated
with litigation in the ordinary course of business; (iv) an increase of
$218,000 in advertising and tradeshow expenses; (v) an increase of $164,000 in
factor and bank fees due to the increase in our net sales; and (vi) an increase
of $56,000 in stock-based compensation expense due to the issuance of
restricted stock units in the fourth quarter of fiscal 2008 and first quarter
of fiscal 2009, respectively; and (vii) an increase of $92,000 in commission
expense due to an increase in wholesale net sales. These increases were partially offset by (i) a
decrease of $412,000 in sample expense due to better control over costs and
timing of the expense; and (ii) a decrease of $98,000 in earn-out expense due
to the change in accounting related to the earn-out expense we made during the
first three quarters of fiscal 2009 that was not made for the fourth quarter of
fiscal 2008 because of its immateriality related that quarter.
Depreciation
and Amortization Expenses
Our
depreciation and amortization expenses increased to $401,000 for the nine
months ended August 31, 2009 from $244,000 for the nine months ended August 31,
2008, a 64 percent increase. The
increase was primarily attributable to additional depreciation for our retail
stores leasehold improvements due to the addition of four retail stores in the
fourth quarter of fiscal 2008 and one in the third quarter of fiscal 2009.
Interest
Expense
Our
combined interest expense decreased to $290,000 for the nine months ended August
31, 2009 from $492,000 for the nine months ended August 31, 2008, a 41 percent
decrease. Our interest expense consists
of interest expense from our factoring and inventory lines of credit and
letters of credit from CIT. The decrease
in interest expense is mostly due to a lower average interest rate on our
factoring and inventory lines of credit as compared to the prior year period as
a result of interest rate cuts by the Federal Reserve.
Income
Tax
For
the nine months ended August 31, 2009, our income tax expense was $1,190,000 compared
to $631,000 for the nine months ended May 31, 2008. Our effective tax rate was 23 percent for the
nine months ended August 31, 2009 and 14 percent for the nine months ended August
31, 2008. We expect our effective tax
rate to be approximately 21 percent for fiscal 2009. For the nine months ended August 31, 2009 and
2008, the difference between the effective tax rate and the statutory rate is
primarily attributable to the utilization of net operation loss tax
carryforwards against which a full valuation allowance has been established.
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Table of Contents
Net Income
We generated net income of $4,059,000 in the nine
months ended August 31, 2009 compared to $3,762,000 for the nine months ended August
31, 2008. The increase in net income for
the nine months ended August 31, 2009 compared to the nine months ended August 31,
2008 is largely the result of our increase of $3,152,000, or 13 percent, in
gross profit, which was offset by an increase of $2,341,000, or 12 percent, in
SG&A and an increase of $559,000, or 89 percent, in income tax expense due
to continued profitability.
Liquidity and Capital Resources
Our primary sources of liquidity are: (i) cash from
sales of our products; and (ii) sales from accounts receivable factoring
facilities and advances against inventory. For the nine months ended August 31,
2009, we generated $5,251,000 of cash flow from operations and used $401,000
for purchases of property and equipment mostly in connection with the operation
of our retail stores. We received net
proceeds of $1,332,000 in factored borrowings.
Our cash balance was $9,545,000 as of August 31, 2009.
We are dependent on credit arrangements with
suppliers and factoring and inventory based agreements for working capital
needs. From time to time, we have conducted equity financing through private
placement transactions and obtained increases in our cash availability from CIT
through guarantees by certain related parties.
Our primary methods to obtain the cash necessary for
operating needs were through the sales of Joes® products, sales of our
accounts receivable pursuant to our factoring agreements, obtaining advances
under our inventory security agreements with CIT and utilizing existing cash
balances. The accounts receivable are
sold for up to 85 percent of the face amount on either a recourse or
non-recourse basis depending on the creditworthiness of the customer. In addition, the agreements allow us to
obtain advances for up to 50 percent of the value of certain eligible
inventory. CIT currently permits us to
sell our accounts receivable at the maximum level of 85 percent and allows advances
of up to $6,000,000 for eligible inventory.
CIT has the ability, in its discretion at any time or from time to time,
to adjust or revise any limits on the amount of loans or advances made to us
pursuant to these agreements and to impose surcharges on our rates for certain
of our customers. As further assurance
to CIT, cross guarantees were executed by and among us and all of our
subsidiaries to guarantee each subsidiarys obligations. As of August 31, 2009, our cash availability
with CIT was approximately $720,000. This amount fluctuates on a daily basis
based upon invoicing and collection related activity by CIT on our behalf. In
connection with the agreements with CIT, most of our tangible assets are
pledged to CIT, including all of our inventory, merchandise, and/or goods,
including raw materials through finished goods and receivables. Our trademarks
are not encumbered.
The agreements may be terminated by CIT upon 60 days
prior written notice or immediately upon the occurrence of an event of default,
as defined in the agreement. The agreements may be terminated by us upon 60
days advanced written notice prior to June 30, 2010 or earlier provided that
the minimum factoring fees have been paid for the respective period.
The factoring rate that we pay to CIT to factor
accounts is 0.6 percent for accounts which CIT bears the credit risk, subject
to discretionary surcharges, and 0.4 percent for accounts which we bear the
credit risk. The interest rate
associated with the agreements is 0.25 percent plus the Chase prime rate.
We have also established a letter of credit facility
with CIT to allow us to open letters of credit for a fee of 0.25 percent of the
letter of credit face value with international and domestic suppliers, subject
to cash availability on our inventory line of credit.
As of August 31, 2009, we had a net loan balance of
$9,950,000 with CIT for factored receivables, a loan balance of $3,813,000 for
inventory advances and no letters of credit outstanding.
For the remainder of fiscal 2009, our primary
capital needs are for (i) operating expenses; (ii) working capital necessary to
fund inventory purchases; (iii) capital expenditures for any additional retail
store openings; (iv) financing extensions of trade credit to our customers; and
(v) payment for the contingent consideration pursuant to the merger agreement
with JD Holdings. We anticipate funding our operations through working capital
generated by the following: (i) cash flow from sales of our products; (ii) managing
our operating expenses and inventory levels; (iii) maximizing trade payables
with our domestic and international suppliers; (iv) increasing collection
efforts on existing accounts receivables; and (v) utilizing our receivable and
inventory-based agreements with CIT.
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Table of Contents
Based on our cash on hand, cash flow from operations
and the expected cash availability under our agreements with CIT, we believe
that we have the working capital resources necessary to meet our projected
operational needs for the remainder of fiscal 2009. However, if we require more
capital for growth or experience operating losses, we believe that it will be
necessary to obtain additional working capital through credit arrangements or
debt or equity financings. We believe that any additional capital, to the
extent needed, may be obtained from additional sales of equity securities or
other loans or credit arrangements. There can be no assurance that this or
other financings will be available if needed. Our inability to fulfill any
interim working capital requirements would force us to constrict our
operations.
We believe that the rate of inflation over the past
few years has not had a significant adverse impact on our net sales or income
(losses) from operations.
Off
Balance Sheet Arrangements
We
do not have any off balance sheet arrangements.
Managements Discussion of Critical Accounting Policies
We believe that the accounting policies discussed
below are important to an understanding of our financial statements because
they require management to exercise judgment and estimate the effects of
uncertain matters in the preparation and reporting of financial results.
Accordingly, we caution that these policies and the judgments and estimates
they involve are subject to revision and adjustment in the future. While they
involve less judgment, management believes that the other accounting policies
discussed in Notes to Consolidated Financial Statements - Note 2 Summary of
Significant Accounting Policies included in our Annual Report on Form 10-K for
the year ended November 30, 2008 previously filed with the SEC are also
important to an understanding of our financial statements. We believe that the
following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Wholesale revenues are recorded on the accrual basis
of accounting when title transfers to the customer, which is typically at the
shipping point. We record estimated
reductions to revenue for customer programs, including co-op advertising, other
advertising programs or allowances, based upon a percentage of sales. We also allow for returns based upon
pre-approval or in the case of damaged goods. Such returns are estimated based
on historical experience and an allowance is provided at the time of sale.
Retail
store revenue is recognized net of estimated returns at the time of sale to
consumers. E-commerce sales of products ordered through our retail internet
site known as www.joesjeans.com are recognized upon estimated delivery and
receipt of the shipment by the customers. E-commerce revenue is also reduced by
an estimate of returns. Retail store revenue and E-commerce revenue exclude
sales taxes. Revenue from licensing
arrangements are recognized when earned in accordance with the terms of the
underlying agreements, generally based upon the higher of (a) contractually
guaranteed minimum royalty levels; and (b) estimates of sales and royalty data
received from our licensees. Payments received in consideration of the grant of
a license or advanced royalty payments are recognized ratably as revenue over
the term of the license agreement and are reflected under the caption of
Deferred Licensing Revenue on the Condensed Consolidated Balance Sheets. The revenue recognized ratably over the term
of the license agreement will not exceed royalty payments received. The unrecognized portion of the upfront
payments are included in deferred royalties and accrued expenses depending on
the long or short term nature of the payments to be recognized. As of August 31, 2009, we have received total
advanced payments of $1,125,000 of the advanced payments under our licensing
agreements and has recognized $259,000 as income.
24
Table of Contents
Accounts Receivable, Due To Factor and Allowance for Customer Credits
and Doubtful Allowances
We evaluate our ability to collect on accounts
receivable and charge-backs (disputes from the customer) based upon a
combination of factors. In circumstances
where we are aware of a specific customers inability to meet its financial
obligations (e.g., bankruptcy filings, substantial downgrading of 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 charge-backs
based on our historical collection experience.
If collection experience deteriorates (i.e., an unexpected material
adverse change in a major customers ability to meet its financial obligations
to us), the estimates of the recoverability of amounts due to us could be
reduced by a material amount.
The balance in the allowance for customer credits
and doubtful accounts as of August 31, 2009 and November 30, 2008 was $865,000
and $660,000 for non-factored accounts receivables.
Inventory
We continually evaluate the composition of our
inventories, assessing slow-turning, ongoing product as well as product from
prior seasons. Market value of
distressed inventory is valued based on historical sales trends on our
individual product lines, the impact of market trends and economic conditions,
and the value of current orders relating to the future sales of this type of
inventory. Significant changes in market
values could cause us to record additional inventory markdowns.
Valuation of Long-lived and Intangible Assets and Goodwill
We assess the impairment of identifiable
intangibles, long-lived assets and goodwill annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important that could trigger an impairment
review other than on an annual basis include the following:
·
A significant underperformance relative to
expected historical or projected future operating results;
·
A significant change in the manner of the use
of the acquired asset or the strategy for the overall business; or
·
A significant negative industry or economic
trend.
In fiscal 2007, we acquired through merger JD
Holdings, which included all of the intangible assets and goodwill related to
the Joes®, Joes Jeans and JD® logo and marks. For fiscal 2008, we did not
recognize any impairment related to the intangible assets and goodwill of our
Joes® brand. We have assigned an indefinite life to these intangible assets
and therefore, no amortization expenses are expected to be recognized. However,
we test the assets for impairment annually in accordance with our critical
accounting policies.
SFAS
No. 142 requires that goodwill and other intangibles be tested for impairment
using a two-step process. The first step
is to determine the fair value of each reporting unit and compare this value to
its carrying value. If the fair value
exceeds the carrying value, no further work is required and no impairment loss
would be recognized. The second step is
performed if the carrying value exceeds the fair value of the assets. The implied fair value of the reporting units
goodwill must be determined and compared to the carrying value of the goodwill.
Our
annual impairment testing date is September 30 of each year. On that date in 2008, we determined that
there was no impairment of our indefinite lived intangible assets or
goodwill. Additionally, our market
capitalization on the impairment testing date was approximately
$65,809,000. On November 30, 2008, the
carrying value of our net assets was $36,085,000 and the market capitalization
of our outstanding shares was $21,581,000. Accordingly, we updated our annual
goodwill impairment test in accordance with SFAS 142.
25
Table of Contents
We
calculated the implied fair value of our net assets using a weighting of (1) a
discounted cash flow analysis using updated forward-looking projections of
estimated future operating results; and (2) a guideline company methodology
under the market approach using revenue and earnings before interest, taxes,
depreciation and amortization, or EBITDA, multiples. Based on the results of
this testing, we concluded that our implied fair value exceeded our carrying
value at November 30, 2008 and accordingly, determined that our recorded
goodwill was not impaired as of November 30, 2008.
Upon
further evaluation and because our stock price has been volatile since November
30, 2008, we also considered the market value of our common stock as of August 31,
2009. Our market cap was $44,740,000 as
of August 31, 2009 and was approximately the carrying value of our net assets
as of that date. In addition, there were
no other indicators of impairment of our indefinite lived intangible assets or
goodwill. Therefore, we determined our
recorded goodwill was not impaired under SFAS 142.
Additional Merger Consideration (Contingent Consideration)
In connection with the merger with JD Holdings, we
agreed to pay to Mr. Dahan the following contingent consideration in the
applicable fiscal year for 120 months following October 25, 2007:
·
No contingent consideration if the gross
profit is less than $11,250,000 in the applicable fiscal year;
·
11.33% of the gross profit from $11,251,000
to $22,500,000;
·
3% of the gross profit from $22,501,000 to
$31,500,000;
·
2% of the gross profit from $31,501,000 to
$40,500,000; and
·
1% of the gross profit above $40,501,000.
The additional merger consideration, or contingent
consideration, is paid in advance on a monthly basis based upon estimates of
gross profits after the assumption that the payments are likely to be paid. At
the end of each quarter, any overpayments are offset against future payments
and any significant underpayments are made.
EITF 95-8, Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination, addresses accounting for consideration transferred to settle a
contingency based on earnings or other performance measures. It sets forth the
criteria to determine whether contingent consideration based on earnings or
other performance measures should be accounted for as (1) adjustment of the
purchase price of the acquired enterprise or (2) compensation for services, use
of property or profit sharing.
The determination of how to account for the
contingent consideration is a matter of judgment that depends on the relevant
facts and circumstances. Based upon our evaluation of the relevant facts and
circumstances, we originally accounted for the contingent consideration as
additional purchase price. As previously
disclosed, we will no longer account for the contingent consideration as
additional purchase price. We now
account for the contingent consideration as compensation expense, i.e.
compensation for services, use of property or profit sharing. Accordingly, in our Notes to Consolidated
Financial Statements in our Annual Report previously filed with the SEC, we
have restated our first three quarters for fiscal 2008 to reflect this change
and a change to our valuation of the assets acquired. The advanced contingent consideration
payments are accounted for as operating expense. For the nine months ended August 31, 2009 and
2008, the advanced contingent consideration payments were $1,238,000 and
$1,337,000, respectively.
Income Taxes
As part of the process of preparing our consolidated
financial statements, management is required to estimate income taxes in each
of the jurisdictions in which we operate. The process involves estimating
actual current tax expense along with assessing temporary differences resulting
from differing treatment of items for book and tax purposes. These timing
differences result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. Management records a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be
realized. Management has considered future taxable income and ongoing tax
planning strategies in assessing the need for the valuation allowance.
Increases in the valuation allowance result in additional expense to be
reflected within the tax provision in the consolidated statement of income.
Reserves are also estimated for ongoing audits regarding federal and state
issues that are currently unresolved. We routinely monitor the potential impact
of these situations. Based on managements assessment, there has been no
reduction of the valuation allowance other than to the extent that income taxes
on current year net income was offset by net operating losses that carried
forward.
26
Table of Contents
Contingencies
We
account for contingencies in accordance with SFAS No. 5, Accounting for
Contingencies, or SFAS No. 5. SFAS No. 5
requires that we record an estimated loss from a loss contingency when
information available prior to issuance of our financial statements indicates
that it is probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount of the loss can
be reasonably estimated. Accounting for contingencies such as legal and income
tax matters requires management to use judgment. Many of these legal and tax
contingencies can take years to be resolved. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. Management believes that the
accruals for these matters are adequate. Should events or circumstances change,
we could have to record additional accruals.
Stock Based Compensation
We
adopted the provisions of and account for stock-based compensation in
accordance with SFAS No. 123(R), Share Based Payment, or SFAS No. 123(R), on November
27, 2005. We elected the modified prospective method where prior periods are
not revised for comparative purposes. Under the fair value recognition
provisions of SFAS No. 123(R), stock based compensation is measured at grant
date based upon the fair value of the award and expense is recognized on a
straight-line basis over the vesting period. We use the Black-Scholes option
pricing model to determine the fair value of stock options, which requires
management to use estimates and assumptions. The determination of the fair
value of stock based option awards on the date of grant is based upon the
exercise price as well as assumptions regarding subjective variables. These
variables include our expected life of the option, expected stock price
volatility over the term of the award, determination of a risk free interest rate
and an estimated dividend yield. We estimate the expected life of the option by
calculating the average term based upon historical experience. We estimate the
expected stock price volatility by using implied volatility in market traded
stock over the same period as the vesting period. We base the risk-free
interest rate on zero coupon yields implied from U.S. Treasury issues with
remaining terms similar to the term on the options. We do not expect to pay
dividends in the foreseeable future and therefore use an expected dividend
yield of zero. If factors change or we employ different assumptions for
estimating fair value of the stock option, our estimates may be different than
future estimates or actual values realized upon the exercise, expiration, early
termination or forfeiture of those awards in the future. At this time, we
believe that our current method for accounting for stock based compensation is
reasonable. Furthermore, under SFAS No. 123(R), an entity may elect either an
accelerated recognition method or a straight-line recognition method for awards
subject to graded vesting based on a service condition, regardless of how the
fair value of the award is measured. For all stock based compensation awards
that contain graded vesting based on service conditions, we have elected to
apply a straight-line recognition method to account for these awards. However,
SFAS No. 123(R) guidance is relatively new and the application of these
principles over time may be subject to further interpretation or refinement.
See Note 9 Stockholders Equity Stock Incentive Plans for additional
discussion of SFAS No. 123(R).
Recent Accounting Pronouncements
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, or SFAS No. 141(R). New
requirements under the revised standard include: (i) the fair value of stock
provided as consideration be measured as of the acquisition date instead of the
announcement date; (ii) acquisition-related costs be recognized separately from
the acquisition, generally as an expense, instead of treated as a part of the
cost of the acquisition that was allocated to the assets acquired and the
liabilities assumed; (iii) restructuring
costs that the acquirer expected, but was not obligated to incur, be recognized
separately from the acquisition instead of recognized as if they were a
liability assumed at the acquisition date; (iv) contingent consideration be
recognized at the acquisition date, measured at its fair value at that date,
instead of recognized when the contingency was resolved and consideration was
issued or became issuable; (v) recognizing a gain when the fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred instead of allocating the negative goodwill amount as a pro rata
reduction of the amounts that otherwise would have been assigned to particular
assets acquired; (vi) research and development assets acquired in a business
27
Table of Contents
combination
will be recognized at their acquisition-date fair values as assets
acquired in a business combination instead of being measured at their
acquisition-date fair values and then immediately charged to expense; and (vii) changes
in the amount of deferred tax benefits created in a business combination,
outside of the valuation period, will be recognized either in income from
continuing operations or directly in contributed capital, depending on the
circumstances, instead of recognized through a corresponding reduction to
goodwill or certain noncurrent assets or an increase in so-called negative
goodwill. SFAS No. 141(R) is effective for us for transactions
consummated during annual periods beginning after December 15, 2008, which
is the year beginning December 1, 2009 for us. We do not expect that SFAS No. 141(R) will
have any impact on our financial statements unless we enter into an applicable
transaction in the future.
In
April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful
Life of Intangible Assets, or FSP 142-3.
FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142, in order to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R). FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008,
which is the year beginning December 1, 2009 for us, and interim periods
within that fiscal year. The adoption of
FSP142-3 did not have a material impact on our financial position or results
from operations.
In
May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS No. 165. SFAS No. 165 establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
It requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for selecting that date, that is, whether that
date represents the date the financial statements were issued or were available
to be issued. SFAS No. 165 is
effective for interim or annual financial periods ending after June 15,
2009. We adopted SFAS No. 165 in
the third fiscal quarter of 2009 and the related disclosure can be found in
Note 12 Subsequent Events.
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162, or SFAS No. 168. SFAS 168 replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, to establish the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
preparation of financial statements in conformity with generally accepted
accounting principles in the United States.
SFAS No. 168 is effective for interim and annual periods ending
after September 15, 2009. The
adoption of SFAS No. 168 will not impact our financial position or results
of operations.
Item 3.
Quantitative
and Qualitative Disclosure About Market Risk.
Not
applicable as a Smaller Reporting Company.
Item 4T. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
of August 31, 2009, the end of the period covered by this periodic report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15(b) and 15d-15(b) under the Exchange Act.
Disclosure controls and procedures are controls and
other procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC
rules and forms. In addition,
disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that the information required to be disclosed by
us in the reports we file or submit under the Exchange Act is accumulated and communicated
to management, including our principal executive and principal financial
officers or persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosures. Management recognizes that a control system,
no matter how well conceived
28
Table of Contents
and
operated, can provide only reasonable assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
within the company have been detected.
Therefore, assessing the costs and benefits of such controls and
procedures necessarily involves the exercise of judgment by management. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives.
As of the end of the period covered by this report,
our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective at the reasonable assurance
level.
Changes
in Internal Control Over Financial Reporting
We
made no changes in our internal control over financial reporting during the
third quarter of the fiscal year covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to lawsuits
and other contingencies in the ordinary course of our business. We do not believe that we are a party to any
material pending legal proceedings or that it is probable that the outcome of
any individual action would have an adverse effect in the aggregate on our
financial condition. We do not believe
that it is likely that an adverse outcome of individually insignificant actions
in the aggregate would be sufficient enough, in number or in magnitude, to have
a material adverse effect in the aggregate on our financial condition.
Item 1A. Risk Factors.
In
addition to the other information set forth in this Quarterly Report, you
should carefully consider the factors discussed under Risk Factors in our
Annual Report on Form 10-K for the fiscal year ended November 30,
2008 as filed with the SEC. These risks could materially and adversely
affect our business, financial condition and results of operations. The
risks described in our Form 10-K are not the only risks we face. Our
operations could also be affected by additional factors that are not presently
known to us or by factors that we currently consider immaterial to our
business.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security
Holders.
None.
Item 5. Other Information.
(a) None.
(b) There have been no material changes
to the procedures by which security holders may recommend nominees to our board
of directors, including adoption of procedures by which our stockholders may
recommend nominees to the our board of directors.
29
Table of
Contents
Item 6.
Exhibits.
Exhibits
(listed according to the number assigned in the table in Item 601 of Regulation
S-K):
Exhibit
No.
|
|
Description
|
|
Document if Incorporated
by Reference
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
32
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
30
Table of
Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
JOES JEANS INC.
|
|
|
October 15,
2009
|
/s/
Marc B. Crossman
|
|
Marc
B. Crossman
|
|
Chief
Executive Officer (Principal Executive Officer), President and Director
|
|
|
|
|
October 15,
2009
|
/s/
Hamish Sandhu
|
|
Hamish
Sandhu
|
|
Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
|
31
Table of
Contents
EXHIBIT INDEX
Exhibit
No.
|
|
Description
|
|
Document if Incorporated by
Reference
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
32
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
32
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