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,
2008
OR
o
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
|
|
11-2928178
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
5901 South Eastern Avenue, Commerce, California
|
|
90040
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(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 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
|
|
Accelerated filer
o
|
Non-accelerated filer
x
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
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 14, 2008 was
59,826,974.
Table
of Contents
PART I FINANCIAL
INFORMATION
Item 1. Financial Statements.
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
August 31, 2008
|
|
November 30, 2007
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,117
|
|
$
|
1,331
|
|
Accounts receivable, net of allowance for
customer credits and returns of $590 (2008) and $652 (2007)
|
|
1,042
|
|
803
|
|
Inventories, net
|
|
21,040
|
|
20,803
|
|
Prepaid expenses and other current assets
|
|
203
|
|
282
|
|
Total current assets
|
|
25,402
|
|
23,219
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
959
|
|
792
|
|
Goodwill
|
|
11,463
|
|
10,415
|
|
Intangible assets, net
|
|
13,200
|
|
13,200
|
|
Other assets
|
|
109
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,133
|
|
$
|
47,626
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
6,920
|
|
$
|
7,794
|
|
Due to factor
|
|
2,739
|
|
3,040
|
|
Due to related parties
|
|
9
|
|
1,142
|
|
Total current liabilities
|
|
9,668
|
|
11,976
|
|
|
|
|
|
|
|
Long term deferred rent
|
|
87
|
|
|
|
Deferred tax liability
|
|
5,254
|
|
5,254
|
|
Total liabilities
|
|
15,009
|
|
17,230
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
Preferred stock, $0.10 par value: 5,000
shares authorized, no shares issued or outstanding
|
|
|
|
|
|
Common stock, $0.10 par value: 100,000
shares authorized, 59,939 shares issued and 59,827 outstanding
|
|
5,995
|
|
5,988
|
|
Additional paid-in capital
|
|
102,679
|
|
102,056
|
|
Accumulated deficit
|
|
(69,774
|
)
|
(74,872
|
)
|
Treasury stock, 112 shares
|
|
(2,776
|
)
|
(2,776
|
)
|
Total stockholders equity
|
|
36,124
|
|
30,396
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
51,133
|
|
$
|
47,626
|
|
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)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
August 31, 2008
|
|
August 25, 2007
|
|
August 31, 2008
|
|
August 25, 2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,248
|
|
$
|
15,708
|
|
$
|
51,413
|
|
$
|
44,693
|
|
Cost of goods sold
|
|
9,303
|
|
9,123
|
|
27,242
|
|
25,664
|
|
Gross profit
|
|
8,945
|
|
6,585
|
|
24,171
|
|
19,029
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
6,134
|
|
5,335
|
|
17,706
|
|
16,922
|
|
Depreciation
|
|
70
|
|
91
|
|
244
|
|
266
|
|
|
|
6,204
|
|
5,426
|
|
17,950
|
|
17,188
|
|
Operating income
|
|
2,741
|
|
1,159
|
|
6,221
|
|
1,841
|
|
Interest expense
|
|
(133
|
)
|
(203
|
)
|
(492
|
)
|
(598
|
)
|
Other expense
|
|
|
|
|
|
|
|
(25
|
)
|
Income before provision for taxes
|
|
2,608
|
|
956
|
|
5,729
|
|
1,218
|
|
Income taxes
|
|
368
|
|
43
|
|
631
|
|
56
|
|
Net income
|
|
$
|
2,240
|
|
$
|
913
|
|
$
|
5,098
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - basic
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - diluted
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
59,477
|
|
43,662
|
|
59,360
|
|
41,385
|
|
Diluted
|
|
60,063
|
|
45,541
|
|
59,752
|
|
42,682
|
|
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)
|
|
Nine months ended
|
|
|
|
August 31, 2008
|
|
August 25, 2007
|
|
|
|
(unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
3,533
|
|
$
|
(8,223
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Proceeds from sales of property and
equipment
|
|
|
|
2
|
|
Payments for earnout on trademark
|
|
(1,048
|
)
|
|
|
Purchases of property and equipment
|
|
(411
|
)
|
(187
|
)
|
Net cash used in investing activities
|
|
(1,459
|
)
|
(185
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds (net repayments) from factor
borrowing, net
|
|
(301
|
)
|
1,829
|
|
Proceeds from issuance of common stock
|
|
13
|
|
6,974
|
|
Net cash (used in) provided by financing
activities
|
|
(288
|
)
|
8,803
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
1,786
|
|
395
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, at beginning of
period
|
|
1,331
|
|
385
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, at end of period
|
|
$
|
3,117
|
|
$
|
780
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
Additional
|
|
Accumulated
|
|
Treasury
|
|
Stockholders
|
|
|
|
Shares
|
|
Par Value
|
|
Paid-In Capital
|
|
Deficit
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 25, 2006
|
|
34,455
|
|
$
|
3,447
|
|
$
|
79,763
|
|
$
|
(77,126
|
)
|
$
|
(2,776
|
)
|
$
|
3,308
|
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
1,162
|
|
|
|
1,162
|
|
Stock-based compensation (unaudited)
|
|
|
|
|
|
15
|
|
|
|
|
|
15
|
|
Issuance of common stock and warrants
(unaudited)
|
|
10,776
|
|
1,078
|
|
5,896
|
|
|
|
|
|
6,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 25, 2007 (unaudited)
|
|
45,231
|
|
$
|
4,525
|
|
$
|
85,674
|
|
$
|
(75,964
|
)
|
$
|
(2,776
|
)
|
$
|
11,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2007
|
|
59,862
|
|
$
|
5,988
|
|
$
|
102,056
|
|
$
|
(74,872
|
)
|
$
|
(2,776
|
)
|
$
|
30,396
|
|
Net income (unaudited)
|
|
|
|
|
|
|
|
5,098
|
|
|
|
5,098
|
|
Stock-based compensation (unaudited), net
of withholding taxes
|
|
|
|
|
|
617
|
|
|
|
|
|
617
|
|
Issuance of restricted common stock
(unaudited)
|
|
64
|
|
6
|
|
(6
|
)
|
|
|
|
|
|
|
Issuance of common stock and warrants
(unaudited)
|
|
13
|
|
1
|
|
12
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2008 (unaudited)
|
|
59,939
|
|
$
|
5,995
|
|
$
|
102,679
|
|
$
|
(69,774
|
)
|
$
|
(2,776
|
)
|
$
|
36,124
|
|
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, 2008 and August 25, 2007 and the related footnote
information have been prepared on a basis consistent with Joes audited
consolidated financial statements as of November 30, 2007 contained in Joes
Annual Report on Form 10-K and Amendment No. 1 to its Annual Report
on Form 10-K/A for the year ended November 30, 2007, or collectively,
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 a license agreement for accessories.
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.
Effective October 11, 2007, Joes changed from a thirteen-week
quarterly reporting period to a last day of the month quarterly reporting
period. This change was made to conform
to standard quarterly accounting periods.
Prior to the change in its fiscal year, Joes fiscal year end was the
Saturday closest to November 30 based upon a 52 week period and the
quarterly periods consisted of 13 week periods based on a Sunday to Saturday
week. Quarterly periods presented have
nine calendar months for the period ended August 31, 2008 and 26 weeks for
the period ended August 25, 2007.
The modification of the fiscal years and respective quarterly periods
did not have a material effect on Joes financial condition, results of
operations or cash flows.
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, 2008 are not necessarily indicative of the results
anticipated for the entire year ending November 30, 2008. 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
July 13, 2006, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 48, or FIN No. 48, Accounting for Uncertainty in
Income Taxes: An Interpretation of FASB Statement No. 109. This interpretation clarifies the accounting
for and disclosure of uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109, Accounting for
Income Taxes. This interpretation
defines the criteria that must be met for the benefits of a tax position to be
5
Table
of Contents
recognized
in the financial statements and the measurement of tax benefits
recognized. The provisions of FIN 48
were effective for fiscal years beginning after December 15, 2006. Joes adopted FIN 48 effective December 1,
2007. The adoption of FIN 48 did not
have a material impact on its results of operations, consolidated financial
position or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS No. 157, which defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements. SFAS No. 157 requires companies to disclose the fair
value of their financial instruments according to a fair value hierarchy (i.e.,
levels 1, 2, and 3, as defined).
Additionally, companies are required to provide enhanced disclosure
regarding instruments in the level 3 category, including a reconciliation of
the beginning and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. Joes
adopted SFAS No. 157 on December 1, 2007. Given the nature of Joes current financial
instruments, the adoption of SFAS No. 157 did not have a material impact
on its results of operations or consolidated financial position.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115, or SFAS No. 159. SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. Joes adopted SFAS No. 159 on December 1,
2007. Given the nature of Joes current
financial instruments, the adoption of SFAS No. 159 did not have a
material impact on its results of operations or consolidated financial
position.
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, 2008
|
|
November 30, 2007
|
|
Non-recourse receivables assigned to factor
|
|
$
|
10,190
|
|
$
|
8,346
|
|
Client recourse receivables
|
|
980
|
|
778
|
|
Total receivables assigned to factor
|
|
11,170
|
|
9,124
|
|
Allowance for customer credits and doubtful
accounts
|
|
(1,764
|
)
|
(1,421
|
)
|
Net loan balance from factored accounts
receivable
|
|
(9,353
|
)
|
(6,201
|
)
|
Net loan balance from inventory advances
|
|
(2,792
|
)
|
(4,542
|
)
|
Due to factor
|
|
$
|
(2,739
|
)
|
$
|
(3,040
|
)
|
|
|
|
|
|
|
Non-factored accounts receivable
|
|
$
|
1,632
|
|
$
|
1,455
|
|
Allowance for customer credits and returns
|
|
(590
|
)
|
(652
|
)
|
Accounts receivable, net of allowance
|
|
$
|
1,042
|
|
$
|
803
|
|
6
Table
of Contents
Of
the total amount of receivables sold as of August 31, 2008 and November 30,
2007, Joes bears the risk of payment of $980,000 and $778,000, respectively,
in the event of non-payment by its customers.
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 advances
for up to 50 percent of the value of certain eligible inventory. The accounts receivables 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 receivables 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. As further
assurance to CIT, cross guarantees were executed by and among Joes and all of
its subsidiaries to guarantee each subsidiaries obligations.
As
of August 31, 2008, Joes cash availability with CIT was approximately
$1,042,000. 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 at 0.6 percent for
accounts which CIT bears the credit risk and 0.4 percent for accounts which Joes
bears the credit risk and the interest rate associated with borrowings under
the inventory lines and factoring facility is at 0.25 percent plus the Chase
prime rate. As of August 31, 2008,
the Chase prime rate was five percent.
In
addition, in the event Joes needs additional funds, 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 availability.
At August 31, 2008, Joes had 12 letters of credit outstanding in
the aggregate amount of $446,000.
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):
7
Table
of Contents
|
|
August 31, 2008
|
|
November 30, 2007
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
8,998
|
|
$
|
7,450
|
|
Work in progress
|
|
1,679
|
|
1,998
|
|
Raw materials
|
|
11,419
|
|
11,969
|
|
|
|
22,096
|
|
21,417
|
|
Less allowance for obsolescence and slow
moving items
|
|
(1,056
|
)
|
(614
|
)
|
|
|
$
|
21,040
|
|
$
|
20,803
|
|
Joes
recorded charges to its inventory reserve allowance of $0 and $92,000 for the
three months ended August 31, 2008 and August 25, 2007, respectively,
and $22,000 and $289,000 for the nine months ended August 31, 2008 and August 25,
2007, respectively.
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 a definitive Agreement and Plan
of Merger on February 6, 2007, as amended on June 25, 2007, or the
Merger Agreement. JD Holdings primary
asset was 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. At the time
of entering into the Merger Agreement, Mr. Dahan was a current employee of
Joes, serving as president of Joes Subsidiary. In addition, 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.
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 rights, title and interest in the Joes Brand.
Under
the revised Merger Agreement, Mr. Dahan will be 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
Earn Out for a further discussion of the earn-out 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 purchase under U.S. generally accepted
accounting principles. Accordingly, management, with the assistance from
independent valuation specialists, 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.
8
Table
of Contents
The
assets acquired in this merger consisted of 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 Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, Joes
has determined that the useful life of the acquired assets is indefinite and
therefore no amortization expense will initially need to be recognized.
However, Joes will test 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 advanced earn-out payments are recorded as
additional goodwill. For the nine months
ended August 31, 2008, Joes has recorded $1,048,000 of earn-out payments
as additional goodwill.
Employment
Agreement
In
connection with the completion of the merger, an employment agreement
automatically became effective upon the closing of the merger 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 within 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,
9
Table
of Contents
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 held by Mr. Dahan. His contractual restrictions on resale for
those shares lapsed on April 25, 2008.
On October 15, 2008, a registration statement on Form S-3 was
filed for the resale of an additional 2,333,333 shares held by Mr. Dahan. The contractual restrictions on these shares
lapse on October 25, 2008.
NOTE 6 RELATED PARTY TRANSACTIONS
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 merger, the license
agreement terminated.
As
part of the consideration paid in connection with the completion of 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 and Note 10
Commitment and Contingencies for a further discussion on the merger agreement
and the earn-out. For the nine months
ended August 31, 2008, Joes paid $1,048,000 in earn-out payments to Mr. Dahan,
which it has recorded as additional goodwill.
As
a related party, Mr. Dahans brother is the managing member of a company
Shipson LLC, or Shipson, to whom Joes outsourced its E-shop on its Joes Jeans
website. Joes sold its Joes® products
to Shipson at its wholesale price on normal and customary terms and conditions to
fulfill purchases by customers on the E-shop.
Joes ceased doing business with Shipson in February 2008. As of August 31, 2008, Shipson currently
owes $192,000 to Joes for outstanding purchase orders and this amount has been
fully reserved for in its financial statements.
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:
10
Table
of Contents
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
(in thousands, except per share data)
|
|
(in thousands, except per share data)
|
|
|
|
August 31, 2008
|
|
August 25, 2007
|
|
August 31, 2008
|
|
August 25, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share computation:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,240
|
|
$
|
913
|
|
$
|
5,098
|
|
$
|
1,162
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
59,477
|
|
43,662
|
|
59,360
|
|
41,385
|
|
Income per common share - basic
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share computation:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,240
|
|
$
|
913
|
|
$
|
5,098
|
|
$
|
1,162
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
59,477
|
|
43,662
|
|
59,360
|
|
41,385
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options and warrants
|
|
586
|
|
1,879
|
|
392
|
|
1,297
|
|
Dilutive potential common shares
|
|
60,063
|
|
45,541
|
|
59,752
|
|
42,682
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share - dilutive
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.09
|
|
$
|
0.03
|
|
Potentially
dilutive options, warrants, restricted stock and restricted stock units in the
aggregate of 3,007,885 and 1,302,051 for both the three and nine months ended August 31,
2008 and August 25, 2007, 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, 2008, shares reserved for future issuance include (i) 3,313,146
shares of common stock issuable upon the exercise of stock options granted
under the incentive plans; (ii) 590,275 shares of common stock issuable
upon the vesting of restricted stock units; (iii) an aggregate of
3,466,845 shares of common stock available for future issuance under the 2004
Stock Incentive Plan as of August 31, 2008; and (iv) 1,165,833 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.
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
11
Table
of Contents
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.
Joes
recorded an income tax expense of $368,000 and $43,000 for the three months
ended August 31, 2008, and August 25, 2007, respectively, and
$631,000 and $56,000 for the nine months ended August 31, 2008, and August 25,
2007, respectively. Joes effective tax
rate was 14 percent for the three months ended August 31, 2008 and five
percent for the three months ended August 25, 2007. Joes effective tax rate was 11 percent for
the nine months ended August 31, 2008 and five percent for the nine months
ended August 26, 2007. 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, 2008, outstanding common stock warrants are as
follows:
Exercise price
|
|
Shares
|
|
Issued
|
|
Expiration
|
|
$
|
4.00
|
|
373,333
|
|
November 2003
|
|
November 2008
|
|
1.53
|
|
125,000
|
|
June 2004
|
|
June 2009
|
|
2.28
|
|
62,500
|
|
October 2004
|
|
October 2009
|
|
0.66
|
|
125,000
|
|
December 2006
|
|
December 2011
|
|
1.36
|
|
480,000
|
|
June 2007
|
|
June 2012
|
|
|
|
1,165,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the third quarter of fiscal 2008, 217,500 warrants expired unexercised.
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.
12
Table
of Contents
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, 2008, options to
purchase up to 203,546 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 8,265,172 shares of common stock. 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. During the fourth
quarter of fiscal 2007, Joes granted 555,849 shares of restricted common stock
to its directors and CEO pursuant to the 2004 Stock Incentive Plan. In December 2007, Joes issued 745,600
restricted common stock units, or RSUs, to its employees pursuant to the 2004
Stock Incentive Plan. These 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. The RSUs vest ratably every six months with
the first tranche vested on June 18, 2008 until all of the RSUs are vested
on December 18, 2011. On the vesting date, Joes expects to issue the
shares of common stock to each employee that he or she is vested in and expects
to withhold an equivalent number of shares at fair market value on the vesting
date to fulfill each employees minimum tax withholding obligation. The RSUs withheld will again be shares
available for issuance in accordance with the terms of the 2004 Incentive
Plan. In the fourth quarter of fiscal
2007, Joes granted an option to purchase 100,000 shares that vested on a
monthly basis over a two year period; however, this option was cancelled and
replaced with the consent of the option holder with RSUs for 100,000 shares of
common stock in December 2007. As
of August 31, 2008, 60,000 RSUs have been forfeited by employees.
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,
2008, 3,466,845 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,
2007, there was a total of $221,000 and $655,000 of stock based compensation
expense recognized in the three months and nine months ended August 31,
2008, respectively.
The
following summarizes option grants and restricted common stock issued to
members of the Board of Directors for the fiscal years 2002 through the third
quarter of fiscal 2008 (in actual amounts) for service as a member:
13
Table
of Contents
|
|
August 31, 2008
|
|
|
|
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
|
|
2007
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of restricted
shares isssued
|
|
2007
|
|
|
|
320,000
|
|
2008
|
|
|
|
|
|
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average per option fair value of
options granted during the year
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Options
|
|
Weighted
average exercise
price
|
|
Weighted average
remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 26, 2006
|
|
4,092,296
|
|
$
|
1.68
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(291,250
|
)
|
0.90
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(200,000
|
)
|
1.02
|
|
|
|
|
|
Outstanding at August 25, 2007
|
|
3,601,046
|
|
$
|
1.78
|
|
7.2
|
|
$
|
1,913,304
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and vested at August 25,
2007
|
|
3,519,796
|
|
$
|
1.81
|
|
7.2
|
|
$
|
1,786,554
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average per option fair value of
options granted during the year
|
|
|
|
N/A
|
|
|
|
|
|
14
Table of
Contents
As of August 31, 2008,
there was $1,085,000 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 three years. The total fair value of
shares of stock options vested during the three months ended August 31,
2008, and August 25, 2007 was $5,000 and $5,000, respectively, and
$203,000 for restricted common stock during the three months ended August 31,
2008. The total fair value of shares of
stock options vested during the nine months ended August 31, 2008, and August 25,
2007 was $17,000 and $15,000, respectively, and $655,000 for restricted common
stock during the nine months ended August 31, 2008.
Exercise
prices for options outstanding as of August 31, 2008 are as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number of shares
|
|
Weighted-Average
Remaining Contractual
Life
|
|
Number of options
vested
|
|
Weighted-Average
Remaining Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
$0.39 - $0.41
|
|
190,064
|
|
5.0
|
|
183,814
|
|
4.8
|
|
$1.00 - $1.02
|
|
2,002,100
|
|
5.9
|
|
2,002,100
|
|
5.9
|
|
$1.27 - $1.30
|
|
60,982
|
|
4.5
|
|
60,982
|
|
4.5
|
|
$1.58 - $1.63
|
|
610,000
|
|
5.9
|
|
610,000
|
|
5.9
|
|
$5.91
|
|
450,000
|
|
6.8
|
|
450,000
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,313,146
|
|
5.9
|
|
3,306,896
|
|
5.9
|
|
The
following table summarizes the stock option activity by plan.
|
|
Total Number
of Options
|
|
2004 Incentive
Plan
|
|
2000 Employee
Plan
|
|
2000 Director
Plan
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2007
|
|
3,626,046
|
|
3,222,500
|
|
200,000
|
|
203,546
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(12,900
|
)
|
(12,900
|
)
|
|
|
|
|
Forfeited / Cancelled
|
|
(300,000
|
)
|
(100,000
|
)
|
(200,000
|
)
|
|
|
Outstanding at August 31, 2008
|
|
3,313,146
|
|
3,109,600
|
|
|
|
203,546
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 31, 2008
|
|
3,306,896
|
|
3,103,350
|
|
|
|
203,546
|
|
There were no options
granted or exercised in the first or second quarters of fiscal 2008. In the
third quarter of fiscal 2008, there were no options granted. During the third
quarter of fiscal 2008, one employee exercised an option to purchase 12,900
shares of common stock and Joes also issued 63,870 shares of its common stock
to the holders of RSUs and withheld 31,455 RSUs to cover the minimum tax
withholding obligation for each employee.
15
Table of
Contents
A summary of the status of
restricted common stock and RSUs as of November 30, 2007, and changes
during the nine months ended August 31, 2008, is presented below:
|
|
|
|
|
|
|
|
Weighted-Average Grant-Date Fair
Value
|
|
|
|
Restricted
Shares
|
|
Restricted Stock
Units
|
|
Total Shares
|
|
Restricted
Shares
|
|
Restricted Stock
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
1.46
|
|
Cancelled
|
|
|
|
(31,455
|
)
|
|
|
|
|
1.46
|
|
Forfeited
|
|
|
|
(60,000
|
)
|
(60,000
|
)
|
|
|
(1.46
|
)
|
Outstanding at August 31, 2008
|
|
289,182
|
|
590,275
|
|
974,782
|
|
$
|
1.59
|
|
$
|
1.46
|
|
NOTE 10 COMMITMENTS AND CONTINGENCIES
Earn Out
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; plus (ii) three percent of the gross profit from $22,501,000
to $31,500,000; plus (iii) two percent of the gross profit from
$31,501,000 to $40,500,000; plus (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 profits 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. For
the nine months ended August 31, 2008, Joes has recorded $1,048,000 of
earn-out payments as additional goodwill.
Retail Leases
Joes leases retail store locations under operating lease agreements
expiring on various dates through 2018 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, 2008,
the future minimum rental payments under non-cancelable retail operating leases
with lease terms in excess of one year were as follows:
Period
|
|
Future Payments
|
|
2008 (remainder of year)
|
|
$
|
121
|
|
2009
|
|
1,041
|
|
2010
|
|
1,078
|
|
2011
|
|
1,119
|
|
2012
|
|
1,160
|
|
Thereafter
|
|
7,770
|
|
|
|
$
|
12,289
|
|
In September and October 2008,
Joes entered into two additional lease agreements for the lease of retail
space in Santa Monica, California and Camarillo, California. Joes expects cumulative future minimum lease
payments of approximately $6,012,000 under these lease agreements.
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.
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, including our Annual Report on Form 10-K
for the year ended November 30, 2007 and Amendment No. 1 to our
Annual Report of Form 10-K/A, or collectively, the Annual Report. 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.
The following discussion
provides information and analysis of our results of operations for the three
and nine month periods ended August 31, 2008 and August 25, 2007, and
our liquidity and capital resources. The
following discussion and analysis should be read in conjunction with our notes
to our accompanying condensed consolidated financial statements included
elsewhere herein.
Introduction
This discussion and analysis
summarizes the significant factors affecting our results of operations and
financial condition during the three and nine month periods ended August 31,
2008 and August 25, 2007. This
discussion should be read in conjunction with our accompanying condensed
consolidated financial statements, our notes to condensed consolidated
financial statements and supplemental information in Item 1 of this Quarterly
Report. The discussion and analysis
contains statements that may be considered forward-looking. These statements contain a number of risks and
uncertainties as discussed here, under the heading Forward-Looking Statements
of this Quarterly Report that could cause actual results to differ materially.
Executive
Overview
Our
principal business activity has evolved into the design, development and
worldwide marketing of 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 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 as well as craft and accessory products. Since fiscal 2006, we have not had any sales
of these other products.
18
Table of
Contents
In
fiscal 2007, we continued to implement our transition plan to focus our
operations on our Joes® brand after we sold the assets or ceased operations of
our other branded and private label apparel and accessory 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 Inc., or 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, belts and small
leather goods bearing the Joes® brand to be effective upon completion of the
merger. In October 2007, we
completed the merger and acquired the Joes® brand. In exchange for all of the rights for the Joes®
brand, we issued 14,000,000 shares of our common stock, $300,000 in cash and
entered into an employment agreement with Joe Dahan, the principal designer and
sole stockholder of JD Holdings. As part
of the merger consideration, we are also obligated to pay Mr. Dahan a percentage
of our gross profits until 2017 above $11,251,000. In addition to owning approximately 24
percent of our total shares outstanding, after the merger, Mr. Dahan
became an executive officer and a member of our Board of Directors.
We
reported net income for the full fiscal year of 2007 for the first time since
2002 and have also reported net income for the past six consecutive
quarters. While we have strived to
reduce costs and implement cost saving measures in order to generate net
income, there can be no assurance that we can continue to improve our net
sales, gross profit or maintain expenses in order to continue to generate net
income. Our strategic plan for the
remainder of 2008 and 2009 includes entering into lease agreements to open
retail and outlet stores, improving international sales, increasing sales from
our mens and childrens product lines, evaluating licensing opportunities for
other product categories and enhancing the quality, fit and products available
in our collection beyond denim bottoms.
In the first nine months of fiscal 2008, we entered into two leases for
retail outlet space at Woodbury Common Premium Outlets® in Central Valley, New
York and Orlando Premium Outlets® in Orlando, Florida and two leases for full
price retail stores in Chicago, Illinois and San Francisco, California. We opened our first full price retail store
in Chicago in October 2008 and expect to open the remainder of the stores
in by the end of the calendar year of 2008.
Subsequent to our quarter end, we also entered into two additional
leases 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 expect to open these stores in fiscal
2009. We believe that the retail store
strategy will enhance our net sales and gross profit and the outlet store
strategy will allow us to sell our overstock or slow moving items at higher
profit margins. We are actively looking
for other retail leases for fiscal 2009 and beyond. In addition, we have been focusing on
designing an entire collection of products to be available and showcased in
retail stores. To assist us in improving
and strategically growing international sales, we have had two consultants
based in Europe to assist us in entering into agent and distributor agreements
worldwide. We feel that direct contact
with agents and distributors will give us better control over their management
and direction.
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.
In
October 2007, we changed our fiscal year end from a thirteen-week
quarterly reporting period to a last day of the month quarterly reporting
period to reflect standard quarterly accounting periods. The modification of the fiscal year or
quarters did not have a material effect on our financial condition, results of
operations or cash flows.
19
Table of
Contents
Comparison of Three Months Ended August 31, 2008 to Three Months
Ended August 25, 2007
Results of Operations
The
following table sets forth certain statements of operations data for the
periods as indicated:
|
|
Three months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2008
|
|
August 25, 2007
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,248
|
|
$
|
15,708
|
|
$
|
2,540
|
|
16
|
%
|
Cost of goods sold
|
|
9,303
|
|
9,123
|
|
180
|
|
2
|
%
|
Gross profit
|
|
8,945
|
|
6,585
|
|
2,360
|
|
36
|
%
|
Gross margin
|
|
49
|
%
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative
|
|
6,134
|
|
5,335
|
|
799
|
|
15
|
%
|
Depreciation
|
|
70
|
|
91
|
|
(21
|
)
|
(23
|
)%
|
Income from operations
|
|
2,741
|
|
1,159
|
|
1,582
|
|
136
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(133
|
)
|
(203
|
)
|
70
|
|
(34
|
)%
|
Income before provision for taxes
|
|
2,608
|
|
956
|
|
1,652
|
|
173
|
%
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
368
|
|
43
|
|
325
|
|
756
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,240
|
|
$
|
913
|
|
$
|
1,327
|
|
145
|
%
|
Three Months Ended August 31, 2008 Overview
For the three months ended August 31,
2008, or the third quarter of fiscal 2008, our net sales increased to
$18,248,000 from $15,708,000 for the three months ended August 25, 2007,
or the third quarter fiscal 2007, a 16 percent increase. We generated net income in the amount of
$2,240,000 for the third quarter of fiscal 2008 compared to $913,000 for the
third quarter of fiscal 2007.
The primary reason for the
increase in net income from the third quarter of fiscal 2008 compared to the
third quarter of fiscal 2007 was a 16% increase in our net sales coupled with a
seven percentage point increase in our gross margin due to shifting the
sourcing of products from the U.S. to lower cost facilities in Mexico and
Morocco.
Net Sales
Our
net sales increased to $18,248,000 for the third quarter of fiscal 2008 from
$15,708,000 for the third quarter of fiscal 2007, a 16 percent increase. This increase can be attributed to a
continued (i) strong demand for denim apparel products in the marketplace,
(ii) brand acceptance and recognition for Joes® products, and (iii) growth
from European sales, domestic womens, mens and childrens product lines and
e-commerce sales.
20
Table of
Contents
Gross Profit
Our
gross profit increased to $8,945,000 for the third quarter of fiscal 2008 from
$6,585,000 for the third quarter of fiscal 2007, a 36 percent increase. Our overall gross margin increased to 49
percent for the third quarter of fiscal 2008 from 42 percent for the third
quarter of fiscal 2007, a seven percentage point increase.
The
increase in our gross profit was primarily due to an increase in net sales of
16 percent and a seven percentage point increase in our gross margin. The increase in gross margin was due to a
shifting of a greater percentage of our production requirements from the United
States to lower cost facilities in Mexico and Morocco, which reduced our costs
of goods sold.
Selling, General and Administrative Expense
Selling,
general and administrative, or SG&A, expenses increased to $6,134,000 for
the third quarter of fiscal 2008 from $5,335,000 for the third quarter of
fiscal 2007, a 15 percent increase.
The
SG&A increase in the third quarter of fiscal 2008 compared to the third
quarter of fiscal 2007 is mostly due to (i) an increase of $403,000 in
employee and employee-related expenses due to a higher headcount in the third
quarter of fiscal 2008 compared to fiscal 2007 to support our sales growth
including hiring personnel to support our retail strategy; (ii) an increase
of $216,000 in stock-based compensation expense due to the issuance of
restricted common stock and restricted stock units in the fourth quarter of
fiscal 2007 and first quarter of fiscal 2008, respectively; (iii) an
increase of $360,000 in professional fees primarily due to an increase in legal
fees from lawsuits in the ordinary course of business and consulting fees to
support our retail strategy and European operations; and (iv) an increase
of $250,000 in facilities and distribution related expenses due to higher net
sales domestically and internationally.
These increases were partially offset by (i) a decrease of $320,000
in royalty expenses due to no longer having an obligation to pay a three
percent royalty on net sales to JD Holdings; and (ii) a decrease of
$110,000 in other business expenses due to better oversight and control on
costs.
Interest Expense
Our
combined interest expense decreased to $133,000 for the third quarter of fiscal
2008 from $203,000 for the third quarter of fiscal 2007, a 34 percent
decrease. Our interest expense primarily
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 third quarter of fiscal 2008, our income tax expense was $368,000 compared
to $43,000 for the third quarter of fiscal 2007. Our effective tax rate was 14 percent for the
third quarter of fiscal 2008 and five percent for the third quarter of fiscal
2007. We expect our effective tax rate
to be approximately 11 percent during fiscal 2008. For the three months ended August 31,
2008 and August 25, 2007, 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.
21
Table of
Contents
Comparison
of Nine Months Ended August 31, 2008 to Nine Months Ended August 25,
2007
Results
of Operations
The
following table sets forth certain statements of operations data for the
periods as indicated:
|
|
Nine months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2008
|
|
August 25, 2007
|
|
$
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
51,413
|
|
$
|
44,693
|
|
$
|
6,720
|
|
15
|
%
|
Cost of goods sold
|
|
27,242
|
|
25,664
|
|
1,578
|
|
6
|
%
|
Gross profit
|
|
24,171
|
|
19,029
|
|
5,142
|
|
27
|
%
|
Gross margin
|
|
47
|
%
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative
|
|
17,706
|
|
16,922
|
|
784
|
|
5
|
%
|
Depreciation
|
|
244
|
|
266
|
|
(22
|
)
|
(8
|
)%
|
Operating income
|
|
6,221
|
|
1,841
|
|
4,380
|
|
238
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(492
|
)
|
(598
|
)
|
106
|
|
(18
|
)%
|
Other expense
|
|
|
|
(25
|
)
|
25
|
|
(100
|
)%
|
Income before provision for taxes
|
|
5,729
|
|
1,218
|
|
4,511
|
|
370
|
%
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
631
|
|
56
|
|
575
|
|
1,027
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,098
|
|
$
|
1,162
|
|
$
|
3,936
|
|
339
|
%
|
Nine
Months Ended August 31, 2008 Overview
For
the nine months ended August 31, 2008, our net sales increased to
$51,413,000 from $44,693,000 for the nine months ended August 25, 2007, a
15 percent increase. We generated net
income of $5,098,000 for the nine months ended August 31, 2008 compared to
$1,162,000 for the nine months ended August 25, 2007.
The
primary reason for the increase in net income for the nine months ended August 31,
2008 compared to August 25, 2007 was a 15% increase in our net sales
coupled with a four percentage point increase in our gross margin due to
shifting the sourcing of our products from the U.S. to lower cost facilities in
Mexico and Morocco.
Net
Sales
Our
net sales increased to $51,413,000 for the nine months ended August 31,
2008 compared to $44,693,000 for the nine months ended August 25, 2007, a
15 percent increase.
The
increase can be attributed to continued brand acceptance for our Joes Jeans®
products in the marketplace by retailers and customers during the first nine
months of fiscal 2008. In an effort to
increase our net sales during the first nine months of fiscal 2008, we focused
on expansion by increasing the
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number
of department store doors carrying our products, increasing the average
inventory per door, increasing the number of retailers participating in our
replenishment program for our core basic styles offered continuously throughout
the year, growing the retail and specialty stores that carry our mens and
childrens product lines and offering more products to our retailers and
customers. We also experienced an
increase in our European sales in the first nine months of fiscal 2008 after we
terminated our former international distributor in February 2007 and an
increase in sales from our recently introduced mens and childrens product
lines.
Gross
Profit
Our
gross profit increased to $24,171,000 for the nine months ended August 31,
2008 from $19,029,000 for the nine months ended August 25, 2007, a 27
percent increase. Our gross margin
percentage increased to 47 percent for the nine months ended August 31,
2008 from 43 percent for the nine months ended August 25, 2007, a four
percentage point increase.
The
increase in our gross profit was primarily due to an increase in net sales of
15 percent and a four percentage point increase in our gross margin. The increase in our gross margin was due to
shifting a greater percentage of our production requirements from the United
States to lower cost facilities in Mexico and Morocco in the first nine months
of fiscal 2008 compared to the first nine months of fiscal 2007, which reduced
our costs of goods sold.
Selling,
General and Administrative Expenses
Selling,
general and administrative, or SG&A, expenses increased to $17,706,000 for
the nine months ended August 31, 2008 from $16,922,000 for the nine months
ended August 25, 2007, a five percent increase.
The
SG&A increase in the nine months ended August 31, 2008 compared to the
nine months ended August 25, 2007 is mostly due to (i) an increase of
$1,160,000 in employee and employee-related expenses due to a higher headcount
in the first nine months of fiscal 2008 compared to fiscal 2007 to support our
sales growth, including hiring personnel to support our retail strategy; (ii) an
increase of $310,000 in sample expenses to support our development of a full
collection of items; (iii) an increase of $640,000 in stock-based
compensation expense due to the issuance of restricted common stock and
restricted stock units in the fourth quarter of fiscal 2007 and first quarter of
fiscal 2008, respectively; (iv) an increase of $564,000 in facilities and
distribution related expenses due to increases in net sales both domestically
and internationally; (v) an increase of $478,000 in professional fees
primarily due to an increase in legal fees from lawsuits in the ordinary course
of business and consulting fees to support our retail strategy and European
expansion; (vi) an increase of $110,000 in advertising and tradeshow
expenses; and (vii) an increase of $160,000 in factor and bank fees due to
the increase in our net sales. These
increases were offset by (i) a non-cash charge of $1,483,000 in May 2007
in connection with the settlement agreement with our former international
distributor; (ii) a decrease of $775,000 in royalty expense due to no
longer having an obligation to pay a three percent royalty on net sales to JD
Holdings; and (iii) a decrease of $380,000 in other expenses primarily due
to a decrease in bad debt expense.
Interest Expense
Our
combined interest expense decreased to $492,000 for the nine months ended August 31,
2008 from $598,000 for the nine months ended August 25, 2007, an 18
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.
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Other
Expense
For
the nine months ended August 25, 2007, other expense was $25,000. The other expense of $25,000 for the nine months
ended August 25, 2007 is associated with a shortfall in the amount of
insurance proceeds received from the loss of certain raw materials.
Income
Tax
For
the nine months ended August 31, 2008, our income tax expense was $631,000
compared to $56,000 for the nine months ended August 25, 2007. Our effective tax rate was 11 percent for the
nine months ended August 31, 2008 and five percent for the nine months
ended August 25, 2007. We expect
our effective tax rate to be approximately 11 percent during fiscal 2008. For the nine months ended August 31,
2008 and August 25, 2007, 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.
Liquidity and Capital Resources
Our primary sources of liquidity are: (i) cash
from sales of our Joes® products; and (ii) cash from sales of our
accounts receivables and advances against inventory. For the nine months ended August 31,
2008, we generated $3,533,000 of cash flow from operations. The primary uses for our cash flows from
operations were $1,048,000 to pay the earn-out payment under the merger
agreement and $411,000 for purchases of property and equipment. We repaid $301,000 of our factor borrowings
and our cash balance increased by $1,786,000 to $3,117,000 as of August 31,
2008.
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
Commercial Services, Inc., a unit of CIT Group, or CIT, through guarantees
by certain related parties.
During the third quarter of fiscal 2008, 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 and obtaining advances under our inventory security agreements with
CIT. 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. 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, 2008, our cash availability with CIT was
approximately $1,042,000. 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
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
written notice prior to June 30, 2010 or earlier provided that the minimum
factoring fees have been paid for the respective period.
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The factoring rate that we pay to CIT to factor
accounts is at 0.6 percent for accounts which CIT bears the credit risk and 0.4
percent for accounts which we bear the credit risk and the interest rate
associated with the agreements is at 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, 2008, we had $9,353,000 of
factored receivables with CIT and a loan balance of $2,792,000 for inventory
advances. We had 12 letters of credit in the aggregate amount of $446,000
outstanding as of August 31, 2008.
For the remainder of fiscal 2008, our primary
capital needs are for our operating expenses, including funds to support our
retail strategy, which includes opening retail stores, and working capital
necessary to fund inventory purchases, capital expenditures for our expected
retail stores and finance extensions of our trade credit to our customers. We anticipate funding our operations through
working capital generated by the following: (i) cash flow from sales of
our products; (ii) reducing our inventory levels and managing our
operating expenses; (iii) maximizing our 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.
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 2008. 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 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.
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Revenue Recognition
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.
Accounts Receivable and Due from Factor and Allowance for Customer
Credits and Other 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 uncollectible
accounts, customer credits and allowances as of August 31, 2008 and November 30,
2007 was $590,000 and $652,000 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.
When we determine that the carrying value of
intangibles, long-lived assets and goodwill may not be recoverable based upon
the existence of one or more of the above indicators of impairment, we will
measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management.
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In fiscal 2007, we acquired through merger all of
the intangible assets and goodwill related to the Joes®, Joes Jeans and JD®
logo and marks. For fiscal 2007, we did
not recognize any impairment related to the intangible assets and goodwill of
our Joes® brand since we acquired it in October 2007. We have assigned an
indefinite life to these intangible assets and therefore, no amortization
expenses are expected to be recognized.
However, we will test the assets for impairment annually in accordance
with our critical accounting policies.
Additional Merger Consideration (Earn-out)
In connection with the merger with JD Holdings, we
agreed to pay to Mr. Dahan the following additional payments in the
applicable fiscal year for 120 months following October 25, 2007:
·
No earn out if the gross profit is less than
$11,250,000 in the applicable fiscal year;
·
11.33 percent of the gross profit above
$11,251,000 to $22,500,000; plus
·
an additional three percent of the gross
profit from $22,501,000 to $31,500,000; plus
·
an additional two percent of the gross profit
from $31,501,000 to $40,500,000; plus
·
an additional one percent of the gross profit
above $40,501,000.
The additional merger consideration, or earn-out,
will be paid in advance on a monthly basis based upon estimates of gross
profits 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.
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 have determined that accounting for the earn-out as
additional purchase price is proper. Advanced earn-out payments are recorded as
additional goodwill. For the nine months
ended August 31, 2008, we have recorded $1,048,000 of earn-out payments as
additional goodwill.
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 current
year net income was offset by net operating losses that carried forward.
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Contingencies
We
account for contingencies, other than income tax contingencies, in accordance
with Statement of Financial Accounting Standards, or SFAS No. 5, Accounting
for Contingencies. 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 Statement of Financial Accounting Standards, or SFAS, 123(R), Share Based
Payment 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 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, which are applied consistent with the prior
year. 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
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. See Notes to Condensed
Consolidated Financial Statements Note 9 Stockholders Equity Stock
Incentive Plans for additional discussion of SFAS 123(R).
Recent Accounting Pronouncements
On
July 13, 2006, the FASB issued Interpretation No. 48, or FIN No. 48,
Accounting for Uncertainty in Income Taxes: An interpretation of FASB
Statement No. 109. This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN No. 48
prescribes a recognition threshold and measurement principles for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. This interpretation is effective
for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective December 1,
2007. The adoption of FIN No. 48
did not have a material impact on our results of operations, consolidated
financial position or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS No. 157, which defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements. SFAS No. 157
requires companies to disclose the fair value
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of
their financial instruments according to a fair value hierarchy (i.e., levels
1, 2, and 3, as defined). Additionally, companies are required to provide enhanced
disclosure regarding instruments in the level 3 category, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. We adopted SFAS No. 157 on December 1,
2007. Given the nature of our current
financial instruments, the adoption of SFAS No. 157 did not have a
material impact on our results of operations or consolidated financial
position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected will be recognized in earnings at
each subsequent reporting date. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 on December 1,
2007. Given the nature of our current
financial instruments, the adoption of SFAS No. 159 did not have a
material impact on our results of operations or consolidated financial
position.
On December 4, 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) will significantly
change the accounting for business combinations. Under SFAS No. 141(R), an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141(R) also includes a substantial
number of new disclosure requirements.
SFAS No. 141(R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, which is the
year beginning December 1, 2009 for us.
We are currently evaluating the impact that SFAS No. 141(R) will
have on our financial statements.
On December 4, 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements-an Amendment of
Accounting Research Bulletin (ARB) No. 51, or SFAS No. 160. SFAS No. 160 establishes new accounting
and reporting standards for a non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements separate from the parents equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net income on the
face of the income statement. SFAS No. 160 clarifies that changes in a
parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain
or loss will be measured using the fair value of the non-controlling equity investment
on the deconsolidation date. SFAS No. 160
also includes expanded disclosure requirements regarding the interests of the
parent and its non-controlling interest.
SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, which
is the year beginning December 1, 2009 for us. We are currently evaluating the impact that
SFAS No. 160 will have on our financial statements.
In
June 2008, the FASB, ratified Emerging Issues Task Force, or EITF, Issue No. 08-3
Accounting by Lessees for Nonrefundable Maintenance Deposits Under Lease
Arrangements, or EITF 08-3. EITF 08-3
provides guidance for accounting for nonrefundable maintenance deposits paid by
a lessee to a lessor. It also provides
revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years
beginning after December 15, 2008 and is not applicable to us.
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In
May 2008, the FASB issued SFAS No. 162 The Hierarchy of Generally
Accepted Accounting Principles, or SFAS 162.
SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements that are presented in conformity with generally accepted
accounting principles. SFAS 162 is
effective 60 days following the Securities and Exchange Commissions approval
of the Public Company Accounting Oversight Board amendments to AU Section 411
The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. We do not expect the
adoption of SFAS 162 to impact our results of operations, financial position or
cash flows.
Item 3.
Quantitative and Qualitative
Disclosure About Market Risk.
We are exposed to certain market risks arising from
transactions in the normal course of our business. Such risk is principally associated with
interest rate and changes in our credit standing.
Interest Rate Risk
Our obligations under our receivable and inventory
agreements bear interest at floating rates (primarily JP Morgan Chase prime
rate); therefore, we are sensitive to changes in prevailing interest
rates. We believe that a one percent
increase or decrease in market interest rates that affect our financial
instruments would have an immaterial impact on earnings or cash flow during the
next fiscal year.
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions,
including firm commitments and anticipated contracts, denominated in a currency
other than an entitys functional currency and from foreign-denominated
revenues translated into U.S. dollars.
We generally sell our products in U.S. dollars. However, we sell an immaterial amount of our
products in Euros. Changes in currency
exchange rates may affect the relative prices at which we and our foreign
competitors sell products in the same market and collect receivables from such
sales. We currently do not hedge our
exposure to changes in foreign currency exchange rates. We cannot assure you that foreign currency
fluctuations will not have a material adverse impact on our financial condition
and results of operations.
We also source most of our products outside of the
U.S. However, we generally purchase our
products in U.S. dollars. The cost of
these products may be affected by changes in the value of the relevant
currencies; however, our exposure to currency exchange rates is limited as a
result of such companies outside of the U.S. accepting payment in U.S. dollars.
Item 4.
Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
of August 31, 2008, 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 the design and operation of our disclosure
controls and procedures pursuant to Securities Exchange Act Rule 15d-15.
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Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act
of 1934, or 1934 Act, is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms. Management recognizes that a control system,
no matter how well conceived 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 the objective of ensuring that information required to be
disclosed in our reports filed or submitted under the 1934 Act is recorded,
processed, summarized and reported within the time periods specified in the SEC
rules and forms. In addition, our
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 1934 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 disclosure.
Our Chief Executive Officer and Chief Financial
Officer have concluded, based on our evaluation of our disclosure controls and
procedures, that our disclosure controls and procedures under Rule 13a-15(e) and
Rule 15d-15(e) of the 1934 Act are 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.
Item 4T.
Controls and Procedures.
Not Applicable.
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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 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.
There
have been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended November 30,
2007.
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.
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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
|
33
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,
2008
|
/s/
Marc B. Crossman
|
|
Marc
B. Crossman
|
|
Chief
Executive Officer (Principal Executive Officer),
President and Director
|
|
|
|
|
|
/s/
Hamish Sandhu
|
|
Hamish
Sandhu
|
|
Chief
Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
34
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
|
35
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