UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Quarterly Period Ended: March 31, 2007
Commission
File Number: 000-33297
BLUE
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0450923
|
(State
or other jurisdiction of
|
(IRS
Employer
|
incorporation
or organization)
|
Identification
No.)
|
4901
Zambrano St., Commerce, CA 90040
(Address
of principal executive offices)
(323)
726-0297
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
Accelerated Filer o
Accelerated
Filer o Non-accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o No
x
As
of May
9, 2007, 26,057,200 shares of the registrant’s common stock were
outstanding.
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
PART
I
|
Financial
Information
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements
|
4
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2007
|
|
|
(Restated,
Unaudited) and December 31, 2006
|
4
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations for
|
|
|
the
three months ended March 31, 2007 (as restated) and 2006
|
5
|
|
|
|
|
Unaudited
Condensed Consolidated Statement of Shareholders’ Equity
|
|
|
for
the three months ended March 31, 2007 (as restated) and
2006
|
6
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for
|
|
|
the
three months ended March 31, 2007 (as restated) and 2006
|
7
|
|
|
|
|
Notes
to the Unaudited Condensed Consolidated Financial Statements
|
|
|
for
the three months ended March 31, 2007 (as restated) and
2006
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
26
|
|
|
|
Item
4.
|
Controls
and Procedures
|
40
|
|
|
|
|
|
|
PART
II
|
Other
Information
|
|
|
|
|
Item
6.
|
Exhibits
|
42
|
EXPLANATORY
NOTE
Blue
Holdings, Inc. is filing this Amendment No. 1 to its Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2007 filed with the Securities
and
Exchange Commission on May 15, 2007 (the “Form 10-Q”). This filing amends and
restates our unaudited condensed consolidated balance sheet as of March 31,
2007, and the condensed consolidated statements of operations, stockholders
equity, and cash flows for the three month period ending March 31, 2007 to
reflect the Company’s failure to record $240,435 of inventory purchased from a
vendor that was directly paid for by Mr. Guez. The Company has now agreed to
a
settlement with Mr. Guez relating to these disputed amounts. The effects of
the
settlement agreement on the Form 10-Q for the three months ending March 31,
2007
are detailed in Note 1(d) of the accompanying restated condensed consolidated
financial statements.
This
Amendment No. 1 amends and restates the following items of the Form 10-Q as
described above: (i) Part I, Item 1 – Financial Statements; (ii) Part I, Item 2
– Management’s Discussion and Analysis of Result of Operations and Financial
Condition; (iii) Part I, Item 4 – Controls and Procedures and (iv) Part II, Item
6 - Exhibits.
All
information in the Form 10-Q, as amended by this Amendment No. 1, speaks as
to
the date of the original filing of our Form 10-Q for such period and does not
reflect any subsequent information or events except as noted in this Amendment
No. 1. All information contained in this Amendment No. 1 is subject to updating
and supplementing as provided in our reports, as amended, filed with the
Securities and Exchange Commission subsequent to the date of the initial filing
of the Form 10-Q.
PART
I
ITEM
1. CONDENSED
FINANCIAL STATEMENTS
BLUE
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(As
Restated)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
164,104
|
|
$
|
109,031
|
|
Due
from factor, net of reserves of $0 and $178,801,
respectively
|
|
|
17,276
|
|
|
1,366,588
|
|
Accounts
receivable, net of reserves of $1,169,330 and $901,941,
respectively:
|
|
|
-
|
|
|
|
|
-
Purchased by factor with recourse
|
|
|
8,535,383
|
|
|
7,662,198
|
|
-
Others
|
|
|
176,299
|
|
|
19,312
|
|
Inventories,
net of reserves of $1,289,508 and $1,742,893 respectively
|
|
|
8,805,701
|
|
|
5,394,006
|
|
Due
from related parties
|
|
|
-
|
|
|
-
|
|
Income
taxes receivable
|
|
|
2,053,235
|
|
|
2,030,919
|
|
Deferred
income taxes
|
|
|
2,295,958
|
|
|
2,488,082
|
|
Prepaid
expenses and other current assets
|
|
|
688,381
|
|
|
396,810
|
|
Total
current assets
|
|
|
22,736,337
|
|
|
19,466,946
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
453,972
|
|
|
-
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,564,191
|
|
|
1,611,171
|
|
Total
assets
|
|
$
|
24,754,500
|
|
$
|
21,078,117
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
412,682
|
|
$
|
266,788
|
|
Accounts
payable
|
|
|
3,575,144
|
|
|
2,820,024
|
|
Short-term
borrowings
|
|
|
12,420,272
|
|
|
10,026,814
|
|
Due
to related parties
|
|
|
630,865
|
|
|
710,153
|
|
Advances
from majority shareholder
|
|
|
2,292,331
|
|
|
1,876,991
|
|
Current
portion of liability for unrecognized tax benefits
|
|
|
145,568
|
|
|
-
|
|
Current
portion of convertible debt
|
|
|
-
|
|
|
|
|
Accrued
expenses and other current liabilities
|
|
|
1,869,294
|
|
|
2,133,932
|
|
Total
current liabilities
|
|
|
21,346,156
|
|
|
17,834,702
|
|
|
|
|
|
|
|
|
|
Non-current
portion of liability for unrecognized tax benefits
|
|
|
170,884
|
|
|
|
|
Non-current
portion of convertible debt
|
|
|
-
|
|
|
|
|
Total
liabilities
|
|
|
21,517,040
|
|
|
17,834,702
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock $0.001 stated value, 5,000,000 shares authorized,
1,000,000
|
|
|
|
|
|
|
|
Series
A convertible shares issued with 6% cumulative dividend of
the
|
|
|
|
|
|
|
|
designated
purchase price and initial conversion price of $0.7347
|
|
|
-
|
|
|
|
|
Common
stock $0.001 par value, 75,000,000 shares authorized,
|
|
|
|
|
|
|
|
26,057,200
shares issued and outstanding
|
|
|
26,057
|
|
|
26,057
|
|
Additional
paid-in capital
|
|
|
5,017,110
|
|
|
4,964,091
|
|
Accumulated
deficit
|
|
|
(1,805,707
|
)
|
|
(1,746,733
|
)
|
Total
stockholders' equity
|
|
|
3,237,460
|
|
|
3,243,415
|
|
Total
liabilities and stockholders' equity
|
|
$
|
24,754,500
|
|
$
|
21,078,117
|
|
SEE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
|
|
2007
|
|
2006
|
|
|
|
(As
Restated)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
8,440,222
|
|
$
|
11,877,879
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
3,608,196
|
|
|
5,928,616
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,832,026
|
|
|
5,949,263
|
|
|
|
|
|
|
|
|
|
Selling,
distribution & administrative expenses
|
|
|
4,520,568
|
|
|
4,600,407
|
|
|
|
|
|
|
|
|
|
Loss
before other expenses and
|
|
|
|
|
|
|
|
provision
for income taxes
|
|
|
311,458
|
|
|
1,348,856
|
|
|
|
|
|
|
|
|
|
Other
expenses - Interest expense
|
|
|
338,144
|
|
|
171,313
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
(26,686
|
)
|
|
1,177,543
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
497,367
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(26,686
|
)
|
$
|
680,176
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share, basic and diluted
|
|
$
|
0.00
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
26,057,200
|
|
|
26,057,200
|
|
SEE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY)
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (UNAUDITED)
(RESTATED)
|
|
Common
Shares Issued
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Par
Value
|
|
Paid
In
|
|
Accumulated
|
|
|
|
|
|
Number
|
|
0.001
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
26,057,200
|
|
$
|
26,057
|
|
$
|
4,964,091
|
|
$
|
(1,746,733
|
)
|
$
|
3,243,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of vested stock options
|
|
|
-
|
|
|
-
|
|
|
53,019
|
|
|
|
|
|
53,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of FIN 48
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(32,288
|
)
|
|
(32,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period (as restated)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(26,686
|
)
|
|
(26,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008 (as restated)
|
|
|
26,057,200
|
|
$
|
26,057
|
|
$
|
5,017,110
|
|
$
|
(1,805,707
|
)
|
$
|
3,237,460
|
|
SEE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)
|
|
2007
|
|
2006
|
|
|
|
(As
Restated)
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(26,686
|
)
|
$
|
680,176
|
|
Adjustments
to reconcile net income to cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
90,601
|
|
|
26,020
|
|
Stock
based exchange transaction expense
|
|
|
-
|
|
|
114,497
|
|
Fair
value of vested stock options
|
|
|
53,019
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,030,172
|
)
|
|
(575,793
|
)
|
Due
from factor
|
|
|
1,349,312
|
|
|
(571,925
|
)
|
Income
taxes receivable
|
|
|
(22,316
|
)
|
|
-
|
|
Inventories
|
|
|
(3,411,695
|
)
|
|
(2,152,278
|
)
|
Due
to related parties
|
|
|
(79,288
|
)
|
|
333,877
|
|
Due
from related parties
|
|
|
-
|
|
|
15,974
|
|
Deferred
income taxes
|
|
|
22,316
|
|
|
(138,292
|
)
|
Prepaid
expenses and other current assets
|
|
|
(291,571
|
)
|
|
56,068
|
|
Income
tax payable
|
|
|
-
|
|
|
(53,515
|
)
|
Bank
overdraft
|
|
|
145,894
|
|
|
(76,691
|
)
|
Accounts
payable
|
|
|
755,120
|
|
|
427,550
|
|
Due
to customers
|
|
|
-
|
|
|
88,208
|
|
Other
current liabilities
|
|
|
(264,638
|
)
|
|
(174,053
|
)
|
Net
cash used in operating activities
|
|
|
(2,710,104
|
)
|
|
(2,000,177
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(43,621
|
)
|
|
(181,221
|
)
|
Net
cash used in investing activities
|
|
|
(43,621
|
)
|
|
(181,221
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
2,393,458
|
|
|
2,059,202
|
|
Advances
from majority shareholder
|
|
|
415,340
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,808,798
|
|
|
2,059,202
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
55,073
|
|
|
(122,196
|
)
|
Cash
at beginning of period
|
|
|
109,031
|
|
|
228,127
|
|
Cash
at end of period
|
|
$
|
164,104
|
|
$
|
105,931
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
338,144
|
|
$
|
171,313
|
|
|
|
|
|
|
|
|
|
Cash
paid for income tax
|
|
$
|
-
|
|
$
|
683,500
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Value
of common stock issued for finders fee relating to exchange
transaction
|
|
$
|
-
|
|
$
|
114,497
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of FIN 48
|
|
$
|
32,288
|
|
$
|
-
|
|
SEE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF
OPERATIONS
(a)
Basis of Presentation
The
interim condensed consolidated financial statements are unaudited, but in the
opinion of management of the Company, contain all adjustments, which include
normal recurring adjustments, necessary to present fairly the financial position
at March 31, 2007 and the results of operations for the three months ended
March
31, 2007 and 2006. The condensed consolidated balance sheet as of December
31,
2006 is derived from the Company’s audited financial statements.
Certain
information and footnote disclosures normally included in financial statements
that have been presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission with respect to interim financial
statements, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, as
filed with the Securities and Exchange Commission.
The
Company’s results of operations for the three months ended March 31, 2007 are
not necessarily indicative of the results of operations to be expected for
the
full fiscal year ending December 31, 2007.
The
condensed consolidated financial statements include the operations of Blue
Holdings, Inc. and its wholly-owned subsidiaries. Intercompany transactions
and
balances are eliminated in consolidation.
(b)
Organization
Blue
Holdings, Inc. was incorporated in the State of Nevada on February 9, 2000.
On
April 14, 2005, Blue Holdings entered into an Exchange Agreement with Antik
Denim, LLC (“Antik”). At the closing of the transactions contemplated by the
Exchange Agreement, which occurred on April 29, 2005, Blue Holdings acquired
all
of the outstanding membership interests of Antik (the “Interests”) from the
members of Antik, and the members contributed all of their Interests to Blue
Holdings. In exchange, Blue Holdings issued to the members 843,027 shares of
Series A Convertible Preferred Stock, par value $0.001 per share, of Blue
Holdings (“Preferred Shares”), which, on June 7, 2005, as a result of a change
to Marine Jet Technology Corp.’s name to Blue Holdings, Inc. and a 1 for 29
reverse stock split, were converted into 24,447,783 shares of Blue Holding’s
common stock on a post-reverse stock split basis.
As
such,
immediately following the closing and upon the conversion of the Preferred
Shares, the Antik members and Elizabeth Guez, our former Chief Operating Officer
and wife of Paul Guez, owned approximately 95.8% of the total issued and
outstanding common stock of Blue Holdings on a fully-diluted basis. Following
completion of the exchange transaction, Antik became a wholly-owned subsidiary
of Blue Holdings. The acquisition was accounted for as a reverse merger
(recapitalization) in the accompanying financial statements with Antik deemed
to
be the accounting acquirer and Blue Holdings deemed to be the legal acquirer.
As
such, the financial statements herein include those of Antik since September
13,
2004 (the date of its inception). All assets and liabilities of Marine Jet
Technology Corp. were assumed by the major shareholder of Blue Holdings, Inc.
prior to the exchange transaction and were inconsequential to the merged
companies.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
On
June
7, 2005, Marine Jet Technology Corp. changed its name to Blue Holdings, Inc.,
and increased its authorized number of shares of common stock to
75,000,000.
On
October 31, 2005, the Company entered into an exchange agreement with Taverniti
So Jeans, LLC, a California limited liability company (“Taverniti”), and the
members of Taverniti (the “Taverniti Members”). Under the exchange agreement,
the Company acquired all of the outstanding membership interests of Taverniti
(the “Taverniti Interests”) from the Taverniti Members, and the Taverniti
Members contributed all of their Taverniti Interests to the Company. In
exchange, the Company issued to the Taverniti Members, on a pro rata basis,
an
aggregate of 500,000 shares of the Common Stock, par value $0.001 per share,
of
the Company, and paid to the Taverniti Members, on a pro rata basis, an
aggregate of Seven Hundred Fifty Thousand Dollars ($750,000). At the closing
of
the exchange transaction, Taverniti became a wholly-owned subsidiary of the
Company. Paul Guez, the Company’s Chairman, Chief Executive Officer, President
and majority shareholder, was and remains the sole manager and was a member
of
Taverniti. Elizabeth Guez, Paul Guez’s spouse and the Company’s former Chief
Operating Officer, was also a member of Taverniti. Two other members of Mr.
and
Mrs. Guez’s family, were the remaining members of Taverniti. The transaction was
accounted for as a combination of entities under common control. As such, the
financial statements herein have been presented to include the operations of
Taverniti since September 13, 2004, the date of its inception, and the $750,000
payment was considered as a deemed distribution to the members of Taverniti
upon
the closing of the combination.
(c)
Nature of Operations
The
Company operates exclusively in the wholesale apparel industry. The Company
designs, develops, markets and distributes high fashion jeans and accessories
under the brand names Antik
Denim,
Yanuk,
U,
Faith
Connexion
and
Taverniti
So Jeans.
The
Company’s products currently include jeans, jackets, belts, purses and T-shirts.
The Company is currently looking into integrating Life
& Death
as one
of its brands. The Company currently sells its products in the United States,
Canada, Japan and the European Union directly to department stores and boutiques
and through distribution arrangements in certain foreign jurisdictions. The
Company is headquartered in Commerce, California and maintains showrooms in
New
York and Los Angeles. The Company opened a retail store in Los Angeles during
August 2005 and another store in San Francisco in July 2006. The retail
operations are not yet significant to the consolidated
operations.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
(d)
Restatement
The
Company has restated its unaudited condensed consolidated balance sheet as
of
September 30, 2007, and the condensed consolidated statements of operations,
stockholders equity (deficiency), and cash flows for the three and nine month
periods ending September 30, 2007.
From
time
to time Paul Guez, the Company’s Chairman of the Board and majority stockholder,
and his spouse Elizabeth Guez made advances to the Company to support its
working capital needs. These advances are part of a line of credit agreement
with Mr. Guez which allows the Company to borrow from him up to a maximum of
$3,000,000 at an interest rate of 6% per annum (the “Revolving Line”). The
Company may repay the advances in full or in part at any time until the
Revolving Line expires and repayment is required on December 31, 2007. The
Company also maintains several due to/from related party accounts with Mr.
Guez
and his affiliated companies where funds are advanced to cover certain operating
expenses. These advances are unsecured, non-interest bearing with no formal
terms of repayment.
In
early
May 2008, Mr. Guez informed the Company of claims for sums he believed were
due
and owing to him pursuant to advances made to and payments made on behalf of
the
Company during fiscal 2007 that were inaccurately recorded in the Company’s
previously filed financial statements for the three and nine month periods
ended
September 30, 2007.
The
Audit
Committee commenced a review of these potential errors and instructed management
to review the Registrant’s books and records to obtain a summary of transactions
recorded and amounts owed per such records. These investigations revealed
accounting errors in the Registrant’s related party accounts pertaining to
payables due Mr. Guez as of March 31, 2007. These errors related to the Company
not recording $240,435 of inventory purchased from a vendor that was directly
paid for by Mr. Guez. The Company has now agreed to a settlement with Mr. Guez
relating to these disputed amounts.
In
light
of this dispute and settlement, the Audit Committee and Management of the
Company have determined that the Company’s unaudited condensed consolidated
financial statements for the three months ended March 31, 2007 need to be
restated due to accounting errors in the Company’s related party accounts. The
effects of the settlement agreement on the previously filed Form 10-Q for the
three months ending March 31, 2007 are summarized as follows:
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(As
initially
|
|
(Adjustment)
|
|
(As
restated)
|
|
|
|
reported)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
164,104
|
|
|
|
|
$
|
164,104
|
|
Due
from factor, net of reserves
|
|
|
17,276
|
|
|
|
|
|
17,276
|
|
Accounts
receivable, net of reserves:
|
|
|
|
|
|
|
|
|
|
|
-
Purchased by factor with recourse
|
|
|
8,535,383
|
|
|
|
|
|
8,535,383
|
|
-
Others
|
|
|
176,299
|
|
|
|
|
|
176,299
|
|
Inventories,
net of reserves
|
|
|
8,805,701
|
|
|
|
|
|
8,805,701
|
|
Due
from related parties
|
|
|
-
|
|
|
|
|
|
-
|
|
Income
taxes receivable
|
|
|
2,053,235
|
|
|
|
|
|
2,053,235
|
|
Deferred
income taxes
|
|
|
2,199,467
|
|
|
96,491
|
(2)
|
|
2,295,958
|
|
Prepaid
expenses and other current assets
|
|
|
688,381
|
|
|
|
|
|
688,381
|
|
Total
current assets
|
|
|
22,639,846
|
|
|
96,491
|
|
|
22,736,337
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
453,972
|
|
|
|
|
|
453,972
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,564,191
|
|
|
|
|
|
1,564,191
|
|
Total
assets
|
|
$
|
24,658,009
|
|
$
|
96,491
|
|
$
|
24,754,500
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
412,682
|
|
|
|
|
|
412,682
|
|
Accounts
payable
|
|
|
3,575,144
|
|
|
|
|
|
3,575,144
|
|
Short-term
borrowings
|
|
|
12,420,272
|
|
|
|
|
|
12,420,272
|
|
Due
to related parties
|
|
|
630,865
|
|
|
|
|
|
630,865
|
|
Advances
from majority shareholder
|
|
|
2,051,896
|
|
|
240,435
|
(1)
|
|
2,292,331
|
|
Current
portion of liability for unrecognized tax benefits
|
|
|
145,568
|
|
|
|
|
|
145,568
|
|
Current
portion of convertible debt
|
|
|
-
|
|
|
|
|
|
-
|
|
Accrued
expenses and other current liabilities
|
|
|
1,869,294
|
|
|
|
|
|
1,869,294
|
|
Total
current liabilities
|
|
|
21,105,721
|
|
|
240,435
|
|
|
21,346,156
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
portion of liability for unrecognized tax benefits
|
|
|
170,884
|
|
|
|
|
|
170,884
|
|
Non-current
portion of convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
liabilities
|
|
|
21,276,605
|
|
|
240,435
|
|
|
21,517,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock $0.001 stated value, 5,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
1,000,000
Series A convertible shares issued with 6%
|
|
|
|
|
|
|
|
|
|
|
cumulative
dividend of the designated purchase price and initial
conversion
price
of $0.7347
|
|
|
|
|
|
|
|
|
|
|
Common
stock $0.001 par value, 75,000,000 shares authorized
|
|
|
26,057
|
|
|
|
|
|
26,057
|
|
Additional
paid-in capital
|
|
|
5,017,110
|
|
|
|
|
|
5,017,110
|
|
Accumulated
deficit
|
|
|
(1,661,763
|
)
|
|
(143,944
|
)
|
|
(1,805,707
|
)
|
Total
stockholders' equity
|
|
|
3,381,404
|
|
|
(143,944
|
)
|
|
3,237,460
|
|
Total
liabilities and stockholders' equity
|
|
$
|
24,658,009
|
|
$
|
96,491
|
|
$
|
24,754,500
|
|
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(As
initially
|
|
(Adjustment)
|
|
(As
restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
8,440,222
|
|
|
|
|
$
|
8,440,222
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
3,367,761
|
|
|
240,435
|
(1)
|
|
3,608,196
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,072,461
|
|
|
(240,435
|
)
|
|
4,832,026
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
distribution & administrative expenses
|
|
|
4,520,568
|
|
|
-
|
|
|
4,520,568
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other expenses and
|
|
|
|
|
|
|
|
|
|
|
provision
for income taxes
|
|
|
551,893
|
|
|
(240,435
|
)
|
|
311,458
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses - Interest expense
|
|
|
338,144
|
|
|
-
|
|
|
338,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
213,749
|
|
|
(240,435
|
)
|
|
(26,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
96,491
|
|
|
(96,491
|
)
(2)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
117,258
|
|
$
|
(143,944
|
)
|
$
|
(26,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share, basic and diluted
|
|
$
|
0.00
|
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(As
initially
|
|
(Adjustment)
|
|
(As
restated)
|
|
|
|
reported)
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
117,258
|
|
$
|
(143,944
|
)
|
|
(26,686
|
)
|
Adjustments
to reconcile net income to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
90,601
|
|
|
|
|
|
90,601
|
|
Stock
based exchange transaction expense
|
|
|
|
|
|
|
|
|
-
|
|
Fair
value of vested stock options
|
|
|
53,019
|
|
|
|
|
|
53,019
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,030,172
|
)
|
|
|
|
|
(1,030,172
|
)
|
Due
from factor
|
|
|
1,349,312
|
|
|
|
|
|
1,349,312
|
|
Income
taxes receivable
|
|
|
(22,316
|
)
|
|
|
|
|
(22,316
|
)
|
Inventories
|
|
|
(3,411,695
|
)
|
|
|
|
|
(3,411,695
|
)
|
Due
to related parties
|
|
|
(79,288
|
)
|
|
|
|
|
(79,288
|
)
|
Due
from related parties
|
|
|
-
|
|
|
|
|
|
-
|
|
Deferred
income taxes
|
|
|
118,807
|
|
|
(96,491)
|
(2)
|
|
22,316
|
|
Prepaid
expenses and other current assets
|
|
|
(291,571
|
)
|
|
|
|
|
(291,571
|
)
|
Income
tax payable
|
|
|
-
|
|
|
|
|
|
-
|
|
Bank
overdraft
|
|
|
145,894
|
|
|
|
|
|
145,894
|
|
Accounts
payable
|
|
|
755,120
|
|
|
|
|
|
755,120
|
|
Due
to customers
|
|
|
-
|
|
|
|
|
|
-
|
|
Other
current liabilities
|
|
|
(264,638
|
)
|
|
|
|
|
(264,638
|
)
|
Net
cash used in operating activities
|
|
|
(2,469,669
|
)
|
|
(240,435
|
)
|
|
(2,710,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(43,621
|
)
|
|
|
|
|
(43,621
|
)
|
Net
cash used in investing activities
|
|
|
(43,621
|
)
|
|
-
|
|
|
(43,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
2,393,458
|
|
|
|
|
|
2,393,458
|
|
Advances
from majority shareholder
|
|
|
174,905
|
|
|
240,435
|
(1)
|
|
415,340
|
|
Issuance
of convertible notes
|
|
|
-
|
|
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,568,363
|
|
|
240,435
|
|
|
2,808,798
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
55,073
|
|
|
-
|
|
|
55,073
|
|
Cash
at beginning of period
|
|
|
109,031
|
|
|
|
|
|
109,031
|
|
Cash
at end of period
|
|
$
|
164,104
|
|
$
|
-
|
|
$
|
164,104
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
338,144
|
|
$
|
-
|
|
$
|
338,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income tax
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of FIN 48
|
|
$
|
32,288
|
|
$
|
-
|
|
$
|
32,288
|
|
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
Description
of adjustments:
|
1
|
To
reflect a $240,435 adjustment to cost of sales and to increase payable
to
Paul Guez at March 31, 2007 for inventory purchases paid directly
to a
vendor by Mr. Guez that were not previously
recorded.
|
|
2
|
To
remove the previously recorded tax provision for the
period.
|
|
3. |
To
reflect change in loss per share based on
adjustments.
|
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues. On an ongoing
basis, we evaluate estimates, including those related to returns, discounts,
bad
debts, inventories, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
(b)
Revenue Recognition
Revenue
is recognized when merchandise has been shipped against a customer’s written
purchase order, the risk of ownership has passed, selling price has been fixed
and determined and collectibility is reasonably assured either through payment
received, or fulfillment of all the terms and conditions of the particular
purchase order. Revenue is recorded net of estimated returns, charge backs
and
markdowns based on management’s estimates and historical
experience.
(c)
Advertising
Advertising
costs are expensed as of the first date the advertisements take place.
Advertising expenses included in selling expenses approximated $61,922 and
$506,165 for the three months ended March 31, 2007 and 2006,
respectively.
(d)
Shipping and Handling Costs
Freight
charges are included in selling, distribution and administrative expenses in
the
statement of operations and approximated $147,275 and $168,646 for the three
months ended March 31, 2007 and 2006, respectively.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
(e)
Major Suppliers
We
purchase our fabric, thread and other raw materials from various industry
suppliers within the United States and abroad. We do not currently have any
long-term agreements in place for the supply of our fabric, thread or other
raw
materials. The fabric, thread and other raw materials used by us are available
from a large number of suppliers worldwide. During the three months ended March
31, 2007, three suppliers accounted for more than 10% of our purchases.
Purchases from these suppliers were 24.4%, 16.4% and 10.5% respectively. During
the three months ended March 31, 2006, three suppliers also accounted for more
than 10% of our purchases and purchases from these suppliers were 24.2%, 14.7%
and 11.1%, respectively.
(f)
Major Customers
During
the three months ended March 31, 2007, one customer accounted for more than
10%
of the Company’s sales. Sales to that customer were 13.5%. International sales
accounted for approximately 25.5% of the Company’s sales during the three months
ended March 31, 2007, including Japan which accounted for 15.9% of our total
sales. As of March 31, 2007, one customer accounted for 37% of total accounts
receivable.
During
the three months ended March 31, 2006, one customer comprised greater than
10%
of the Company’s sales. Sales to that customer were 20.6%. International sales
accounted for approximately 37% of the Company’s sales during the three months
ended March 31, 2006, including Japan which accounted for 25.0% of our total
sales. As of March 31, 2006, one customer accounted for 19.4% of total accounts
receivable.
(g)
Stock-Based Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS
123R”). This statement requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. This statement
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions
with
employees except for equity instruments held by employee share ownership plans.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, using the modified prospective method. Under this
method, the provisions of SFAS 123R apply to all awards granted or modified
after the date of adoption and all previously granted awards not yet vested
as
of the date of adoption.
The
fair
value of options was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for the
three months ended March 31, 2007 and 2006:
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
Risk-free
interest rate
|
|
|
4.50
|
%
|
|
4.50
|
%
|
Expected
volatility
|
|
|
46.01
|
%
|
|
46.01
|
%
|
Expected
life of options
|
|
|
5
years
|
|
|
5
years
|
|
(h)
Earnings per Share
Statement
of Financial Accounting Standards No. 128, “Earnings per Share,” requires
presentation of basic earnings per share (“Basic EPS”) and diluted earnings per
share (“Diluted EPS”). Basic earnings (loss) per share are computed by dividing
net income by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution, using
the treasury stock method, that could occur if securities or other contracts
to
issue common stock were exercised or converted into common stock or resulted
in
the issuance of common stock that then shared in the earnings of the Company.
In
computing diluted earnings per share, the treasury stock method assumes that
outstanding options and warrants are exercised and the proceeds are used to
purchase common stock at the average market price during the period. Options
and
warrants will have a dilutive effect under the treasury stock method only when
the average market price of the common stock during the period exceeds the
exercise price of the options and warrants.
At
March
31, 2007 and 2006, potentially dilutive securities consisted of outstanding
common stock options to acquire 335,500 and 697,000 shares, respectively. These
potentially dilutive securities were not included in the calculation of loss
per
share for the quarter ended March 31, 2007 as they are insignificant to the
calculation. Accordingly, basic and diluted earnings per share for quarters
ended March 31, 2007 and 2006, are the same.
(i)
Reclassifications
Certain
prior year balance sheet items have been reclassified to conform to the current
period presentation.
ADOPTION
OF NEW ACCOUNTING POLICY
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN
48”)—an
interpretation of FASB Statement No. 109, Accounting for Income
Taxes.”
The
Interpretation addresses the determination of whether tax benefits claimed
or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we may recognize the tax benefit from an uncertain
tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has
a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. At the date of adoption, and as of March 31,
2007, the Company made a cumulative effect adjustment. See note
8.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years after 2002. The Company’s tax returns are currently
under examination by the government. As
of
March 31, 2007, the taxing authorities have not proposed any significant
adjustments to taxable income. The Company does not expect to receive any
adjustments that would result in a material change to its final
position.
The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. See note 8.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB Statement
No. 115” (FAS 159). FAS 159,
which becomes effective for the company on January 1, 2008, permits
companies to choose to measure many financial instruments and certain other
items at fair value and report unrealized gains and losses in earnings. Such
accounting is optional and is generally to be applied instrument by instrument.
The company does not anticipate that election, if any, of this fair-value option
will have a material effect on its consolidated financial
condition, results of operations, cash flows or disclosures.
In
September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
Value Measurements,” which establishes a framework for measuring fair value in
accordance with GAAP and expands disclosures about fair value measurements.
FAS
157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
FAS 157 is effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact this standard will have on its
consolidated financial
condition, results of operations, cash flows or disclosures.
NOTE
3 – DUE FROM FACTOR
We
use a
factor for working capital and credit administration purposes. Under the various
factoring agreements entered into separately by Blue Holdings, Antik and
Taverniti, the factor purchases all the trade accounts receivable assigned
by
the Company and its subsidiaries and assumes all credit risk with respect to
those accounts approved by it.
The
factor agreements provide that we can borrow an amount up to 90% of the value
of
our purchased customer invoices, less a reserve of 10% of unpaid accounts
purchased and 100% of all such accounts which are disputed. The factor
agreements provide for automatic renewal after July 24, 2006 subject to 120
days’ termination notice from any party. The factor also makes available to all
three companies a combined line of credit up to the lesser of $2.4 million
(increased from $1.5 million effective as of January 1, 2006) and 50% of the
value of eligible raw materials and finished goods. The increase in this line
of
credit - from $1.5 million to $2.4 million - became effective as of January
1,
2006. As of March 31, 2007, the Company drew down $2.4 million of this credit
line against inventory.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
As
of
March 31, 2007, the factor holds $1,923,604 of accounts receivable purchased
from us on a without recourse basis and has made advances to us of $1,906,328
against those receivables, resulting in a net balance amount Due from Factor
of
$17,276. The Company has accounted for the sale of receivables to the factor
in
accordance with SFAS No. 140, “Accounting for the Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.”
As
of
March 31, 2007, the factor also held as collateral $9,704,713 of accounts
receivable that were subject to recourse, against which the Company has provided
reserves of $1,169,330 and as of March 31, 2007, the Company received advances
totaling $12,420,272 against such receivables and against eligible inventory.
The Company has included the $8,535,383 in accounts receivable, and has
reflected the $12,420,272 as short term borrowings on the accompanying balance
sheet. The factor commission against such receivables is 0.4% and interest
is
charged at the rate of 1% over the factor’s prime lending rate per
annum.
Effective
January 1, 2006, the factor commission is 0.75% if the aggregate amount of
approved invoices is below $10 million per annum, 0.70% if between $10 million
and $20 million and 0.65% if between $20 million and $30 million. The Company
is
contingently liable to the factor for merchandise disputes, customer claims
and
the like on receivables sold to the factor. To the extent that the Company
draws
funds prior to the deemed collection date of the accounts receivable sold to
the
factor, interest is charged at the rate of 1% over the factor’s prime lending
rate per annum. Factor advances are collateralized by the non-factored accounts
receivable, inventories and the personal guarantees of Paul Guez, our Chairman,
Chief Executive Officer, President
and majority shareholder, and the living trust of Paul and Elizabeth
Guez.
NOTE
4 - INVENTORIES
Inventories
at March 31, 2007 and December 31, 2006 are summarized as follows:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
$
|
3,315,503
|
|
$
|
3,583,019
|
|
Work-in-Process
|
|
|
1,266,867
|
|
|
991,775
|
|
Finished
Goods
|
|
|
5,512,839
|
|
|
2,562,105
|
|
|
|
$
|
10,095,209
|
|
$
|
7,136,899
|
|
|
|
|
|
|
|
|
|
Less:
Inventory valuation allowance
|
|
|
(1,289,508
|
)
|
|
(1,742,893
|
)
|
TOTAL
|
|
$
|
8,805,701
|
|
$
|
5,394,006
|
|
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment at March 31, 2007 and December 31, 2006 are summarized as
follows:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Furniture
|
|
$
|
20,825
|
|
$
|
14,294
|
|
Leasehold
Improvements
|
|
|
1,226,594
|
|
|
1,219,094
|
|
Computer
Equipment
|
|
|
646,141
|
|
|
616,551
|
|
|
|
|
1,893,560
|
|
|
1,849,939
|
|
Less:
Accumulated depreciation and Amortization
|
|
|
(329,369
|
)
|
|
(238,768
|
)
|
|
|
$
|
1,564,191
|
|
$
|
1,611,171
|
|
Depreciation
expense totaled $90,601 and $26,020 for the quarters ended March 31, 2007 and
2006, respectively.
NOTE
6 - RELATED PARTY TRANSACTIONS
The
Company purchased fabric at cost from Blue Concept, LLC which is owned by Paul
Guez, the Company’s Chairman and Chief Executive Officer, for $68,237 and
$241,566 during the quarters ended March 31, 2007 and 2006,
respectively.
The
Company also purchased finished Yanuk
products
from Blue Concept, LLC. These purchases were made at a cost plus basis to cover
the cost of goods sold plus allocated overhead. Off –price Yanuk
products
were sold on behalf of Blue Concept, LLC with an overhead recovery charged
to
Blue Concept, LLC. During the quarters ended March 31, 2007 and 2006, total
purchases of Yanuk
products
from Blue Concept, LLC amounted to $15,322 and $266,725,
respectively.
Since
January 1, 2006, the Company has leased its facility at Commerce, California
from Azteca Production International Inc. as a sub-tenant and is paying it
$19,030 per month. Rent expense includes $57,090 paid under this lease during
the quarter ended March 31, 2007.
On
July
5, 2005 the Company entered into a ten-year license agreement with Yanuk Jeans,
LLC. Under the terms of the agreement, the Company became the exclusive licensor
for the design, development, manufacture, sale, marketing and distribution
of
the Yanuk
brand
products to the wholesale and retail trade. The Company pays to Yanuk Jeans,
LLC
a royalty of six percent of all net sales of the licensed products and a
guaranteed minimum royalty on an annual basis. In addition, during the term
of
the license agreement, the Company has the option to purchase from Yanuk Jeans,
LLC the property licensed under the agreement. The royalties for the quarters
ended March 31, 2007 and 2006 paid or payable to Yanuk Jeans, LLC totaled $0
and
$114,619, respectively. Yanuk Jeans, LLC is solely owned by Paul
Guez.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
On
October 6, 2005, the Company entered into a five-year license agreement with
Yanuk Jeans, LLC. Under the terms of the agreement, the Company became the
exclusive licensor for the design, development, manufacture, sale, marketing
and
distribution of Yanuk Jeans, LLC’s U
brand
products to the wholesale and retail trade. The Company pays to Yanuk Jeans,
LLC
a royalty of five percent of all net sales of the licensed products and shall
pay a guaranteed minimum royalty on an annual basis. In addition, during the
term of the license agreement, the Company has the option to purchase from
Yanuk
Jeans, LLC the property licensed under the agreement. The royalties for the
quarters ended March 31, 2007 and 2006 paid or payable to Yanuk Jeans, LLC
for
the U
brand
products was $0 and $0, respectively.
Paul
Guez
and the living trust of Paul and Elizabeth Guez have guaranteed all advances
and
ledger debt due to the Company’s factor.
On
August
27, 2005, the Company opened a retail store on Melrose Avenue, Los Angeles,
California and took over all the obligations of
a
10-year property lease which was entered into by Blue Concept, LLC in April
2005. The lease will expire on March 15, 2015.
Taverniti
is the exclusive licensee for the design, development, manufacture, sale,
marketing and distribution of the Taverniti
So Jeans
trademark in the denim and knit sports wear categories for men and women. It
is
paying royalties to Taverniti Holdings, LLC in the ranges of 5-8 percent
depending on the net sales of the licensed products pursuant to a license
agreement with Taverniti Holdings, LLC. Taverniti Holdings, LLC is jointly
owned
by Paul Guez (60%) and Jimmy Taverniti (40%), the designer of the products
for
the brand, and Mr. Guez is the sole manager. The license agreement was signed
in
May 2004 and expires on December 31, 2015. Royalties paid or payable for the
quarters ended March 31, 2007 and 2006 amounted to $125,336 and $350,782,
respectively.
NOTE
7 - DUE FROM/TO RELATED PARTIES
The
related parties are the Company’s majority shareholder (who is also the
Chairman, Chief Executive Officer and President of the Company) and limited
liability companies that are either owned or co-owned by the majority
shareholder. These amounts are all unsecured and non-interest bearing. All
non-trade related advances from related parties have been repaid. Trade-related
outstanding items follow regular payment terms as invoiced. As of March 31,
2007
and 2006, total trade-related items due to related parties amounted to $630,865
and $710,153, respectively.
From
time
to time, the Company’s majority shareholder, Mr. Paul Guez, made advances to the
Company to support its working capital needs. These advances were non-interest
bearing and unsecured, with no formal terms of repayment. On July 1, 2006,
Mr.
Guez converted the advances to a line of credit in an agreement with the
Company. The line of credit allows the Company to borrow from him up to a
maximum of $3 million at an interest rate of 6% per annum. The Company may
repay
the advances in full or in part at any time until the credit line expires and
repayment is required on December 31, 2007. As of March 31, 2007 and December
31, 2006, the balance of these advances was $2,292,331 (as restated) and
$1,876,991, respectively, and accrued interest thereon was $32,011 and $68,190,
respectively. Interest expense includes $32,011 and $0, relates to advances
made
under this facility during the quarters ended March 31, 2007 and 2006,
respectively.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
NOTE
8 - INCOME TAX
The
Company accounts for income taxes and the related accounts under the liability
method. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted rates expected to be in effect during the year in
which the basis differences reverse.
The
Company’s provision for income taxes was $0 for the three months ended March 31,
2007 compared to $497,367 for the same period of the prior year.
The
provision for income taxes consists of the following for the periods ended
March
31:
|
|
2007
|
|
2006
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
$
|
454,294
|
|
State
|
|
|
0
|
|
|
181,365
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
|
0
|
|
|
(80,690
|
)
|
State
|
|
|
0
|
|
|
(57,602
|
)
|
Provision
for income tax expense
|
|
$
|
0
|
|
$
|
497,367
|
|
A
reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows for the periods ended March 31:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Statutory
federal rate
|
|
|
34.0
|
%
|
|
34.0
|
%
|
State
taxes, net of federal benefit
|
|
|
6.7
|
|
|
7.0
|
|
Permanent
differences
|
|
|
0.0
|
|
|
1.5
|
|
Change
in valuation reserve
|
|
|
-40.7
|
|
|
0.0
|
|
Other
|
|
|
0.0
|
|
|
(0.1
|
)
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
42.4
|
%
|
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
The
Company and its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal or state and local income tax examinations
by tax authorities for years before 2002. The Internal Revenue Service (IRS)
commenced an examination of the Company’s U.S. income tax return for 2005 in the
first quarter of 2007 that is anticipated to be completed by the end of 2007.
As
of March 31, 2007, the IRS has not proposed any adjustments.
The
Company adopted the provisions of FASB Interpretation No.48, “Accounting for
Uncertainty in Income Taxes,” at the beginning of fiscal year 2007. As a result
of the implementation of Interpretation 48, the Company recognized a $32,288
increase in the liability for unrecognized tax benefits, which was accounted
for
as a reduction to the January 1, 2007 balance of retained earnings. The Company
had approximately $316,452 of total gross unrecognized tax benefits that, if
recognized, would probably affect the effective income tax rate in any future
periods.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
Balance
at January 1, 2007
|
|
$
|
310,458
|
|
Additions
based on tax positions related to the current year
|
|
|
-
|
|
Additions
for tax positions of prior years
|
|
|
5,994
|
|
Reductions
for tax positions of prior years
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
Balance
|
|
$
|
316,452
|
|
Included
in the balance at March 31, 2007 are $258,269 of tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an earlier
period.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income tax expense. During the period ended March 31, 2007, the
Company recognized in income tax expense $0 for interest and penalties. The
Company included in its balance for unrecognized tax benefits at March 31,
2007
$61,489 for the payment of interest and penalties.
NOTE
9 – STOCK OPTIONS
Under
the
Company’s 2005 Stock Incentive Plan (the “Company Plan”), the Company may grant
qualified and nonqualified stock options and stock purchase rights to selected
employees. The Company reserved 2,500,000 shares of common stock for issuance
under the Company Plan.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
At
March
31, 2007, options outstanding are as follows:
|
|
Number of
options
|
|
Weighted average
exercise price
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
335,500
|
|
$
|
7.18
|
|
|
-
|
|
Granted
|
|
|
-
|
|
$
|
5.20
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
Cancelled
|
|
|
-
|
|
$
|
5.20
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
|
335,500
|
|
$
|
5.75
|
|
|
-
|
|
Additional
information regarding options outstanding as of March 31, 2007 is as
follows:
|
|
Options outstanding
|
|
Options exercisable
|
|
|
|
Exercise price
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual life
(years)
|
|
Weighted average
exercise price
|
|
Number
exercisable
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.10
|
|
|
62,000
|
|
|
8.18
|
|
$
|
8.10
|
|
|
42,000
|
|
$
|
8.10
|
|
|
|
$
|
5.30
|
|
|
33,500
|
|
|
8.37
|
|
$
|
5.30
|
|
|
23,500
|
|
$
|
5.30
|
|
|
|
$
|
5.20
|
|
|
240,000
|
|
|
8.75
|
|
$
|
5.20
|
|
|
67,000
|
|
$
|
5.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5.20
- $8.10
|
|
|
335,500
|
|
|
8.61
|
|
$
|
5.75
|
|
|
132,500
|
|
$
|
6.14
|
|
Stock
based compensation expense of $53,019 and $0 were recognized during the quarters
ended March 31, 2007 and 2006, respectively, relating to the vesting of such
options. As of March 31, 2007, the unamortized value of these option awards
were
$499,696 which will be amortized as a stock based compensation cost over the
average of approximately three years as the options vest.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
On
September 8, 2005, Antik entered into a license agreement with Titan Industries,
Inc. that provides Titan with an exclusive right to use the Antik
Denim
trademark for the sale of men’s and women’s footwear in the United States and
its possessions and territories, Canada and Mexico, and a right of first refusal
for similar use of the trademark in Europe and South America.
On
December 4, 2006, Antik entered into a license agreement with North Star
International, Inc. pursuant to which North Star will distribute Antik’s knit
apparel and hats in all categories for men and women in the United States and
internationally. The license will have a term of 66 months commencing on October
1, 2006, and will be subject to five renewal options for one-year
terms.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
On
January 12, 2007, the Company entered into a License Agreement with Faith
Connexion S.A.R.L., a company formed under the laws of France (“Faith”).
Pursuant to the License Agreement, Faith granted an exclusive right and
license
to use
the Faith
Connexion
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of men’s and women’s hoodies, t-shirts, sweatshirts,
sweatpants and hats in North America (including Canada), South America, Japan
and Korea. Compensation for use of the Faith
Connexion
trademark will consist of a royalty calculated as 9% of the Company’s net sales
arising from products bearing the Faith
Connexion
trademark in the first two years, and 9.5% of net sales in year three. The
License Agreement has a term of three years as follows: the first year is
comprised of 18 months, year two is comprised of the next six months, and year
three is comprised of the following 12 months. Per the agreement, the Company
has agreed to a guarantee payment of royalties on identified minimum net sales
amounts ranging from $3.5 to $10 million over each of the three years (equal
to
minimum royalties of $450,000, $315,000, and $950,000, in each of years one
(first eighteen months), two (next 6 months) and three (next twelve months),
respectively, and to spend at least 3% of actual net sales amounts on marketing
and advertising the Faith
Connexion
trademarked products in the territory. During three months ended March 31,
2007,
the Company recorded royalty expense of $75,000.
NOTE
11-SUBSEQUENT EVENTS
On
May 1,
2007, the Company signed a licensing agreement with Mercier SARL. The new
agreement grants Mercier the right to manufacture sell market and distribute
apparel and accessories for Blue Holdings’ Antik
Denim
brand
throughout Europe. The deal will have a twenty month term which is renewable
for
another 4 years if the licensee achieves certain established minimum net sales
levels. Under the license agreement, Mercier SARL will pay Antik a 10% royalty
on all net sales of licensed products. Antik will license its Antik
Denim
brand
with Mercier SARL throughout France, Spain, Italy, Germany, Austria, England
and
Denmark as well as other European countries. Antik will retain decision-making
authority in the manufacturing, selling, marketing and distribution of its
brand
and products.
The
license agreement provides for an upfront minimum guarantee advance of $250,000
and an aggregate of minimum royalty payments of $2.5 million for the years
2009
though 2012 assuming the proposed license agreement is renewed at the end of
2008. Additionally, Blue Holdings announced the amendment of Northstar’s
agreement to relinquish its European distribution rights for knits for the
Antik
Denim
brand in
order to allow Antik to enter into the Mercier agreement for distribution in
Europe.
BLUE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 (AS RESTATED) AND
2006
(UNAUDITED)
On
May 1,
2007, Antik executed a License Agreement (the “Max Ray License Agreement”) dated
to be effective as of May 1, 2007, by and between Antik and Max Ray, Inc.,
a
California corporation (“Max Ray”). Pursuant to the Max Ray License Agreement,
Antik granted an exclusive right and license to use the Antik
Denim
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of small leather goods consisting of belts, handbags, small
leather accessories and scarves in the United States and its territories.
Compensation for use of the Antik
Denim
trademark will consist of a royalty calculated as 8% of Max Ray’s net sales
arising from products bearing the Antik
Denim
trademark. The Max Ray License Agreement has an initial term of eighteen (18)
months, and includes four (4) one (1)-year extension options available to Max
Ray unless earlier terminated by Max Ray. Max Ray has agreed to guarantee
payment of royalties on an identified minimum net sales amount of $1.1 million
during the initial eighteen (18) month term, and on identified minimum net
sales
amounts ranging from $3 million to $10 million over the eligible extension
terms. In connection with these minimum net sales, the Max Ray License Agreement
provides for an upfront minimum guarantee advance of $20,000 to be applied
against the minimum guaranty for the aggregate initial term, and an aggregate
of
minimum royalty payments of $2.1 million for the years 2009 though 2012 assuming
the Max Ray License Agreement is renewed at the end of 2008.
On
May 8,
2007, the Company granted an aggregate of 300,000 options to the non-employee
members of the board of directors. The options have a term of 10 years, are
exercisable at a per share price of $1.98, and vest as follows: 1/3 on the
date
of grant and the remaining 2/3 in equal annual installments for two years
thereafter.
ITEM
2. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
Forward-Looking
Statements
Statements
made in this Form 10-Q (the “Quarterly Report”) that are not historical or
current facts are “forward-looking statements” made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). We intend that such forward-looking statements be subject to
the safe harbors for such statements. We wish to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as
of
the date made. Any forward-looking statements represent management’s best
judgment as to what may occur in the future. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments
with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Quarterly Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will
be
achieved. We disclaim any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statement
or to reflect the occurrence of anticipated or unanticipated
events.
The
words
“we,” “us,” “our,” and the “Company,” refer to Blue Holdings, Inc. The words or
phrases “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,”
“approximate,” or “continue,” “would be,” “will allow,” “intends to,” “will
likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimate,” “project,” or similar expressions, or the negative thereof, are
intended to identify “forward-looking statements.” Actual results could differ
materially from those projected in the forward looking statements as a result
of
a number of risks and uncertainties, including but not limited to: (a) our
failure to implement our business plan within the time period we originally
planned to accomplish; and (b) other risks that are discussed in this Quarterly
Report or included in our previous filings with the Securities and Exchange
Commission (“SEC”).
Description
of Business
Overview
Blue
Holdings, Inc. designs, develops, markets and distributes high end fashion
jeans, apparel and accessories under the brand name names Antik
Denim,
Yanuk,
U,
Faith
Connexion
and
Taverniti
So Jeans.
We plan
to also design, develop, market and distribute jeans and accessories under
other
brands that we may license or acquire from time to time. We are currently
looking into integrating Life
& Death
as one
of our brands. Our products currently include jeans, jackets, belts, purses
and
T-shirts. We currently sell our products in the United States, Canada, Japan
and
the European Union directly to department stores and boutiques and through
distribution arrangements in certain foreign jurisdictions. We are headquartered
in Commerce, California and maintain two showrooms in New York and Los Angeles.
We opened a retail store in Los Angeles during August 2005 and another in San
Francisco in September 2006.
Corporate
Background
We
were
incorporated in the State of Nevada on February 9, 2000 under the name Marine
Jet Technology Corp. From our inception through January 2005, we focused on
developing and marketing boat propulsion technology. Between January and
February 2005, we entered into separate transactions whereby, among other
matters, Keating Reverse Merger Fund, LLC (“KRM Fund”), an existing shareholder
of the Company, agreed to purchase a substantial majority of our outstanding
common stock, and Intellijet Marine, Inc., a company formed by our former
majority shareholder and principal executive officer and director, Jeff P.
Jordan, acquired all of our boat propulsion technology assets and assumed all
of
our then existing liabilities.
Between
February 4, 2005 and April 29, 2005, we existed as a public “shell” company with
nominal assets.
Significant
Developments
On
January 12, 2007, we entered into a three-year License Agreement (the “Faith
License Agreement”) with Faith Connexion S.A.R.L. (“Faith”) pursuant to which
Faith granted us an exclusive right and license to use the Faith
Connexion
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of men’s and women’s hoodies, t-shirts, sweatshirts,
sweatpants and hats in North America, South America, Japan and Korea.
Compensation for use of the Faith
Connexion
trademark will consist of a royalty of 9% of our net sales arising from products
bearing the Faith
Connexion
trademark in the first two years, and 9.5% of net sales in year three. The
Faith
License Agreement has a term of three years as follows: the first year is
comprised of 18 months, year two is comprised of the next six months, and year
three is comprised of the following 12 months. We have agreed to guarantee
payment of royalties on identified minimum net sales amounts ranging from $3.5
to $10 million over each of the three years (equal to minimum royalties of
$450,000, $315,000, and $950,000, in each of years one (first eighteen months),
two (next 6 months) and three (next twelve months), respectively, and to spend
at least 3% of actual net sales amounts on marketing and advertising the
Faith
Connexion
trademarked products in the territory. During first quarter ended March 31,
2007, we recorded royalty expense of $75,000 pursuant to the minimum guaranteed
royalty.
In
March
2007, the United States Internal Revenue Service initiated an examination of
our
Federal income tax return for the year ended December 31, 2005. As of March
31,
2007, the taxing authorities have not proposed any significant adjustments
to
taxable income. We do not expect to receive any adjustments that would result
in
a material change to our final position.
In
March
2007, we appointed Scott J. Drake as our President of Sales and Chief Operating
Officer. Mr. Drake has over 25 years of experience in the apparel
business.
On
April
27, 2007, Antik Denim, LLC (“Antik”), a California limited liability company and
our wholly-owned subsidiary, executed a License Agreement (the “Mercier License
Agreement”) dated to be effective as of April 18, 2007, by and between Antik and
Mercier SARL, a company formed under the laws of France
(“Mercier”).
Pursuant
to the Mercier License Agreement, Antik granted an exclusive right and license
to use the Antik
Denim
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of denim and sportswear apparel in Europe. Compensation
for
use of the Antik
Denim
trademark will consist of a royalty calculated as 10% of Mercier’s net sales
arising from products bearing the Antik
Denim
trademark. The Mercier License Agreement has an initial term of twenty (20)
months, and includes four (4) one (1)-year extension options available to
Mercier to the extent it achieves specified minimum net sales. Mercier has
agreed to guarantee payment of royalties on an identified minimum net sales
amount of $2.5 million during the initial twenty (20) month term, and on
identified minimum net sales amounts ranging from $2.5 million to $10 million
over the eligible extension terms. In connection with these minimum net sales,
the Mercier License Agreement provides for an upfront minimum guarantee advance
of $250,000 and an aggregate of minimum royalty payments of $2.5 million for
the
years 2009 though 2012 assuming the Mercier License Agreement is renewed at
the
end of 2008.
On
April
27, 2007, in anticipation of Antik’s entry into the Mercier License Agreement,
Antik executed Amendment No. 1 to License Agreement (the “Amendment”), dated to
be effective as of April 25, 2007, by and between Antik and North Star, LLC
(“North Star”). The sole purpose of the Amendment was to remove the European
territory from the rights previously granted to North Star.
On
May 1,
2007, Antik executed a License Agreement (the “Max Ray License Agreement”) dated
to be effective as of May 1, 2007, by and between Antik and Max Ray, Inc.,
a
California corporation (“Max Ray”). Pursuant to the Max Ray License Agreement,
Antik granted an exclusive right and license to use the Antik
Denim
trademark for the manufacture, marketing, promotion, sale, distribution and
other exploitation of small leather goods consisting of belts, handbags, small
leather accessories and scarves in the United States and its territories.
Compensation for use of the Antik
Denim
trademark will consist of a royalty calculated as 8% of Max Ray’s net sales
arising from products bearing the Antik
Denim
trademark. The Max Ray License Agreement has an initial term of eighteen (18)
months, and includes four (4) one (1)-year extension options available to Max
Ray unless earlier terminated by Max Ray. Max Ray has agreed to guarantee
payment of royalties on an identified minimum net sales amount of $1.1 million
during the initial eighteen (18) month term, and on identified minimum net
sales
amounts ranging from $3 million to $10 million over the eligible extension
terms. In connection with these minimum net sales, the Max Ray License Agreement
provides for an upfront minimum guarantee advance of $20,000 to be applied
against the minimum guaranty for the aggregate initial term, and an aggregate
of
minimum royalty payments of $2.1 million for the years 2009 though 2012 assuming
the Max Ray License Agreement is renewed at the end of 2008.
Results
of Operations
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Net
Sales
|
|
$
|
8,440,222
|
|
$
|
11,877,879
|
|
Gross
Profit
|
|
|
4,832,026
|
|
|
5,949,263
|
|
Percentage
of net sales
|
|
|
57
|
%
|
|
50
|
%
|
Selling,
distribution & administrative expenses
|
|
$
|
4,520,568
|
|
$
|
4,600,407
|
|
Percentage
of net sales
|
|
|
54
|
%
|
|
39
|
%
|
Income
(loss) before provision for income taxes
|
|
$
|
(26,686
|
)
|
$
|
1,177,543
|
|
Percentage
of net sales
|
|
|
0
|
%
|
|
10
|
%
|
Net
income (loss)
|
|
$
|
(26,686
|
)
|
$
|
680,176
|
|
Percentage
of net sales
|
|
|
0
|
%
|
|
6
|
%
|
Three
Months Ended March 31, 2007 vs. 2006
Net
sales
decreased from $11.9 million for the three months ended March 31, 2006 to $8.4
million for the three months ended March 31, 2007. The sales were less than
during the same period last year for a variety of reasons. First, during first
quarter of 2007, with no major European distributor on board, export sales
declined from 37% last year to 25% during three months ended March 31, 2007.
Secondly, we are still recovering from our third and fourth quarter delivery
problems. However, in the second quarter of 2007, several major retailers
re-established their sales orders with us. In addition, in May 2007, we signed
a
European license agreement.
Gross
profit for the three months ended March 31, 2007 decreased to $4.8 million
from
$5.95 million in the three months ended March 31, 2006. The decrease in gross
profit was largely due to reduced sales during the quarter ended March 31,
2007.
However, we expect our gross margin to be maintained at approximately 50% in
the
future.
Selling,
distribution and administrative expenses for the three months ended March 31,
2007 totaled $4.52 million compared with $4.6 million for the three months
ended
March 31, 2006. The principal components in the first quarter of 2007 were
payroll of $1.61 million (compared to $1.81 million in the first quarter last
year), advertising and trade show expenses of $0.45 million ($0.61 million
in
the same period of 2006)), professional fee expenses of 0.40 million ($0.05
million in the same period of 2006), royalties of $0.2 million ($ 0.47 million
in 2006) and stock-based compensation of $0.05 million ($0.11 million in the
same period last year).
Net
loss
after provision for taxes in the first quarter of 2007 was $(0.026) million
or
(0)% of net sales compared to net income of $0.68 million or 5.7 % of net sales
in the first quarter of 2006. Basic and diluted earnings per share decreased
to
$0.0 from $0.03 in the same period of last year. For the three months ended
March 31, 2007, the Company provided $0 million for income tax compared to
$0.5
million for the three months ended March 31, 2006.
Liquidity
and Capital Resources
We
believe we currently have adequate resources to fund our anticipated cash needs
through December 31, 2007 and beyond. However, an adverse business development
could require us to raise additional financing sooner than
anticipated.
For
the
three months ended March 31, 2007, net cash used in operating activities was
$(2.7 million). The deficit was primarily due to an increase of $3.4 million
in
inventory, $1.0 million in accounts receivable and $0.3 million in prepaid
expenses and other current assets and was offset by a decrease in due from
factor of $1.4 million, an increase in accounts payable of $0.8 million and
an
increase in bank overdraft of $0.2 million. Net cash provided by financing
activities was $2.8 million due to an increase in short-term borrowings by
$2.4
million and an increase in advances from our majority shareholder by $0.4
million.
We
use a
factor, FTC Commercial Corp., for working capital and credit administration
purposes. Under the various factoring agreements entered into separately by
Blue
Holdings, Antik and Taverniti So Jeans, LLC (“Taverniti”), the factor purchases
all the trade accounts receivable assigned by us and assumes all credit risk
with respect to those accounts approved by it.
The
factor agreements provide that we can obtain an amount up to 90% of the value
of
our purchased customer invoices, less a reserve of 10% of unpaid accounts
purchased and 100% of all accounts that are disputed. The factor agreements
provide for the automatic renewal of the agreements after July 24, 2006, subject
to 120 days’ termination notice from any party. We receive amounts against
purchased customer invoices on a recourse basis or a non-recourse basis under
these agreements. Amounts received against customer invoices purchased on a
recourse basis are classified as “short-term borrowings” and amounts received
against customer invoices purchased on a non-recourse basis are reflected on
a
net basis against such receivables purchased by the factor in “due from factor”
on the balance sheets included in our financial statements.
In
addition, the factor also makes available to all three companies a combined
line
of credit up to the lesser of $2.4 million (increased from $1.5 million
effective as of January 1, 2006) and 50% of the value of eligible raw materials
and finished goods. The increase in this line of credit - from $1.5 million
to
$2.4 million - became effective as of January 1, 2006. As of March 31, 2007,
we
drew down $2.4 million of this credit line.
As
of
March 31, 2007, the amount of the reserve held by the factor was approximately
$1.4 million. Before January 1, 2006, the factor commission was 0.8% of the
customer invoice amount for terms up to 90 days, plus one quarter of one percent
(.25%) for each additional thirty-day term. Effective January 1, 2006, the
factor commission is 0.75% if the aggregate amount of approved invoices is
below
$10 million per annum, and will be reduced by 5 basis points for each increase
by $10 million in the aggregate amount of approved invoices. We are contingently
liable to the factor for merchandise disputes, customer claims and the like
on
receivables sold to the factor. To the extent that we draw funds prior to the
deemed collection date of the accounts receivable sold to the factor, interest
is charged at the rate of 1% over the factor’s prime lending rate per annum.
Factor advances and ledger debt are collateralized by the non-factored accounts
receivable, inventories and the personal guarantees of Paul Guez, our Chairman,
Chief Executive Officer, President and majority shareholder, and the living
trust of Paul and Elizabeth Guez.
The
factor also purchased customer invoices on a “with recourse” basis. These
advances and the advances against inventory were classified as “short-term
borrowings.” These short-term borrowings amounted to $12.4 million as of March
31, 2007. The factor commission is 0.4% for receivables purchased subject to
recourse. Receivables subject to recourse approximated $8.5 million net of
reserves as of March 31, 2007. Although the arrangement with our factor is
important to our liquidity and capital resources, management believes that
cash
flow from operations, and our ability to obtain other debt or equity financing,
permits us to adequately support and manage our ongoing operations.
From
time
to time, our majority shareholder, Mr. Paul Guez, made advances to us to support
our working capital needs. These advances were non-interest bearing. On July
1,
2006, Mr. Guez converted the advances to a line of credit in an agreement with
us. The line of credit allows us to borrow from him up to a maximum of $3
million at an annual interest rate of 6%. We may repay the advances in full
or
in part at any time until the credit line expires on December 31, 2007. As
of
March 31, 2007, the balance of these advances was $2.3 million.
Our
primary source of liquidity is expected to be cash flow generated from
operations, cash and cash equivalents currently on hand, and working capital
attainable through our factor. We anticipate a tax recovery and refund in the
range of $2.4 to $3.6 million during 2007. We may seek to finance future capital
needs through various means and channels, such as issuance of long-term debt
or
sale of equity securities.
Critical
Accounting Policies
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues. On an ongoing
basis, we evaluate estimates, including those related to returns, discounts,
bad
debts, inventories, intangible assets, income taxes, contingencies and
litigations. We base our estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
Revenue
Revenue
is recognized when merchandise has been shipped against a customer’s written
purchase order, the risk of ownership has passed, selling price has been fixed
and determined and collectibility is reasonably assured either through payment
received, or fulfillment of all the terms and conditions of the particular
purchase order. Revenue is recorded net of estimated returns, charge backs
and
markdowns based on management’s estimates and historical
experience.
Accounts
Receivable - Allowance for Returns, Discounts and Bad
Debts:
We
evaluate our ability to collect accounts receivable and the circumstances
surrounding chargebacks (disputes from the customer) based upon a combination
of
factors. In circumstances where we are aware of a specific customer’s inability
to meet its financial obligations (such as in the case of bankruptcy filings
or
substantial downgrading by credit sources), a specific reserve for bad debts
is
taken against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, we recognize
reserves for bad debts and uncollectible chargebacks based on our historical
collection experience. If our collection experience deteriorates (for example,
due to an unexpected material adverse change in a major customer’s ability to
meet its financial obligations to us), the estimates of the recoverability
of
amounts due could be reduced by a material amount.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out (“FIFO”) method.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets are recognized for the future tax consequences of transactions that
have
been recognized in our financial statements or tax returns. A valuation
allowance is provided when it is more likely than not that some portion or
all
of the deferred tax asset will not be realized.
At
the
beginning of fiscal year 2007, we adopted the provisions of FASB Interpretation
No.48, “Accounting for Uncertainty in Income Taxes.” As a result of the
implementation of Interpretation 48, we recognized a $32,288 increase in the
liability for unrecognized tax benefits, which was accounted for as a reduction
to the January 1, 2007 balance of retained earnings. We had approximately
$316,452 of total gross unrecognized tax benefits that, if recognized, would
probably affect the effective income tax rate in any future
periods.
Recent
Accounting Pronouncements and Developments
In
February 2007, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB Statement
No. 115” (FAS 159). FAS 159,
which becomes effective for the company on January 1, 2008, permits
companies to choose to measure many financial instruments and certain other
items at fair value and report unrealized gains and losses in earnings. Such
accounting is optional and is generally to be applied instrument by instrument.
The company does not anticipate that election, if any, of this fair-value option
will have a material effect on its consolidated financial condition, results
of
operations, cash flows or disclosures.
In
September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
Value Measurements,” which establishes a framework for measuring fair value in
accordance with GAAP and expands disclosures about fair value measurements.
FAS
157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
FAS 157 is effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact this standard will have on its
consolidated financial condition, results of operations, cash flows or
disclosures.
Off-Balance
Sheet Arrangements
Financial
instruments that potentially subject the Company to off-balance sheet risk
consist of factored accounts receivable. The Company sells certain of its trade
accounts receivable to a factor and is contingently liable to the factor for
merchandise disputes and other customer claims.
As
of
March 31, 2007, the factor holds $1,923,604 of accounts receivable purchased
from us on a without recourse basis and has made advances to us of $1,906,328
against those receivables, resulting in a net balance amount Due from Factor
of
$17,276. The Company has accounted for the sale of receivables to the factor
in
accordance with SFAS No.140, “Accounting for the Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.”
RISK
FACTORS
YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION
CONTAINED IN THIS DESCRIPTION BEFORE PURCHASING SHARES OF OUR COMMON STOCK
OR
OTHER SECURITIES. INVESTING IN BLUE HOLDINGS’ COMMON STOCK INVOLVES A HIGH
DEGREE OF RISK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE NOT AWARE OF,
OR
THAT WE CURRENTLY DEEM IMMATERIAL, ALSO MAY BECOME IMPORTANT FACTORS THAT AFFECT
US. IF ANY OF THE FOLLOWING EVENTS OR OUTCOMES ACTUALLY OCCURS, OUR BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. AS A RESULT,
THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART
OF
THE MONEY YOU PAID TO PURCHASE OUR COMMON STOCK.
Risks
Related to Our Business
We
have a limited operating history, making it difficult to evaluate whether we
will operate profitably.
Antik
and
Taverniti, our wholly-owned subsidiaries, were formed in September 2004 to
design, develop, manufacture, market, distribute and sell high end fashion
jeans, apparel and accessories. Further, L&D is a start-up operation and
Faith
Connection,
although successful in Europe, is not fully tested in the United States. As
a
result, we do not have a meaningful historical record of sales and revenues
nor
an established business track record. While our management believes that we
have
an opportunity to be successful in the high end fashion jean market, there
can
be no assurance that we will be successful in accomplishing our business
initiatives, or that we will achieve any significant level of revenues, or
continue to recognize net income, from the sale of our products.
Unanticipated
problems, expenses and delays are frequently encountered in increasing
production and sales and developing new products, especially in the current
stage of our business. Our ability to continue to successfully develop, produce
and sell our products and to generate significant operating revenues will depend
on our ability to, among other matters:
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successfully
market, distribute and sell our products or enter into agreements
with
third parties to perform these functions on our behalf;
and
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obtain
the financing required to implement our business
plan.
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Given
our
limited operating history, our license agreements with Yanuk Jeans, LLC, our
acquisition of Taverniti, and our lack of long-term sales history and other
sources of revenue, there can be no assurance that we will be able to achieve
any of our goals and develop a sufficiently large customer base to be
profitable.
We
may require additional capital in the future.
We
may
not be able to fund our future growth or react to competitive pressures if
we
lack sufficient funds. Currently, management believes we have sufficient cash
on
hand and cash available through our factor to fund existing operations for
the
foreseeable future. However, in the future, we may need to raise additional
funds through equity or debt financings or collaborative relationships,
including in the event that we lose our relationship with our factor. This
additional funding may not be available or, if available, it may not be
available on commercially reasonable terms. In addition, any additional funding
may result in significant dilution to existing shareholders. If adequate funds
are not available on commercially acceptable terms, we may be required to
curtail our operations or obtain funds through collaborative partners that
may
require us to release material rights to our products.
Failure
to manage our growth and expansion could impair our business.
Management
believes that we are poised for reasonable growth in 2007. However, no assurance
can be given that we will be successful in maintaining or increasing our sales
in the future. Any future growth in sales will require additional working
capital and may place a significant strain on our management, management
information systems, inventory management, sourcing capability, distribution
facilities and receivables management. Any disruption in our order processing,
sourcing or distribution systems could cause orders to be shipped late, and
under industry practices, retailers generally can cancel orders or refuse to
accept goods due to late shipment. Such cancellations and returns would result
in a reduction in revenue, increased administrative and shipping costs and
a
further burden on our distribution facilities.
Additionally,
we intend from time to time to open and/or license retail stores focusing on
the
Antik
Denim,
Yanuk,
Taverniti
So Jeans
and
other brands, and to acquire and/or license other businesses and brands, as
applicable, as we deem appropriate. If we are unable to adequately manage our
retail operations, or to properly integrate any business or brands we acquire
and/or license, this could adversely affect our results of operation and
financial condition.
The
loss of Paul Guez or our lead designers would have an adverse effect on our
future development and could significantly impair our ability to achieve our
business objectives.
Our
success is largely dependent upon the expertise and knowledge of our Chairman,
Chief Executive Officer and President, Paul Guez, and our lead designers, and
our ability to continue to hire and retain other key personnel. The loss of
Mr.
Guez, or any of our other key personnel, could have a material adverse effect
on
our business, development, financial condition, and operating results. We do
not
maintain “key person” life insurance on any of our management or key personnel,
including Mr. Guez.
We
currently own or license, and operate, a limited number of principal brands.
If
we are unsuccessful in marketing and distributing those brands or in executing
our other strategies, our results of operations and financial condition will
be
adversely affected.
While
our
goal is to employ a multi-brand strategy that will ultimately diversify the
fashion and other risks associated with reliance on a limited product line,
we
currently operate, directly and through our wholly-owned subsidiaries Antik
and
Taverniti, a limited number of principal brands, most of which are being
operated pursuant to very recent license or acquisition agreements. If we are
unable to successfully market and distribute our branded products, or if the
recent popularity of premium denim brands decreases, or if we are unable to
execute on our multi-brand strategy to acquire and/or license additional
companies and/or brands, as applicable, identified by our management from time
to time, our results of operations and financial condition will be adversely
affected.
Our
operating results may fluctuate significantly.
Management
expects that we will experience substantial variations in our net sales and
operating results from quarter to quarter. We believe that the factors which
influence this variability of quarterly results include:
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the
timing of our introduction of new product
lines;
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the
level of consumer acceptance of each new product
line;
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general
economic and industry conditions that affect consumer spending and
retailer purchasing;
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the
availability of manufacturing
capacity;
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the
seasonality of the markets in which we
participate;
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the
timing of trade shows;
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the
product mix of customer orders;
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the
timing of the placement or cancellation of customer
orders;
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quotas
and other regulatory matters;
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the
occurrence of charge backs in excess of reserves;
and
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the
timing of expenditures in anticipation of increased sales and actions
of
competitors.
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As
a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is possible
that in some future quarter or quarters, our operating results will be below
the
expectations of securities analysts or investors. In that case, our common
stock
price could fluctuate significantly or decline.
The
loss of business from any significant customer would affect our results of
operations.
We
have
one customer who accounted for approximately 37% of our total receivables at
March 31, 2007 and one customer who accounted for 13.5% of our sales for the
quarter ended March 31, 2007. A decrease in business from or loss of any
significant customer would have a material adverse effect on our results of
operations. Additionally, certain retailers, including some of our customers,
have experienced in the past, and may experience in the future, financial
difficulties, which increase the risk of extending credit to such retailers
and
the risk that financial failure will eliminate a customer entirely. These
retailers have attempted to improve their own operating efficiencies by
concentrating their purchasing power among a narrowing group of vendors. There
can be no assurance that we will remain a preferred vendor for our existing
customers. Further, there can be no assurance that our factor will approve
the
extension of credit to certain retail customers in the future. If a customer’s
credit is not approved by the factor, we could assume the collection risk on
sales to the customer itself, require that the customer provide a letter of
credit, or choose not to make sales to the customer.
Our
business is subject to risks associated with importing
products.
A
portion
of our import operations are subject to tariffs imposed on imported products
and
quotas imposed by trade agreements. In addition, the countries in which our
products are imported may from time to time impose additional new duties,
tariffs or other restrictions on their respective imports or adversely modify
existing restrictions. Adverse changes in these import costs and restrictions,
or our suppliers’ failure to comply with customs or similar laws, could harm our
business. We cannot assure that future trade agreements will not provide our
competitors with an advantage over us, or increase our costs, either of which
could have an adverse effect on our business and financial
condition.
Our
operations are also subject to the effects of international trade agreements
and
regulations such as the North American Free Trade Agreement, and the activities
and regulations of the World Trade Organization. Generally, these trade
agreements benefit our business by reducing or eliminating the duties assessed
on products or other materials manufactured in a particular country. However,
trade agreements can also impose requirements that adversely affect our
business, such as limiting the countries from which we can purchase raw
materials and setting duties or restrictions on products that may be imported
into the United States from a particular country.
Our
ability to import raw materials in a timely and cost-effective manner may also
be affected by problems at ports or issues that otherwise affect transportation
and warehousing providers, such as labor disputes. These problems could require
us to locate alternative ports or warehousing providers to avoid disruption
to
our customers. These alternatives may not be available on short notice or could
result in higher transit costs, which could have an adverse impact on our
business and financial condition.
Our
dependence on independent manufacturers and suppliers of raw materials reduces
our ability to control the manufacturing process, which could harm our sales,
reputation and overall profitability.
We
depend
on independent contract manufacturers and suppliers of raw materials to secure
a
sufficient supply of raw materials and maintain sufficient manufacturing and
shipping capacity in an environment characterized by declining prices, labor
shortages, continuing cost pressure and increased demands for product innovation
and speed-to-market. This dependence could subject us to difficulty in obtaining
timely delivery of products of acceptable quality. In addition, a contractor’s
failure to ship products to us in a timely manner or to meet the required
quality standards could cause us to miss the delivery date requirements of
our
customers. The failure to make timely deliveries may cause our customers to
cancel orders, refuse to accept deliveries, impose non-compliance charges
through invoice deductions or other charge-backs, demand reduced prices or
reduce future orders, any of which could harm our sales, reputation and overall
profitability.
We
do not
have long-term contracts with any of our independent contractors and any of
these contractors may unilaterally terminate their relationship with us at
any
time. While management believes that there exists an adequate supply of
contractors to provide products and services to us, to the extent we are not
able to secure or maintain relationships with independent contractors that
are
able to fulfill our requirements, our business would be harmed.
We
have
initiated standards for our suppliers, and monitor our independent contractors’
compliance with applicable labor laws, but we do not control our contractors
or
their labor practices. The violation of federal, state or foreign labor laws
by
one of our contractors could result in us being subject to fines and our goods
that are manufactured in violation of such laws being seized or their sale
in
interstate commerce being prohibited. To date, we have not been subject to
any
sanctions that, individually or in the aggregate, have had a material adverse
effect on our business, and we are not aware of any facts on which any such
sanctions could be based. There can be no assurance, however, that in the future
we will not be subject to sanctions as a result of violations of applicable
labor laws by our contractors, or that such sanctions will not have a material
adverse effect on our business and results of operations.
We
may not be able to adequately protect our intellectual property
rights.
The
loss
of or inability to enforce our trademarks or any of our other proprietary or
licensed designs, patents, know-how and trade secrets could adversely affect
our
business. If any third party copies or otherwise gains access to our trademarks
or other proprietary rights, or develops similar products independently, it
may
be costly to enforce our rights and we would not be able to compete as
effectively. Additionally, the laws of foreign countries may provide inadequate
protection of intellectual property rights, making it difficult to enforce
such
rights in those countries.
We
may
need to bring legal claims to enforce or protect our intellectual property
rights. Any litigation, whether successful or unsuccessful, could result in
substantial costs and diversions of resources. In addition, notwithstanding
the
rights we have secured in our intellectual property, third parties may bring
claims against us alleging that we have infringed on their intellectual property
rights or that our intellectual property rights are not valid. Any claims
against us, with or without merit, could be time consuming and costly to defend
or litigate and therefore could have an adverse affect on our
business.
Our
business is growing more international and can be disrupted by factors beyond
our control.
We
have
been reducing our reliance on domestic contractors and expanding our use of
offshore manufacturers as a cost-effective means to produce our products. During
the quarter ended March 31, 2007, we sourced a significant majority of our
finished products from suppliers located outside the United States and we also
continued to increase our purchase of fabrics outside the United States. In
addition, we have been increasing our international sales of product primarily
through our licensees and distributors.
As
a
result of our increasing international operations, we face the possibility
of
greater losses from a number of risks inherent in doing business in
international markets and from a number of factors which are beyond our control.
Such factors that could harm our results of operations and financial condition
include, among other things:
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Political
instability or acts of terrorism, which disrupt trade with the countries
in which our contractors, suppliers or customers are
located;
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Local
business practices that do not conform to legal or ethical
guidelines;
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Adoption
of additional or revised quotas, restrictions or regulations relating
to
imports or exports;
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Additional
or increased customs duties, tariffs, taxes and other charges on
imports;
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Significant
fluctuations in the value of the dollar against foreign
currencies;
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Increased
difficulty in protecting our intellectual property rights in foreign
jurisdictions;
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Social,
legal or economic instability in the foreign markets in which we
do
business, which could influence our ability to sell our products
in these
international markets; and
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Restrictions
on the transfer of funds between the United States and foreign
jurisdictions.
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Risks
Related to Our Industry
Our
sales are heavily influenced by general economic cycles.
Apparel
is a cyclical industry that is heavily dependent upon the overall level of
consumer spending. Purchases of apparel and related goods tend to be highly
correlated with cycles in the disposable income of our consumers. Our customers
anticipate and respond to adverse changes in economic conditions and uncertainty
by reducing inventories and canceling orders. As a result, any substantial
deterioration in general economic conditions, increases in interest rates,
acts
of war, terrorist or political events that diminish consumer spending and
confidence in any of the regions in which we compete, could reduce our sales
and
adversely affect our business and financial condition.
Our
business is highly competitive and depends on consumer spending
patterns.
The
apparel industry is highly competitive. We face a variety of competitive
challenges including:
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anticipating
and quickly responding to changing consumer
demands;
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developing
innovative, high-quality products in sizes and styles that appeal
to
consumers;
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competitively
pricing our products and achieving customer perception of value;
and
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the
need to provide strong and effective marketing
support.
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We
must successfully gauge fashion trends and changing consumer preferences to
succeed.
Our
success is largely dependent upon our ability to gauge the fashion tastes of
our
customers and to provide merchandise that satisfies retail and customer demand
in a timely manner. The apparel business fluctuates according to changes in
consumer preferences dictated in part by fashion and season. To the extent
we
misjudge the market for our merchandise, our sales may be adversely affected.
Our ability to anticipate and effectively respond to changing fashion trends
depends in part on our ability to attract and retain key personnel in our
design, merchandising and marketing staff. Competition for these personnel
is
intense, and we cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods.
Our
business may be subject to seasonal trends resulting in fluctuations in our
quarterly results, which could cause uncertainty about our future performance
and harm our results of operations.
In
the
experience of our management, operating results in the high end fashion denim
industry have been subject to seasonal trends when measured on a quarterly
basis. These trends are dependent on numerous factors, including:
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the
markets in which we operate;
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economic
conditions; and
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numerous
other factors beyond our control.
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Other
Risks Related to our Stock
Our
sale of securities in any equity or debt financing could result in dilution
to
our shareholders and have a material adverse effect on our
earnings.
Any
sale
of shares by us in future private placement or other offerings could result
in
dilution to our existing shareholders as a direct result of our issuance of
additional shares of our capital stock. In addition, our business strategy
may
include expansion through internal growth, by acquiring complementary
businesses, by acquiring or licensing additional brands, or by establishing
strategic relationships with targeted customers and suppliers. In order to
do
so, or to fund our other activities, we may issue additional equity securities
that could dilute our shareholders’ stock ownership. We may also assume
additional debt and incur impairment losses related to goodwill and other
tangible assets if we acquire another company and this could negatively impact
our results of operations.
Insiders
own a significant portion of our common stock, which could limit our
shareholders’ ability to influence the outcome of key
transactions.
As
of May
9, 2007, our executive officers and directors owned approximately 79% of the
outstanding shares of our common stock. Paul Guez, our Chairman, Chief Executive
Officer and President, and his spouse Elizabeth Guez collectively owned
approximately 72% of the outstanding shares of our common stock at May 9, 2007.
Accordingly, our executive officers and key personnel have the ability to affect
the outcome of, or exert considerable influence over, all matters requiring
shareholder approval, including the election and removal of directors and any
change in control. This concentration of ownership of our common stock could
have the effect of delaying or preventing a change of control of us or otherwise
discouraging or preventing a potential acquirer from attempting to obtain
control of us. This, in turn, could have a negative effect on the market price
of our common stock. It could also prevent our shareholders from realizing
a
premium over the market prices for their shares of common stock.
Our
stock price has been volatile.
Our
common stock is quoted on the NASDAQ Capital Market, and there can be
substantial volatility in the market price of our common stock. The market
price
of our common stock has been, and is likely to continue to be, subject to
significant fluctuations due to a variety of factors, including quarterly
variations in operating results, operating results which vary from the
expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by us
or
our competitors of a material nature, loss of one or more customers, additions
or departures of key personnel, future sales of common stock and stock market
price and volume fluctuations. In addition, general political and economic
conditions such as a recession, or interest rate or currency rate fluctuations
may adversely affect the market price of our common stock.
In
addition, the stock market in general has experienced extreme price and volume
fluctuations that have affected the market price of our common stock. Often,
price fluctuations are unrelated to operating performance of the specific
companies whose stock is affected. In the past, following periods of volatility
in the market price of a company’s stock, securities class action litigation has
occurred against the issuing company. If we were subject to this type of
litigation in the future, we could incur substantial costs and a diversion
of
our management’s attention and resources, each of which could have a material
adverse effect on our revenue and earnings. Any adverse determination in this
type of litigation could also subject us to significant
liabilities.
Absence
of dividends could reduce our attractiveness to investors.
Some
investors favor companies that pay dividends, particularly in general downturns
in the stock market. We have not declared or paid any cash dividends on our
common stock. We currently intend to retain any future earnings for funding
growth, and we do not currently anticipate paying cash dividends on our common
stock in the foreseeable future. Because we may not pay dividends, your return
on an investment in our common stock likely depends on your selling such stock
at a profit.
Our
Board is authorized to issue preferred stock, which may make it difficult for
any party to acquire us and adversely affect the price of our common
stock.
Under
our
articles of incorporation, our Board of Directors has the power to authorize
the
issuance of up to 5,000,000 shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without further vote or action by the shareholders.
Accordingly, our Board of Directors may issue preferred stock with terms that
could have preference over and adversely affect the rights of holders of our
common stock.
The
issuance of any preferred stock may:
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make
it difficult for any party to acquire us, even though an acquisition
might
be beneficial to our stockholders;
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delay,
defer or prevent a change in control of our
company;
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discourage
bids for the common stock at a premium over the market price of our
common
stock;
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adversely
affect the voting and other rights of the holders of our common stock;
and
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discourage
acquisition proposals or tender offers for our
shares.
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The
provisions allowing the issuance of preferred stock could limit the price that
investors might be willing to pay in the future for shares of our common
stock.
ITEM
4. |
CONTROLS
AND PROCEDURES
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Controls
and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed is recorded, processed, summarized and
reported within the time periods specified by the SEC and that such information
is accumulated and communicated to management, including our chief executive
officer (CEO) and chief financial officer (CFO), as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating
our
disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures.
Management,
with participation by our CEO and CFO, has designed our disclosure controls
and
procedures to provide reasonable assurance of achieving the desired objectives.
As required by SEC Rule 13a-15(b), in connection with filing this report on
Form 10-Q, management conducted an evaluation, with the participation of
our CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as of
March 31, 2007, the end of the period covered by this report.
Our
management, with the participation of our CEO and CFO, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures and concluded that, because of the material weaknesses in our
internal control over financial reporting discussed below, our disclosure
controls and procedures were not effective as of March 31, 2007.
The
Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines
a material weakness as a significant deficiency, or a combination of significant
deficiencies, that results in there being a more than remote likelihood that
a
material misstatement of the annual or interim financial statements will not
be
prevented or detected. Management identified a material weakness in internal
control over financial reporting in connection with this
assessment.
Specifically,
we did not design and implement controls necessary to provide reasonable
assurance that the procedures used in connection with the pricing of cost
components of inventory and in connection with the determination of net
realizable value of fabric, trim, and finished good inventories was appropriate.
As a result the manner in which such pricing and valuation was conducted were
not accounted for in accordance with GAAP.
Subsequent
to filing the Form 10-Q, we determined that there were material weaknesses
in
our procedures and controls used to appropriately account for and report on
related party transactions. Such weaknesses resulted in accounting errors,
the
correction of which have resulted in the filing of this Amendment No. 1 to
Form
10-Q.
Changes
in Internal Control over Financial Reporting
There
has
not been any material change in our internal control over financial reporting
during the three months ended March 31, 2007 that has materially affected,
or is
reasonably likely to materially affect our internal control over financial
reporting, except for the remediation changes discussed below.
To
remediate the material weakness in our disclosure controls and procedures
related to inventory, during the quarter ended March 31, 2007, management
implemented additional documentation control procedures with respect to
inventory pricing and valuation to ensure that inventory balances are
appropriately supported and priced, and correspondingly reduced to their net
realizable values on a timely basis. We also hired an outside consulting firm
with expertise in designing accounting systems to assist in the design and
implementation of these controls. Accordingly, management believes the material
weakness has been remediated.
To
remediate the material weakness in our disclosure controls and procedures with
respect to related party transactions, management will implement additional
documentation control procedures with respect to accounting for and reporting
related party transactions.
PART
II
See
attached Exhibit Index.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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BLUE
HOLDINGS, INC. |
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Date:
October 1, 2008
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By:
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/s/
Glenn S. Palmer
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Glenn
S. Palmer
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Interim
Chief Financial Officer
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Exhibit
Index
Exhibit
Number
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Description
of Exhibit
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10.1
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Summary
of Terms for License Agreement dated January 12, 2007, between the
Registrant and Faith Connexion S.A.R.L. Incorporated by reference
to
Exhibit 10.61 to the Registrant’s Annual Report on Form 10-KSB (File No.
000-33297) filed with the Securities and Exchange Commission on April
2,
2007.
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10.2
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License
Agreement by and between Antik Denim, LLC and Mercier SARL. Incorporated
by reference to Exhibit 10.1 of the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on May 2,
2007.
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10.3
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Amendment
No. 1 to License Agreement by and between Antik Denim, LLC and North
Star,
LLC. Incorporated by reference to Exhibit 10.2 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
May 2, 2007.
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10.4
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License
Agreement by and between Antik Denim, LLC and Max Ray, Inc. Incorporated
by reference to Exhibit 10.3 of the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on May 2,
2007.
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31.1
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Certification
of Principal Executive Officer pursuant to Securities Exchange Act
Rules
13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification
of Principal Financial Officer pursuant to Securities Exchange Act
Rules
13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32.1
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Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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32.2
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Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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