Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31,
2010
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File Number: 0-18926
JOES JEANS INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
11-2928178
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
2340 South Eastern Avenue, Commerce, California
|
|
90040
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(323) 837-3700
(Registrants telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files).
o
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes
o
No
x
The number of shares of the registrants common stock outstanding as of
October 14, 2010 was 63,762,349.
Table of Contents
PART I FINANCIAL
INFORMATION
Item 1.
Financial
Statements.
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
August 31, 2010
|
|
November 30, 2009
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,563
|
|
$
|
13,195
|
|
Accounts receivable, net
|
|
2,354
|
|
1,731
|
|
Inventories, net
|
|
33,665
|
|
22,887
|
|
Due from related parties
|
|
15
|
|
210
|
|
Deferred income taxes, net
|
|
4,893
|
|
4,893
|
|
Prepaid expenses and other current assets
|
|
550
|
|
805
|
|
Total current assets
|
|
48,040
|
|
43,721
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
5,072
|
|
3,162
|
|
Goodwill
|
|
3,836
|
|
3,836
|
|
Intangible assets
|
|
24,000
|
|
24,000
|
|
Deferred income taxes, net
|
|
4,806
|
|
4,806
|
|
Other assets
|
|
123
|
|
99
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
85,877
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|
$
|
79,624
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
15,538
|
|
$
|
13,590
|
|
Due to factor
|
|
5,095
|
|
3,129
|
|
Deferred licensing revenue
|
|
|
|
615
|
|
Due to related parties
|
|
442
|
|
254
|
|
Total current liabilities
|
|
21,075
|
|
17,588
|
|
|
|
|
|
|
|
Deferred rent
|
|
792
|
|
530
|
|
Total liabilities
|
|
21,867
|
|
18,118
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
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|
Stockholders equity
|
|
|
|
|
|
Common stock, $0.10 par value: 100,000 shares
authorized, 63,786 shares issued and 63,646 outstanding (2010) and 61,494 shares
issued and 61,354 outstanding (2009)
|
|
6,381
|
|
6,151
|
|
Additional paid-in capital
|
|
104,095
|
|
103,605
|
|
Accumulated deficit
|
|
(43,666
|
)
|
(45,450
|
)
|
Treasury stock, 140 shares
|
|
(2,800
|
)
|
(2,800
|
)
|
Total stockholders equity
|
|
64,010
|
|
61,506
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
85,877
|
|
$
|
79,624
|
|
The accompanying notes are an integral part of these financial
statements.
1
Table
of Contents
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
|
Three months ended
|
|
Nine months ended
|
|
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August 31, 2010
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|
August 31, 2009
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|
August 31, 2010
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August 31, 2009
|
|
|
|
(unaudited)
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|
(unaudited)
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|
Net sales
|
|
$
|
25,534
|
|
$
|
21,238
|
|
$
|
74,611
|
|
$
|
54,899
|
|
Cost of goods sold
|
|
13,732
|
|
10,864
|
|
39,942
|
|
27,576
|
|
Gross profit
|
|
11,802
|
|
10,374
|
|
34,669
|
|
27,323
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
10,070
|
|
7,394
|
|
29,986
|
|
21,383
|
|
Depreciation and amortization
|
|
223
|
|
132
|
|
604
|
|
401
|
|
|
|
10,293
|
|
7,526
|
|
30,590
|
|
21,784
|
|
Operating income
|
|
1,509
|
|
2,848
|
|
4,079
|
|
5,539
|
|
Interest expense
|
|
113
|
|
90
|
|
329
|
|
290
|
|
Income before provision for taxes
|
|
1,396
|
|
2,758
|
|
3,750
|
|
5,249
|
|
Income taxes
|
|
838
|
|
824
|
|
1,966
|
|
1,190
|
|
Net income
|
|
$
|
558
|
|
$
|
1,934
|
|
$
|
1,784
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|
$
|
4,059
|
|
|
|
|
|
|
|
|
|
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|
Earnings per common share - basic
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share -
diluted
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
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|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
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62,841
|
|
60,177
|
|
62,095
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|
59,935
|
|
Diluted
|
|
64,494
|
|
61,462
|
|
64,278
|
|
60,800
|
|
The
accompanying notes are an integral part of these financial statements.
2
Table
of Contents
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Nine months ended
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
|
|
(unaudited)
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
Net cash (used in) provided by operating
activities
|
|
$
|
(5,519
|
)
|
$
|
5,251
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
Purchases of property and equipment
|
|
(2,514
|
)
|
(401
|
)
|
Net cash used in investing activities
|
|
(2,514
|
)
|
(401
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
Proceeds from factor borrowing, net
|
|
1,966
|
|
1,332
|
|
Proceeds from exercise of warrants
|
|
653
|
|
|
|
Proceeds from exercise of options
|
|
30
|
|
|
|
Taxes on net settled options exercised
|
|
(653
|
)
|
|
|
Payment of taxes on restricted stock units
|
|
(595
|
)
|
(102
|
)
|
Net cash provided by financing activities
|
|
1,401
|
|
1,230
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
(6,632
|
)
|
6,080
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, at beginning of period
|
|
13,195
|
|
3,465
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, at end
of period
|
|
$
|
6,563
|
|
$
|
9,545
|
|
The accompanying notes are an integral part of these financial
statements.
3
Table
of Contents
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
Additional
|
|
Accumulated
|
|
Treasury
|
|
Stockholders
|
|
|
|
Shares
|
|
Par Value
|
|
Paid-In Capital
|
|
Deficit
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2008
|
|
59,946
|
|
$
|
5,996
|
|
$
|
102,859
|
|
$
|
(69,970
|
)
|
$
|
(2,800
|
)
|
$
|
36,085
|
|
Net income (unaudited)
|
|
|
|
|
|
|
|
4,059
|
|
|
|
4,059
|
|
Stock-based compensation, net of withholding taxes
(unaudited)
|
|
|
|
|
|
609
|
|
|
|
|
|
609
|
|
Issuance of restricted stock (unaudited)
|
|
649
|
|
65
|
|
(65
|
)
|
|
|
|
|
|
|
Balance, August 31, 2009
(unaudited)
|
|
60,595
|
|
$
|
6,061
|
|
$
|
103,403
|
|
$
|
(65,911
|
)
|
$
|
(2,800
|
)
|
$
|
40,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2009
|
|
61,494
|
|
$
|
6,151
|
|
$
|
103,605
|
|
$
|
(45,450
|
)
|
$
|
(2,800
|
)
|
$
|
61,506
|
|
Net income (unaudited)
|
|
|
|
|
|
|
|
1,784
|
|
|
|
1,784
|
|
Stock-based compensation, net of withholding taxes
(unaudited)
|
|
|
|
|
|
690
|
|
|
|
|
|
690
|
|
Exercise of warrants (unaudited)
|
|
480
|
|
48
|
|
605
|
|
|
|
|
|
653
|
|
Net settled warrants exercised (unaudited)
|
|
86
|
|
9
|
|
(9
|
)
|
|
|
|
|
|
|
Exercise of stock options (unaudited)
|
|
60
|
|
6
|
|
24
|
|
|
|
|
|
30
|
|
Net settled options exercised (unaudited)
|
|
832
|
|
83
|
|
(83
|
)
|
|
|
|
|
|
|
Taxes on net settled options exercised (unaudited)
|
|
|
|
|
|
(653
|
)
|
|
|
|
|
(653
|
)
|
Issuance of restricted stock (unaudited)
|
|
834
|
|
84
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2010
(unaudited)
|
|
63,786
|
|
$
|
6,381
|
|
$
|
104,095
|
|
$
|
(43,666
|
)
|
$
|
(2,800
|
)
|
$
|
64,010
|
|
The accompanying notes are an integral part of these financial
statements.
4
Table of Contents
JOES JEANS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements of Joes Jeans Inc., or
Joes, which include the accounts of its wholly-owned subsidiaries, for the
three and nine months ended August 31, 2010 and 2009 and the related
footnote information have been prepared on a basis consistent with Joes
audited consolidated financial statements as of November 30, 2009
contained in its Annual Report on Form 10-K, or the Annual Report. Joes
fiscal year end is November 30.
Joes
principal business activity involves the design, development and worldwide
marketing of apparel products. Joes
primary current operating subsidiary is Joes Jeans Subsidiary Inc., or Joes
Jeans Subsidiary. All significant
inter-company transactions have been eliminated. Joes operates in two primary business
segments: Wholesale and Retail. Joes Wholesale segment is comprised of sales
to retailers, specialty stores and distributors and includes expenses from
marketing, sales, distribution and customer service departments. Also,
some international sales are made directly to wholesale customers who operate
retail stores. Joes Retail segment is
comprised of sales to consumers through full-price retail stores, outlet stores
and through the
www.joesjeans.com/shop
internet site. Joes Corporate and other
is comprised of corporate operations, which include the executive, finance,
legal, and human resources departments, design and production. Prior to the filing of Joes Quarterly Report
on Form 10-Q for the period ended May 31, 2010, Joes operated in one
business segment with an immaterial amount of sales from retail operations and
license agreements. The previous periods
reported have been revised to reflect this change in Joes reportable segments.
These
unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the related notes thereto
contained in its Annual Report. In the
opinion of management, the accompanying unaudited financial statements contain
all adjustments (consisting of normal recurring adjustments), which management
considers necessary to present fairly Joes financial position, results of
operations and cash flows for the interim periods presented. The results for the three and nine months
ended August 31, 2010 are not necessarily indicative of the results
anticipated for the entire year ending November 30, 2010. The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual
results may differ from those estimates.
NOTE 2 ADOPTION OF ACCOUNTING PRINCIPLES
In
December 2007, the Financial Accounting Standards Board, or FASB, issued a
standard on business combinations that significantly changes the accounting for
business combinations. Under the standard, an acquiring entity is required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions and includes a
substantial number of new disclosure requirements. The standard applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008, which is the year beginning December 1, 2009 for
Joes. Joes does not expect that this
standard will have any impact on its financial statements unless it enters into
an applicable transaction in the future.
In
December 2007, the FASB issued a standard that establishes new accounting
and reporting standards for a non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements separate from the parents equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net income on the
face of the income statement. The
standard clarifies that changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a
5
Table of Contents
subsidiary
is deconsolidated. Such gain or loss
will be measured using the fair value of the non-controlling equity investment
on the deconsolidation date and includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. The standard is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008, which is the year beginning December 1, 2009 for
Joes. Joes does not expect that it
will have any impact on its financial statements unless it enters into an
applicable transaction in the future.
In
April 2008, the FASB issued a standard that amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset in order to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset. The standard is effective for financial
statements issued for fiscal years beginning after December 15, 2008,
which is the year beginning December 1, 2009 for Joes, and interim
periods within that fiscal year. The
adoption of this standard did not have a material impact on its financial
position or results from operations.
In
April 2009, the FASB issued changes regarding interim disclosures about
fair value of financial instruments. The changes enhance consistency in
financial reporting by increasing the frequency of fair value disclosures from
annually to quarterly. The changes require disclosures on a
quarterly basis of qualitative and quantitative information about fair value
estimates for all those financial instruments not measured on the balance sheet
at fair value. The disclosure requirement became effective beginning with its
first interim reporting period ending after June 15, 2009. The adoption of
this change did not have a material impact on Joes results of operations or
financial condition.
In
May 2009, the FASB issued a standard related to subsequent
events. The standard is effective for interim or annual periods
ending after June 15, 2009 and establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. In February 2010, the FASB issued an update to the
standard related to subsequent events effective for all financial statements of
SEC filers issued after February 24, 2010, which removed the requirement
to disclose the date through which subsequent events were evaluated. The adoption of this update to the standard
did not have a material impact on its financial position or results from
operations.
In
June 2009, the FASB issued a standard related to the FASB accounting
standards codification and the hierarchy of generally accepted accounting
principles. The standard will become the source of authoritative
U.S. generally accepted accounting principles, or GAAP, recognized by the FASB
to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the
effective date of this standard, the codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the codification
will become non-authoritative. This standard is effective for
financial statements issued for interim and annual periods ending after September 15,
2009. The adoption of this standard did not have a material impact
on Joes results of operations, financial condition or cash flows.
In
June 2009, the FASB issued an amendment to a standard related to the
accounting for transfer of financial assets.
The amendment consists of the removal of the concept of a
special-purpose entity, the elimination of the exception of qualifying
special-purpose entities from the consolidation guidance and clarifies the unit
of account eligible for sale accounting.
The standard is effective as of the beginning of the first annual
reporting period that begins after November 15, 2009, which is the year
beginning December 1, 2009 for Joes, and interim periods within that
fiscal year. The adoption of this
standard did not have a material impact on its financial position or results
from operations.
In
December 2009, Joes adopted an update to a standard related to
determining whether instruments granted in share-based payment transactions are
participating securities. This update defines unvested share-based payment
awards that contain nonforfeitable rights to dividends as participating securities
that should be included in computing earnings per share, or EPS, using the
two-class method. Certain of the Joes non-vested restricted stock awards
previously granted qualify as participating securities. As required, all
current and prior period EPS were evaluated. The adoption did not have a
material impact on the Joes EPS.
6
Table of Contents
In
February 2010, the FASB issued an update to a standard to amend the topic
of Subsequent Events. As a result of this update, Joes will no longer disclose
the date through which we evaluated subsequent events in the financial
statements - either in originally issued financial statements or reissued
financial statements. This change addresses practice issues for Joes with
respect to processes around issuing financial statements and Securities and
Exchange Commission or SEC registration requirements (e.g., incorporation by
reference of previously issued financial statements). In addition, Joes will
not have to disclose the date that financial statements were reissued unless
the financial statements are revised - for either an error correction or other
retrospective application of GAAP. Joes will evaluate subsequent events
through the date that the financial statements are issued. Joes adopted this
guidance in the second fiscal quarter of 2010, and this guidance did not have a
material impact on its financial statements.
NOTE 3 ACCOUNTS RECEIVABLE, INVENTORY ADVANCES AND DUE TO FACTOR
Joes primary method to
obtain the cash necessary for operating needs was through the sale of accounts
receivable pursuant to factoring agreements and obtaining advances under
inventory security agreements with its factor, CIT Commercial
Services, Inc., a unit of CIT Group Inc., or CIT.
As a result of these
agreements, amounts due to factor consist of the following (in thousands):
|
|
August 31, 2010
|
|
November 30, 2009
|
|
Non-recourse receivables assigned to factor
|
|
$
|
14,160
|
|
$
|
14,139
|
|
Client recourse receivables
|
|
331
|
|
263
|
|
Total receivables assigned to factor
|
|
14,491
|
|
14,402
|
|
|
|
|
|
|
|
Allowance for customer credits
|
|
(2,773
|
)
|
(2,606
|
)
|
Net loan balance from factored accounts receivable
|
|
(11,163
|
)
|
(10,345
|
)
|
Net loan balance from inventory advances
|
|
(5,650
|
)
|
(4,580
|
)
|
Due to factor
|
|
$
|
(5,095
|
)
|
$
|
(3,129
|
)
|
|
|
|
|
|
|
Non-factored accounts receivable
|
|
$
|
3,250
|
|
$
|
2,562
|
|
Allowance for customer credits
|
|
(421
|
)
|
$
|
(330
|
)
|
Allowance for doubtful accounts
|
|
(475
|
)
|
(501
|
)
|
Accounts receivable, net of allowance
|
|
$
|
2,354
|
|
$
|
1,731
|
|
Of the total amount of
receivables sold as of August 31, 2010 and November 30, 2009, Joes
bears the risk of payment of $331,000 and $263,000, respectively, in the event
of non-payment by its customers.
CIT
Commercial Services
The
Joes Jeans Subsidiary is a party to an accounts receivable factoring agreement
and an inventory security agreement with CIT.
The accounts receivable agreement gives Joes the ability to obtain cash
by selling to CIT certain of its accounts receivable and the inventory security
agreement gives Joes the ability to obtain advances for up to 50 percent of
the value of certain eligible inventory.
The accounts receivables are sold for up to 85 percent of the face
amount on either a recourse or non-recourse basis depending on the
creditworthiness of the customer. CIT
currently permits Joes to sell its accounts receivables at the maximum level
of 85 percent and allows advances of up to $6,000,000 for eligible inventory. CIT has the ability, in its discretion at any
time or from time to time, to adjust or revise any limits on the amount of
loans or advances made to Joes pursuant to both of these agreements and to
impose surcharges on our rates for certain of our customers. As further assurance to CIT, cross guarantees
were executed by and among Joes and all of its parent and subsidiaries to
guarantee each entitys obligations.
7
Table
of Contents
As
of August 31, 2010, Joes cash availability with CIT was approximately
$975,000. This amount fluctuates on a
daily basis based upon invoicing and collection related activity by CIT for the
receivables sold. In connection with
both of the agreements with CIT, certain assets are pledged to CIT, including
all of Joes inventory, merchandise and/or goods, including raw materials
through finished goods and receivables; however, Joes trademarks are not encumbered.
In
May 2010, the parties amended the accounts receivable agreement to provide
for a change in the factoring fees, an extension of the agreement and
additional termination rights. The
accounts receivable agreement may be terminated by CIT upon 60 days written
notice or immediately upon the occurrence of an event of default as defined in
the agreement. The accounts receivable
agreement may be terminated by Joes upon 60 days written notice prior to
June 30, 2011, or earlier provided that the minimum factoring fees have
been paid for the respective period or CIT fails to fund Joes for five
consecutive days. The inventory
agreement may be terminated once all obligations are paid under both agreements
or if an event of default occurs as defined in the agreement.
From
June 1 to June 30, 2010, Joes paid to CIT a factoring rate of 0.6
percent to factor accounts which CIT bore the credit risk, subject to
discretionary surcharges, and 0.4 percent for accounts which Joes bore the
credit risk. The interest rate
associated with borrowings under the inventory lines and factoring facility is
0.25 percent plus the Chase prime rate.
Beginning July 1, 2010, the factoring rate changed to 0.55 percent
for accounts which CIT bears the credit risk, subject to discretionary
surcharges, up to $40,000,000 of invoices factored, 0.50 percent over
$40,000,000 of invoices factored and 0.35 percent for accounts which Joes
bears the credit risk. The interest rate
associated with borrowings under the inventory lines and factoring facility is
0.25 percent plus the Chase prime rate.
As of August 31, 2010, the Chase prime rate was 3.25 percent.
In
addition, in the event Joes needs additional funds, Joes has also established
a letter of credit facility with CIT to allow it to open letters of credit for
a fee of 0.25 percent of the letter of credit face value with international and
domestic suppliers, subject to availability.
At August 31, 2010, Joes had three letters of credit outstanding
in the aggregate amount of $51,000.
NOTE 4 INVENTORIES
Inventories are valued at
the lower of cost or market with cost determined by the first-in, first-out
method. Inventories consisted of the
following (in thousands):
|
|
August 31, 2010
|
|
November 30, 2009
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
25,671
|
|
$
|
13,093
|
|
Finished goods consigned to others
|
|
332
|
|
139
|
|
Work in progress
|
|
1,862
|
|
3,092
|
|
Raw materials
|
|
6,903
|
|
7,746
|
|
|
|
34,768
|
|
24,070
|
|
Less allowance for obsolescence and slow moving
items
|
|
(1,103
|
)
|
(1,183
|
)
|
|
|
$
|
33,665
|
|
$
|
22,887
|
|
Joes did not record any
charges to its inventory reserve allowance for the three or nine months ended August 31,
2010 and 2009.
8
Table of Contents
NOTE 5 RELATED PARTY TRANSACTIONS
As of August 31, 2010 and November 30,
2009, Joes related party balance consisted of amounts due to and due from
certain related parties, as follows (in thousands):
|
|
August 31, 2010
|
|
November 30, 2009
|
|
|
|
|
|
|
|
Due from related parties
|
|
|
|
|
|
Kids Jeans LLC
|
|
$
|
15
|
|
$
|
210
|
|
Total due from related parties
|
|
$
|
15
|
|
$
|
210
|
|
|
|
|
|
|
|
Due to related parties
|
|
|
|
|
|
Joe Dahan
|
|
$
|
288
|
|
$
|
199
|
|
Albert Dahan
|
|
154
|
|
46
|
|
Commerce Investment Group and affliates
|
|
|
|
9
|
|
Total due to related parties
|
|
$
|
442
|
|
$
|
254
|
|
Joe Dahan
Joe
Dahan, an officer, director and greater than 10 percent stockholder of Joes,
is entitled to a certain percentage of the gross profit earned by Joes in any
applicable fiscal year until October 2017 as a result of the merger. See Note
9- Commitments and Contingencies for a further discussion of the merger
consideration.
Albert Dahan
In
April 2009, Joes entered into a commission-based sales agreement with
Albert Dahan, brother of Joe Dahan, for the sale of its products into the
off-price channels of distribution.
Under the agreement, Mr. Albert Dahan is entitled to a commission
for purchase orders entered into by Joes where he acts as a sales person for
Joes. The agreement may be terminated
at any time for any reason or no reason with or without notice. For the third quarter of fiscal 2010, Mr. Albert
Dahan earned $226,000 under this arrangement.
Effective
as of June 1, 2009, Joes entered into a license agreement for the license
of the childrens product line with Kids Jeans LLC, or Kids LLC, an entity
which Mr. Albert Dahan holds an interest where he has voting control over
the entity. Under the terms of the
license, Kids LLC has an exclusive right to produce, distribute and sell
childrens products bearing the Joes® brand on a worldwide basis, subject to
certain limitations on the channels of distribution. In exchange for the license, Kids LLC will
pay to Joes a royalty payment of 20 percent on the first $5,000,000 in net
sales and 10 percent thereafter. The
initial term of the agreement is for three years until June 30, 2012 and
is subject to certain guaranteed minimum net sales and royalty payment
requirements during the initial term and for renewal. Kids LLC advanced $1,000,000 as a payment against
the first years guaranteed minimum royalties.
This amount has been reflected under the caption of Deferred Licensing
Revenue on the Condensed Consolidated Balance Sheets. Joes expects to recognize the royalty
revenue based upon a percentage as set forth in the agreement of the licensees
actual net sales or minimum net sales, whichever is greater. Payments received in consideration of the
grant of the license or advanced royalty payments are recognized ratably as
revenue over the term of the license agreement.
The revenue recognized ratably over the term of the license agreement
will not exceed royalty payments received.
The unrecognized portion of the upfront payments are included in
deferred royalties and accrued expenses depending on the long or short term
nature of the payments to be recognized.
As of August 31, 2010, all of the advanced payment has been
recognized as income.
9
Table of Contents
NOTE 6 EARNINGS PER SHARE
Earnings per share are
computed using weighted average common shares and dilutive common equivalent
shares outstanding. Potentially dilutive
securities consist of outstanding options and warrants. A reconciliation of the numerator and
denominator of basic earnings per share and diluted earnings per share is as
follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
(in thousands, except per share data)
|
|
(in thousands, except per share data)
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
August 31, 2010
|
|
August 31, 2009
|
|
Basic earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558
|
|
$
|
1,934
|
|
$
|
1,784
|
|
$
|
4,059
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
62,841
|
|
60,177
|
|
62,095
|
|
59,935
|
|
Income per common share - basic
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558
|
|
$
|
1,934
|
|
$
|
1,784
|
|
$
|
4,059
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
62,841
|
|
60,177
|
|
62,095
|
|
59,935
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Restricted shares, RSUs, options and warrants
|
|
1,653
|
|
1,285
|
|
2,183
|
|
865
|
|
Dilutive potential common shares
|
|
64,494
|
|
61,462
|
|
64,278
|
|
60,800
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share -
dilutive
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.07
|
|
For the three months ended August 31,
2010 and 2009, currently exercisable options and warrants in the aggregate of
450,000 and 4,117,340, respectively, have been excluded from the calculation of
diluted income per share because the exercise prices of such options, warrants
and unvested restricted shares and RSUs were out-of-the-money. For the nine months ended August 31,
2010 and 2009, currently exercisable options and warrants in the aggregate of
450,000 and 4,242,340, respectively, have been excluded from the calculation of
diluted income per share because the exercise prices of such options, warrant
and unvested restricted shares and RSUs were out-of-the-money.
Shares Reserved for Future
Issuance
As of August 31, 2010,
shares reserved for future issuance include (i) 919,572 shares of common
stock issuable upon the exercise of stock options granted under the incentive
plans; (ii) 3,500,792 shares of common stock issuable upon the vesting of
RSUs; and (iii) an aggregate of 3,667,483 shares of common stock available
for future issuance under the 2004 Stock Incentive Plan.
NOTE 7 INCOME
TAXES
Joes
utilizes the liability method of accounting for income taxes in accordance with
FASB Accounting Standards Codification, or ASC, 740. Under the liability method, deferred taxes
are determined based on the temporary differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates.
Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized. The likelihood of a material change in Joes
expected realization of these assets depends on its ability to generate
sufficient future taxable income. Joes ability to generate enough taxable
income to utilize its deferred tax assets depends on many factors, among which
is Joes ability to deduct tax loss carry-forwards against future taxable
income, the effectiveness of tax planning strategies and reversing deferred tax
liabilities.
Joes and its subsidiaries
are subject to U.S. federal income tax as well as income tax in multiple state
jurisdictions. To the extent allowed by
law, the tax authorities may have the right to examine prior periods where net
operating losses were generated and carried forward, and make adjustments up to
the amount of the net operating loss carryforward amount. The only periods subject to examination for
Joes federal tax returns are years 2006 through 2008. The periods subject to
examination for Joes state tax returns in California are years 2005 through
2008. Joes is not currently under an
Internal Revenue Service tax examination or an examination by any other state,
local or foreign jurisdictions for any tax year.
10
Table of
Contents
Joes had a net operating
loss carryforward of $42,538,000 at the end of fiscal 2009 for federal tax
purposes that expire through 2026. Joes also has $25,553,000 of net operating
loss carryforwards available for California which begin to expire in 2014.
Certain limitations may be
placed on net operating loss carryforwards as a result of changes in control
as defined in Section 382 of the Internal Revenue Code. In the event a change in control occurs, it
will have the effect of limiting the annual usage of the carryforwards in
future years. Additional changes in
control in future periods could result in further limitations of Joes ability
to offset taxable income. Management
believes that certain changes in control have occurred which resulted in
limitations on its net operating loss carryforwards.
NOTE 8
STOCKHOLDERS EQUITY
Warrants
Joes has historically
issued warrants in conjunction with various private placements of its common
stock, and debt to equity conversions.
As of August 31, 2010, all outstanding common stock warrants have
been exercised or have expired.
Stock Incentive Plans
In September 2000, Joes
adopted the 2000 Director Stock Incentive Plan, or the 2000 Director Plan,
under which nonqualified stock options were granted to members of the Board of
Directors in lieu of cash director fees.
After the adoption of the 2004 Stock Incentive Plan in June 2004,
Joes no longer granted options pursuant to the 2000 Director Plan; however, it
remains in effect for awards outstanding as of the adoption of the 2004 Stock
Incentive Plan. As of August 31,
2010, options to purchase up to 144,572 shares of common stock remained
outstanding under the 2000 Director Plan.
On June 3, 2004, Joes
adopted the 2004 Stock Incentive Plan, or the 2004 Incentive Plan, and has
subsequently amended it to increase the number of shares authorized for
issuance to 12,265,172 shares of common stock.
Under the 2004 Incentive Plan, grants may be made to employees,
officers, directors and consultants under a variety of awards based upon
underlying equity, including, but not limited to, stock options, restricted
common stock, restricted stock units or performance shares. The 2004 Incentive Plan limits the number of
shares that can be awarded to any employee in one year to 1,250,000. Exercise price for incentive options may not
be less than the fair market value of Joes common stock on the date of grant
and the exercise period may not exceed ten years. Vesting periods, terms and types of awards
are determined by the Board of Directors and/or its Compensation and Stock
Option Committee, or Compensation Committee.
The 2004 Incentive Plan includes a provision for the acceleration of
vesting of all awards upon a change of control as well as a provision that
allows forfeited or unexercised awards that have expired to be available again
for future issuance. Since fiscal 2008, Joes has issued both restricted common
stock and restricted common stock units, or RSUs, to its officers, directors
and employees pursuant to the 2004 Stock Incentive Plan. The RSUs represent the right to receive one share
of common stock for each unit on the vesting date provided that the employee
continues to be employed by Joes. On
the vesting date of the RSUs, Joes expects to issue the shares of common stock
to each participant upon vesting and expects to withhold an equivalent number
of shares at fair market value on the vesting date to fulfill tax withholding
obligations. Any RSUs withheld or
forfeited will be shares available for issuance in accordance with the terms of
the 2004 Incentive Plan.
The shares of common stock
issued upon exercise of a previously granted stock option or a grant of
restricted common stock or RSUs are considered new issuances from shares
reserved for issuance in connection with the adoption of the various plans. Joes requires that the option holder provide
a written notice of exercise in accordance with the option agreement and plan
to the stock plan administrator and full payment for the shares be made prior
to issuance. All issuances are made
under the terms and conditions set forth in the applicable plan. As of August 31, 2010, 3,667,483 shares
remained available for issuance under the 2004 Incentive Plan.
11
Table of Contents
For
all stock compensation awards that contain graded vesting with time-based
service conditions, Joes has elected to apply a straight-line recognition
method to account for all of these awards.
For existing grants that were not fully vested at November 30,
2009, there was a total of $456,000 and $1,286,000 of stock based compensation
expense recognized during the three and nine months ended August 31, 2010,
respectively.
The following summarizes
option grants, restricted common stock and RSUs issued to members of the Board
of Directors for the fiscal years 2002 through the third quarter of fiscal 2010
(in actual amounts) for service as a member:
|
|
August 31, 2010
|
|
|
|
As of:
|
|
Number of options
|
|
Exercise price
|
|
2002
|
|
40,000
|
|
$
|
1.00
|
|
2002
|
|
31,496
|
|
$
|
1.27
|
|
2003
|
|
30,768
|
|
$
|
1.30
|
|
2004
|
|
320,000
|
|
$
|
1.58
|
|
2005
|
|
300,000
|
|
$
|
5.91
|
|
2006
|
|
450,000
|
|
$
|
1.02
|
|
|
|
|
|
Number of restricted
shares isssued
|
|
2007
|
|
|
|
320,000
|
|
2008
|
|
|
|
473,455
|
|
2009
|
|
|
|
371,436
|
|
2010
|
|
|
|
|
|
Exercise prices for options
outstanding as of August 31, 2010 are as follows:
|
|
Options Outstanding and Exercisable
|
|
Exercise Price
|
|
Number of shares
|
|
Weighted-Average
Remaining
Contractual Life
|
|
|
|
|
|
|
|
$0.39 - $0.41
|
|
51,282
|
|
0.3
|
|
$1.00 - $1.02
|
|
140,000
|
|
4.4
|
|
$1.27 - $1.30
|
|
53,290
|
|
2.4
|
|
$1.58 - $1.63
|
|
225,000
|
|
4.0
|
|
$5.91
|
|
450,000
|
|
4.8
|
|
|
|
|
|
|
|
|
|
919,572
|
|
4.1
|
|
12
Table of Contents
The following table summarizes
the stock option activity by plan:
|
|
Total Number
of Shares
|
|
2004 Incentive
Plan
|
|
2000 Director
Plan
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2009
|
|
3,226,046
|
|
3,022,500
|
|
203,546
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
(2,306,474
|
)
|
(2,247,500
|
)
|
(58,974
|
)
|
Forfeited / Cancelled
|
|
|
|
|
|
|
|
Outstanding and exercisable at August 31,
2010
|
|
919,572
|
|
775,000
|
|
144,572
|
|
Stock activity in the
aggregate for the periods indicated are as follows (in actual amounts):
|
|
Options
|
|
Weighted
average
exercise price
|
|
Weighted average
remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2009
|
|
3,226,046
|
|
$
|
1.78
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(2,306,474
|
)
|
1.08
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at August 31,
2010
|
|
919,572
|
|
$
|
3.54
|
|
4.1
|
|
$
|
258,791
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average per option fair value of options
granted during the year
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
average
exercise price
|
|
Weighted average
remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at November 30, 2008
|
|
3,313,146
|
|
$
|
1.76
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(87,100
|
)
|
1.02
|
|
|
|
|
|
Outstanding and exercisable at August 31,
2009
|
|
3,226,046
|
|
$
|
1.78
|
|
4.9
|
|
$
|
64,771
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average per option fair value of options
granted during the year
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2010,
there was $3,006,000 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the 2004
Incentive Plan. That unrecognized
compensation cost is expected to be recognized over a weighted-average period
of 2.5 years.
13
Table of Contents
A summary of the status of
restricted common stock and RSUs as of November 30, 2009, and changes
during the three and nine months ended August 31, 2010, are presented
below:
|
|
|
|
|
|
|
|
Weighted-Average Grant-Date
Fair Value
|
|
|
|
Restricted
Shares
|
|
Restricted
Stock Units
|
|
Total
|
|
Restricted
Shares
|
|
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2009
|
|
691,903
|
|
4,773,979
|
|
5,465,882
|
|
$
|
0.94
|
|
$
|
0.84
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
(835,200
|
)
|
(835,200
|
)
|
|
|
0.79
|
|
Cancelled
|
|
|
|
(318,957
|
)
|
(318,957
|
)
|
|
|
0.84
|
|
Forfeited
|
|
|
|
(119,030
|
)
|
(119,030
|
)
|
|
|
0.98
|
|
Outstanding at August 31, 2010
|
|
691,903
|
|
3,500,792
|
|
4,192,695
|
|
$
|
0.94
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2008
|
|
157,233
|
|
2,503,526
|
|
2,660,759
|
|
$
|
1.59
|
|
$
|
0.75
|
|
Granted
|
|
|
|
1,197,856
|
|
1,197,856
|
|
|
|
0.41
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
(648,580
|
)
|
(648,580
|
)
|
|
|
0.70
|
|
Cancelled
|
|
|
|
(144,764
|
)
|
(144,764
|
)
|
|
|
0.77
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2009
|
|
157,233
|
|
2,908,038
|
|
3,065,271
|
|
$
|
1.59
|
|
$
|
0.62
|
|
In
the three and nine months ended August 31, 2010, there were no options or
RSUs granted. In the three and nine
months ended August 31, 2010, Joes issued 455,792 and 835,200 shares of
its common stock to holders of RSUs, respectively, and withheld or cancelled
206,869 RSUs and 318,957 RSUs, respectively.
In addition, 2,306,474 options to purchase shares of its common stock
were exercised and Joes withheld the value of 1,415,005 shares not yet issued
for payment of the exercise price or tax withholding obligations.
NOTE 9 COMMITMENTS AND CONTINGENCIES
Contingent Consideration Payments
Joes,
Joes Subsidiary, JD Holdings, Inc., or JD Holdings, and Joseph Dahan, the
sole stockholder of JD Holdings, entered into a definitive Agreement and Plan
of Merger on February 6, 2007, as amended on June 25, 2007, or the
Merger Agreement. JD Holdings primary
assets included all rights, title and interest in all intellectual property,
including the trademarks, related to the Joes®, Joes Jeans and JD brand and
marks, or the Joes Brand. JD Holdings
was the successor to JD Design, the entity from whom Joes licensed the Joes
Brand. The license agreement terminated
automatically upon completion of the merger.
Joes acquired JD Holdings in order to acquire the Joes Brand. This acquisition allowed it to expand its
product offerings and the brand in the marketplace, including the opening of
company owned retail stores and licensing additional product categories. Joes believed that the combined company
created synergies to allow it to generate additional revenue from the brand
recognition established by the denim business and increased market
opportunity. Joes also believed that
the combined company and complete ownership of the Joes Brand enhanced the
value of Joes from a stockholder and market participant point of view. Joes believes that these factors support the
amount of goodwill recorded.
As
part of the consideration paid in connection with the merger and without regard
to continued employment, Mr. Dahan is entitled to a certain percentage of
the gross profit earned by Joes in any applicable fiscal year until October 2017. Mr. Dahan is entitled to the following:
(i) 11.33 percent of the gross profit from $11,251,000 to $22,500,000;
(ii) three percent of the gross profit from $22,501,000 to $31,500,000; (iii) two
percent of the gross profit
14
Table of Contents
from
$31,501,000 to $40,500,000; (iv) one percent of the gross profit above
$40,501,000. The payments may be paid in
advance on a monthly basis based upon estimates of gross profits after the
assumption has been reached that the payments are likely to be paid. At the end of each quarter, any overpayments
are offset against future payments and any significant underpayments are
made. No payments are made if the gross
profit is less than $11,250,000. Gross
Profit is defined as net sales of the Joes® brand less cost of goods sold.
Retail
Leases
Joes
leases retail store locations under operating lease agreements expiring on
various dates through 2020 or 10 years from the rent commencement date. Joes
currently has 18 executed leases. Some
of these leases require Joes to make periodic payments for property taxes,
utilities and common area operating expenses. Certain retail store leases
provide for rents based upon the minimum annual rental amount and a percentage
of annual sales volume, generally ranging from 6% to 8%, when specific sales
volumes are exceeded. Some leases
include lease incentives, rent abatements and fixed rent escalations, which are
amortized and recorded over the initial lease term on a straight-line basis.
As
of August 31, 2010, the future minimum rental payments under
non-cancelable retail operating leases with lease terms in excess of one year
were as follows (in thousands):
2010 Remainder of the year
|
|
$
|
759
|
|
2011
|
|
3,305
|
|
2012
|
|
3,386
|
|
2013
|
|
3,616
|
|
2014
|
|
3,875
|
|
Thereafter
|
|
22,621
|
|
|
|
$
|
37,562
|
|
NOTE 11
SEASONALITY
The
market for apparel products is seasonal.
The majority of Joes sales activities take place from late fall to
early spring and the greatest volume of shipments and sales are generally made
from late spring through the summer.
This time period coincides with Joes second and third fiscal quarters
and its cash flow is generally strongest in its third and fourth fiscal quarters
when a significant amount of its net sales are realized as a result of shipping
orders taken during earlier months. In
the second quarter in order to prepare for peak sales that occur during the
second half of the year, Joes builds its inventory levels, which results in
higher liquidity needs compared to other quarters.
Due
to the seasonality of its business, as well as the evolution and changes in its
business and product mix, Joes quarterly or yearly results are not necessarily
indicative of the results for the next quarter or year. Furthermore, because of the limited number of
full price retail and outlet stores open last year and the growing number of
full-price retail and outlet stores opened thusfar in fiscal 2010, Joes is
continuing to assess the seasonality of its business on its retail segment and
its potential impact on Joes financial results.
15
Table of Contents
NOTE 12
SEGMENT INFORMATION
The
following table contains summarized financial information concerning our
reportable segments:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
August 31, 2010
|
|
August 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
21,349
|
|
$
|
19,943
|
|
$
|
65,655
|
|
$
|
51,616
|
|
Retail
|
|
4,185
|
|
1,295
|
|
8,956
|
|
3,283
|
|
|
|
$
|
25,534
|
|
$
|
21,238
|
|
$
|
74,611
|
|
$
|
54,899
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
9,498
|
|
$
|
9,514
|
|
$
|
29,285
|
|
$
|
25,177
|
|
Retail
|
|
2,304
|
|
860
|
|
5,384
|
|
2,146
|
|
|
|
$
|
11,802
|
|
$
|
10,374
|
|
$
|
34,669
|
|
$
|
27,323
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
5,741
|
|
$
|
6,525
|
|
$
|
17,738
|
|
$
|
17,067
|
|
Retail
|
|
(10
|
)
|
(108
|
)
|
103
|
|
(625
|
)
|
Corporate and other
|
|
(4,222
|
)
|
(3,569
|
)
|
(13,762
|
)
|
(10,903
|
)
|
|
|
$
|
1,509
|
|
$
|
2,848
|
|
$
|
4,079
|
|
$
|
5,539
|
|
|
|
Nine months ended
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
Capital expenditures:
|
|
|
|
|
|
Wholesale
|
|
$
|
23
|
|
$
|
|
|
Retail
|
|
2,399
|
|
390
|
|
Corporate and other
|
|
92
|
|
11
|
|
|
|
$
|
2,514
|
|
$
|
401
|
|
|
|
August 31, 2010
|
|
November 30, 2009
|
|
Total assets:
|
|
|
|
|
|
Wholesale
|
|
$
|
50,582
|
|
$
|
47,607
|
|
Retail
|
|
7,262
|
|
3,732
|
|
Corporate and other
|
|
28,033
|
|
28,285
|
|
|
|
$
|
85,877
|
|
$
|
79,624
|
|
16
Table of Contents
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Forward-Looking Statements
When
used in this Quarterly Report on Form 10-Q, or Quarterly Report, the words
may, will, expect, anticipate, intend, estimate, continue, believe
and similar expressions are intended to identify forward-looking
statements. Similarly, statements that
describe our future expectations, objectives and goals or contain projections
of our future results of operations or financial condition are also
forward-looking statements. Statements
looking forward in time are included in this Quarterly Report pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties, which could cause actual results to differ materially,
including, without limitation, continued acceptance of our product, product
demand, competition, capital adequacy and the potential inability to raise
additional capital if required, and the risk factors contained in our reports
filed with the Securities and Exchange Commission, or SEC, pursuant to the
Securities Exchange Act of 1934, as amended, or Exchange Act, including our
Annual Report on Form 10-K for the year ended November 30, 2009. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Our future results, performance
or achievements could differ materially from those expressed or implied in
these forward-looking statements. We do
not undertake and specifically decline any obligation to publicly revise these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events, except as
required by law.
Introduction
This discussion and analysis
summarizes the significant factors affecting our results of operations and
financial conditions during the three and nine month period ended August 31,
2010 and 2009. This discussion should be
read in conjunction with our Condensed Consolidated Financial Statements, Notes
to Condensed Consolidated Financial Statements and supplemental information
contained in this Quarterly Report.
Executive
Overview
Our
principal business activity is the design, development and worldwide marketing
of our Joes® products, which include denim jeans, related casual wear and
accessories. Since Joes® was
established in 2001, the brand has been recognized in the premium denim
industry, an industry term for denim jeans with price points of approximately
$100 or more, for its quality, fit and fashion-forward designs. Because we focus on design, development and
marketing, we rely on third parties to manufacture our apparel products. We sell our products through our own retail
stores, to numerous retailers, which include major department stores, specialty
stores and distributors around the world.
The
focus of our operations has been on our Joes® brand. Our transition plan, which began in 2006,
included selling the assets or ceasing operations of our other branded and
private label apparel products. To
enhance our ability to capitalize on the Joes® brand, on February 6,
2007, we entered into a merger agreement to merge with JD Holdings, Inc.,
or JD Holdings, the successor in interest to JD Design LLC, or JD Design, the
entity from whom we licensed the Joes® brand.
We also entered into our first license agreement for other product categories
for handbags bearing the Joes® brand.
In October 2007, we completed the merger and acquired JD
Holdings. In exchange for JD Holdings,
we issued 14,000,000 shares of our common stock and $300,000 in cash to Joe
Dahan, the sole stockholder of JD Holdings.
As part of the merger consideration, we are obligated to pay
Mr. Dahan a percentage of our gross profits above $11,251,000 until
2017. Mr. Dahan will be entitled to
the following: (i) 11.33 percent of the gross profit from $11,251,000 to
$22,500,000; (ii) 3 percent of the gross profit from $22,501,000 to
$31,500,000; (iii) 2 percent of the gross profit from $31,501,000 to
$40,500,000; and (iv) 1 percent of the gross profit above
$40,501,000. Concurrently, we entered
into an employment agreement with Mr. Dahan to be one of our executive
officers. Mr. Dahan is our largest
stockholder. As of October 14,
2010, he owned approximately 19 percent of our total shares outstanding and is
a member of our Board of Directors.
During
fiscal 2009, we recognized growth for our Joes® brand through increases in our
international and retail sales, our mens and womens domestic sales and by
diversifying our product offering to include products such as The Shirt by Joes®
and leggings. In the fall of fiscal 2009,
we launched a line of unisex woven shirts in different fits and fabrications
called The Shirt and branded it with the Joes logo. At the end of fiscal 2009, we launched a line
of denim
17
Table of Contents
leggings
for women and started selling woven knits tops and pants in other fabrications
for men and women branded under The T and The Pant by Joes in the first
quarter of 2010 to further grow the Joes® brand. In the first nine months of fiscal 2010, we
opened eight branded retail and outlet stores as part of our expansion of our
retail store portfolio, opened one in September 2010, and have plans to
open additional branded outlet and full price stores during the remainder of
fiscal 2010 and 2011.
For
2010, we believe that our growth drivers will be dependent upon the performance
of our retail stores, continued improvement in our international and mens
sales, performance of our licensees under their respective agreements for
bags, belts, childrens products, shoes and enhancement of the products
available to our customers branded with our Joes name and logos, including
woven shirts, leggings, tees and pants.
When we commenced fiscal 2010, we operated two full price stores and
four outlet stores. During the first
nine months of fiscal 2010, we added seven outlet stores, one full price retail
store and one additional outlet store in September 2010. We have plans to open two additional outlet
stores and one full price store before the end of fiscal 2010 and are looking
for additional leases for further expansion.
We believe that through our retail stores, we are able to enhance our
net sales and gross profit and sell overstock or slow moving items at higher
profit margins. In addition, we
selectively license the Joes® brand for other product categories. By licensing certain product categories, we
do not incur significant capital investments or incremental operating expenses
and at the same time, we receive royalty payments on net sales, which
contribute to our overall growth.
Our
business is seasonal. The majority of
the marketing and sales orders take place from late fall to early spring. The greatest volume of shipments and actual
sales are generally made from late spring through the summer, which coincides
with our second and third fiscal quarters, and our cash flow is strongest in
our third and fourth fiscal quarters. Due
to the seasonality of our business, as well as the evolution and changes in our
business and product mix, often our quarterly or yearly results are not
necessarily indicative of the results for the next quarter or year. Furthermore, because of the limited number of
full price retail and outlet stores open last year and the growing number of
full-price retail and outlet stores opened thusfar in fiscal 2010, we continue
to assess the seasonality of our business on our retail segment and its
potential impact on our financial results.
We
operate in two primary business segments:
Wholesale and Retail. Our
Wholesale segment is comprised of sales to retailers, specialty stores and
distributors and includes expenses from marketing, sales, distribution and
customer service departments. Also, some
international sales are made directly to wholesale customers who operate retail
stores. Our Retail segment is comprised
of sales to consumers through full-price retail stores, outlet stores and
through the
www.joesjeans.com/shop
internet site. Our Corporate and other
is comprised of expenses from corporate operations, which include the
executive, finance, legal, and human resources departments, design and
production. Prior to the filing of our
Quarterly Report on Form 10-Q for the period ended May 31, 2010, we
operated in one business segment with an immaterial amount of sales from our
retail operations and license agreements.
The previous periods reported have been revised to reflect this change
in our reportable segments.
18
Table of Contents
Comparison of Three Months Ended August 31, 2010 to Three Months
Ended August 31, 2009
|
|
Three months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
25,534
|
|
$
|
21,238
|
|
$
|
4,296
|
|
20
|
%
|
Cost of goods sold
|
|
13,732
|
|
10,864
|
|
2,868
|
|
26
|
%
|
Gross profit
|
|
11,802
|
|
10,374
|
|
1,428
|
|
14
|
%
|
Gross margin
|
|
46
|
%
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
10,070
|
|
7,394
|
|
2,676
|
|
36
|
%
|
Depreciation and amortization
|
|
223
|
|
132
|
|
91
|
|
69
|
%
|
Operating income
|
|
1,509
|
|
2,848
|
|
(1,339
|
)
|
(47
|
)%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
113
|
|
90
|
|
23
|
|
26
|
%
|
Income before provision for taxes
|
|
1,396
|
|
2,758
|
|
(1,362
|
)
|
(49
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
838
|
|
824
|
|
14
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558
|
|
$
|
1,934
|
|
$
|
(1,376
|
)
|
(71
|
)%
|
19
Table of Contents
Three Months Ended August 31, 2010 Overview
The
following table sets forth certain statements of operations data by our
reportable segments for the periods as indicated:
|
|
Three months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
21,349
|
|
$
|
19,943
|
|
$
|
1,406
|
|
7
|
%
|
Retail
|
|
4,185
|
|
1,295
|
|
2,890
|
|
223
|
%
|
|
|
$
|
25,534
|
|
$
|
21,238
|
|
$
|
4,296
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
9,498
|
|
$
|
9,514
|
|
$
|
(16
|
)
|
(0
|
)%
|
Retail
|
|
2,304
|
|
860
|
|
1,444
|
|
168
|
%
|
|
|
$
|
11,802
|
|
$
|
10,374
|
|
$
|
1,428
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
5,741
|
|
$
|
6,525
|
|
$
|
(784
|
)
|
(12
|
)%
|
Retail
|
|
(10
|
)
|
(108
|
)
|
98
|
|
91
|
%
|
Corporate and other
|
|
(4,222
|
)
|
(3,569
|
)
|
(653
|
)
|
(18
|
)%
|
|
|
$
|
1,509
|
|
$
|
2,848
|
|
$
|
(1,339
|
)
|
(47
|
)%
|
For
the three months ended August 31, 2010, or the third quarter of fiscal
2010, our net sales increased to $25,534,000 from $21,238,000 for the three
months ended August 31, 2009, or the third quarter fiscal 2009, a 20
percent increase. We generated operating
income in the amount of $1,509,000 for the third quarter of fiscal 2010
compared to $2,848,000 for the third quarter of fiscal 2009.
Net Sales
Our
net sales increased to $25,534,000 for the third quarter of fiscal 2010 from
$21,238,000 for the third quarter of fiscal 2009, a 20 percent increase.
More
specifically, our wholesale net sales increased to $21,349,000 for the third
quarter of fiscal 2010 from $19,943,000 for the third quarter of fiscal 2009, a
seven percent increase. This increase in
our wholesale sales can be attributed to the addition of new product categories
such as The Shirt, The T and The Pant.
Our
retail net sales increased to $4,185,000 for the third quarter of fiscal 2010
from $1,295,000 for the third quarter of fiscal 2009, a 223 percent
increase. The primary driver for this
increase was the additional sales due to the opening of ten additional stores
since the third quarter of fiscal 2009.
Gross Profit
Our
gross profit increased to $11,802,000 for the third quarter of fiscal 2010 from
$10,374,000 for the third quarter of fiscal 2009, a 14 percent increase. Our overall gross margin decreased to 46
percent for the third quarter of fiscal 2010 from 49 percent for the third
quarter of fiscal 2009.
20
Table of Contents
Our wholesale gross profit decreased to $9,498,000
for the third quarter of fiscal 2010 from $9,514,000 for the third quarter of
fiscal 2009, a less than one percent decrease.
Our wholesale gross margin percentage was negatively impacted by the
addition of a greater percentage of sales from non-denim products and our
product placement mix with our wholesale customers from the third quarter of
fiscal 2009 compared to the third quarter of fiscal 2010. We continue to evaluate our sourcing options
for the production of our new products.
Our
retail gross profit increased to $2,304,000 for the third quarter of fiscal
2010 from $860,000 for the third quarter of fiscal 2009, a 168 percent
increase. For the third quarter of
fiscal 2010, our retail gross margin percentage was lower than the third
quarter of fiscal 2009 due to the mix in our full price retail stores versus
outlet stores open and operating during the corresponding periods.
Selling, General and Administrative Expense
Selling,
general and administrative, or SG&A, expenses increased to $10,293,000 for
the third quarter of fiscal 2010 from $7,526,000 for the third quarter of
fiscal 2009, a 37 percent increase. Our
SG&A include expenses related to employee and employee related benefits,
sales commissions, payments of the earn-out in connection with the merger with
JD Holdings, advertising, sample production, facilities and distribution
related costs, professional fees, stock-based compensation, factor and bank
fees and depreciation and amortization.
Our wholesale SG&A expense increased to
$3,757,000 for the third quarter of fiscal 2010 from $2,989,000 for the third
quarter of fiscal 2009, a 26 percent increase.
Our wholesale SG&A expense was impacted by the additional
commissions associated with our sales growth, the addition of headcount to
support our new product lines and the growth in our wholesale operations and
additional sample and facilities and distribution expenses to support the
expansion of our business and new product lines.
Our retail SG&A expense increased to $2,314,000
for the third quarter of fiscal 2010 from $968,000 for the third quarter of
fiscal 2009, a 139 percent increase. Our
retail SG&A expense increased due to the addition of costs associated with
opening and operating ten new retail stores since the third quarter of fiscal
2009 due primarily to additional store payroll and store rents.
Our
corporate and other SG&A expense increased to $4,222,000 in the third
quarter of fiscal 2010 from $3,569,000 for the third quarter of fiscal 2009, an
18 percent increase. Our corporate and
other SG&A expense includes general overhead associated with running our
operations and increased as a result of our overall growth in our business.
Operating Income
Our wholesale operating income decreased by $784,000
to $5,741,000 for the third quarter of fiscal 2010 from $6,525,000 for the
third quarter of fiscal 2009, a 12 percent decrease. Our retail operating loss decreased by
$98,000 to $10,000 for the third quarter of fiscal 2010 from an operating loss
of $108,000 for the third quarter of fiscal 2009. Our operating income was offset by a $653,000
increase in general overhead costs and resulted in a net decline in our
operating income to $1,509,000 for the third quarter of fiscal 2010 from
$2,848,000 for the third quarter of fiscal 2009.
Interest Expense
Our
combined interest expense increased to $113,000 for the third quarter of fiscal
2010 from $90,000 for the third quarter of fiscal 2009, a 26 percent
increase. Our interest expense is
primarily associated with interest expense from our factoring facility and
inventory lines of credit used to help support our working capital needs. The increase in interest expense is mostly
due to a higher average loan balance under our factoring facility as a result
of our increase in net sales.
21
Table of Contents
Income
Tax
We
account for income taxes pursuant to the provisions of Accounting Standards
Classification, or ASC, 740 Income Taxes (formerly known as SFAS No. 109,
Accounting for Income Taxes
). The
effective tax rate was 60 percent for the third quarter of 2010 compared to 30
percent in the third quarter of 2009. In
2009, our valuation allowance that was recorded against deferred tax assets was
fully released, resulting in a net tax benefit of $20,291,000. For fiscal 2010, no valuation allowance is
necessary as we believe our deferred tax assets will be fully realized. Further, the effective tax rate differs from
the statutory corporate tax rate in part due to permanent book/tax differences
related to the costs of acquiring a trademark and due to state taxes for
various jurisdictions where we are subject to taxation. These factors were the primary drivers
resulting in a higher effective tax rate for the third quarter of fiscal 2010.
Net Income
We
generated net income of $558,000 in the third quarter of fiscal 2010 compared
to $1,934,000 for the third quarter of fiscal 2009. This decrease was primarily as a result of
our increase in SG&A expenses necessary to support the overall growth in
our business, as disclosed above.
Comparison
of Nine Months Ended August 31, 2010 to Nine Months Ended August 31,
2009
|
|
Nine months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
74,611
|
|
$
|
54,899
|
|
$
|
19,712
|
|
36
|
%
|
Cost of goods sold
|
|
39,942
|
|
27,576
|
|
12,366
|
|
45
|
%
|
Gross profit
|
|
34,669
|
|
27,323
|
|
7,346
|
|
27
|
%
|
Gross margin
|
|
46
|
%
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
29,986
|
|
21,383
|
|
8,603
|
|
40
|
%
|
Depreciation and amortization
|
|
604
|
|
401
|
|
203
|
|
51
|
%
|
Operating income
|
|
4,079
|
|
5,539
|
|
(1,460
|
)
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
329
|
|
290
|
|
39
|
|
13
|
%
|
Income before provision for taxes
|
|
3,750
|
|
5,249
|
|
(1,499
|
)
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
1,966
|
|
1,190
|
|
776
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,784
|
|
$
|
4,059
|
|
$
|
(2,275
|
)
|
(56
|
)%
|
22
Table of Contents
Nine
Months Ended August 31, 2010 Overview
The
following table sets forth certain statements of operations data by our
reportable segments for the periods as indicated:
|
|
Nine months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
65,655
|
|
$
|
51,616
|
|
$
|
14,039
|
|
27
|
%
|
Retail
|
|
8,956
|
|
3,283
|
|
5,673
|
|
173
|
%
|
|
|
$
|
74,611
|
|
$
|
54,899
|
|
$
|
19,712
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
29,285
|
|
$
|
25,177
|
|
$
|
4,108
|
|
16
|
%
|
Retail
|
|
5,384
|
|
2,146
|
|
3,238
|
|
151
|
%
|
|
|
$
|
34,669
|
|
$
|
27,323
|
|
$
|
7,346
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
17,738
|
|
$
|
17,067
|
|
$
|
671
|
|
4
|
%
|
Retail
|
|
103
|
|
(625
|
)
|
728
|
|
116
|
%
|
Corporate and other
|
|
(13,762
|
)
|
(10,903
|
)
|
(2,859
|
)
|
(26
|
)%
|
|
|
$
|
4,079
|
|
$
|
5,539
|
|
$
|
(1,460
|
)
|
(26
|
)%
|
For
the nine months ended August 31, 2010, our net sales increased to
$74,611,000 from $54,899,000 for the nine months ended August 31, 2009, a
36 percent increase. We generated
operating income in the amount of $4,079,000 for the nine months ended August 31,
2010 compared to $5,539,000 for the nine months ended August 31, 2009.
Net
Sales
Our
net sales increased to $74,611,000 for the nine months ended August 31,
2010 compared to $54,899,000 for the nine months ended August 31, 2009, a
36 percent increase.
More
specifically, our wholesale net sales increased to $65,655,000 for the nine
months ended August 31, 2010 from $51,616,000 for the nine months ended August 31,
2009, a 27 percent increase. This
increase in our wholesale sales can be attributed to the addition of new
product lines and increases in sales of our denim products to our wholesale
customers.
Our
retail net sales increased to $8,956,000 for the nine months ended August 31,
2010 from $3,283,000 for the nine months ended August 31, 2009, a 173
percent increase. The primary driver for
this increase was the positive impact of additional sales due to the opening of
ten additional stores since the third quarter of fiscal 2009.
Gross
Profit
Our
gross profit increased to $34,669,000 for the nine months ended August 31,
2010 from $27,323,000 for the nine months ended August 31, 2009, a 27
percent increase. Our overall gross
margin decreased to 46 percent for the nine months ended August 31, 2010
from 50 percent for the nine months ended August 31, 2009.
23
Table
of Contents
Our wholesale gross profit increased to $29,285,000
for the nine months ended August 31, 2010 from $25,177,000 for the nine
months ended August 31, 2009, a 16 percent increase. Our wholesale gross margin percentage was
impacted by the addition of new product lines and our product placement mix
with our wholesale customers. We
continue to evaluate our sourcing options for the production of our new
products.
Our
retail gross profit increased to $5,384,000 for the nine months ended August 31,
2010 from $2,146,000 for the nine months ended August 31, 2009, a 151
percent increase. Our retail gross
margin percentage was lower than the nine month period ended August 31,
2009 due to the mix in our full price retail stores versus outlet stores open
and operating during the corresponding periods.
Selling, General and Administrative Expense
Selling,
general and administrative, or SG&A, expenses increased to $30,590,000 for
the nine months ended August 31, 2010 from $21,784,000 for the nine months
ended August 31, 2009, a 40 percent increase. Our SG&A include expenses related to
employee and employee related benefits, sales commissions, payments of the
earn-out in connection with the merger with JD Holdings, advertising, sample
production, facilities and distribution related costs, professional fees,
stock-based compensation, factor and bank fees and depreciation and
amortization.
Our wholesale SG&A expense increased to
$11,547,000 for the nine months ended August 31, 2010 from $8,110,000 for
the nine months ended August 31, 2009, a 42 percent increase. Our wholesale SG&A expense was impacted
by the additional commissions associated with our sales growth, the addition of
higher headcount to support our new product lines and the growth in our
wholesale operations and additional sample and facilities and distribution
expenses to support the expansion of our business and product lines.
Our retail SG&A expense increased to $5,281,000
for the nine months ended August 31, 2010 from $2,771,000 for the nine
months ended August 31, 2009, a 91 percent increase. Our retail SG&A expense was impacted by
the addition of costs associated with opening and operating ten new retail
stores since the third quarter of fiscal 2009 due primarily to additional store
payroll and store rents.
Our
corporate and other SG&A expense increased to $13,762,000 for the nine
months ended August 31, 2010 from $10,903,000 for the nine months ended August 31,
2009, a 26 percent increase. Our
corporate and other SG&A expense includes general overhead associated with
running our operations and increased as a result of our overall growth in our
business.
Operating Income
Our wholesale operating income increased to
$17,738,000 for the nine months ended August 31, 2010 from $17,067,000 for
the nine months ended August 31, 2009, a four percent increase. Our retail operating income increased to
$103,000 for the nine months ended August 31, 2010 from an operating loss
of $625,000 for the nine months ended August 31, 2009. These increases were offset by a $2,859,000
increase in general overhead costs and resulted in a net decline in our
operating income to $4,079,000 for the nine months ended August 31, 2010
from $5,539,000 for the nine months ended August 31, 2009.
Interest Expense
Our
combined interest expense increased to $329,000 for the nine months ended August 31,
2010 from $290,000 for the nine months
ended August 31, 2009, an 13 percent increase. Our interest expense consists of interest
expense from our factoring and inventory lines of credit. The increase in interest expense is mostly
due to the increase in our net sales, which resulted in higher interest
expenses under our factoring and inventory lines of credit.
24
Table of Contents
Income
Tax
We account for income taxes pursuant to the
provisions of ASC 740 Income Taxes (formerly known as SFAS No. 109,
Accounting for Income Taxes
). The effective
tax rate was 52 percent for the nine months ended August 31, 2010 compared
to 23 percent for the nine months ended August 31, 2009. In 2009, our valuation allowance that was
recorded against deferred tax assets was fully released, resulting in a net tax
benefit of $20,291,000. For fiscal 2010,
no valuation allowance is necessary as we believe our deferred tax assets will
be fully realized. Further, the
effective tax rate differs from the statutory corporate tax rate in part due to
permanent book/tax differences related to the costs of acquiring a trademark
and due to state taxes for various jurisdictions where we are subject to
taxation. These factors were the primary
drivers resulting in a higher effective tax rate for the nine months ended August 31,
2010.
Net Income
We
generated net income of $1,784,000 in the nine months ended August 31,
2010 compared to $4,059,000 for the nine months ended August 31,
2009. The decrease in net income for the
nine months ended August 31, 2010 compared to the nine months ended August 31,
2009 is largely the result of our increase in SG&A expenses to support the
general overall growth in our business, as discussed above.
Liquidity and Capital Resources
Our
primary sources of liquidity are: (i) cash from sales of our products; and
(ii) sales from accounts receivable factoring facilities and advances
against inventory. For the nine months ended August 31, 2010, we used
$5,519,000 of cash flow in operations and used $2,514,000 in investing
activities for purchases of property and equipment mostly in connection with
the opening and operation of our new and existing retail stores. We received $683,000 in proceeds from warrant
and stock option exercises and $1,966,000 in factored borrowings. We paid taxes on net settled options and
restricted stock units of $1,248,000.
Our cash balance decreased to $6,563,000 as of August 31, 2010.
We
are dependent on credit arrangements with suppliers and factoring and inventory
based agreements for working capital needs. From time to time, we have
conducted equity financing through private placement transactions and obtained
increases in our cash availability from CIT through guarantees by certain
related parties.
Our
primary methods to obtain the cash necessary for operating needs were through
the sales of Joes® products, sales of our accounts receivable pursuant to our
factoring agreements, obtaining advances under our inventory security
agreements with CIT and utilizing existing cash balances. The accounts receivable are sold for up to 85
percent of the face amount on either a recourse or non-recourse basis depending
on the creditworthiness of the customer.
In addition, the inventory agreement allows us to obtain advances for up
to 50 percent of the value of certain eligible inventory. CIT currently permits us to sell our accounts
receivable at the maximum level of 85 percent and allows advances of up to
$6,000,000 for eligible inventory. CIT
has the ability, in its discretion at any time or from time to time, to adjust
or revise any limits on the amount of loans or advances made to us pursuant to
these agreements and to impose surcharges on our rates for certain of our
customers. As further assurance to CIT,
cross guarantees were executed by and among us and all of our subsidiaries to
guarantee each entitys obligations. As
of August 31, 2010, our cash availability with CIT was approximately
$975,000. This amount fluctuates on a daily basis based upon invoicing and
collection related activity by CIT on our behalf. In connection with both of the agreements
with CIT, most of our tangible assets are pledged to CIT, including all
inventory, merchandise, and/or goods, including raw materials through finished
goods and receivables. Our trademarks are not encumbered.
In
May 2010, the parties amended the accounts receivable agreement to provide
for a change in the factoring fees, an extension of the agreement and
additional termination rights. The
accounts receivable agreement may be terminated by CIT upon 60 days written
notice or immediately upon the occurrence of an event of default as defined in
the agreement. The accounts receivable
agreement may be terminated by us upon 60 days written notice prior to
June 30, 2011, or earlier provided that the minimum factoring fees have
been paid for the respective period or CIT fails to fund us for five
consecutive days. The inventory
agreement may be terminated once all obligations are paid under both agreements
or if an event of default occurs as defined in the agreement.
From
June 1 to June 30, 2010, we paid to CIT a factoring rate of 0.6
percent to factor accounts which CIT bore the credit risk, subject to
discretionary surcharges, and 0.4 percent for accounts which we bore the credit
risk. The interest rate associated with
borrowings under the inventory lines and factoring facility is 0.25 percent
plus the Chase prime rate. Beginning July 1,
2010, the factoring rate changed to 0.55 percent for accounts which CIT bears
the credit risk, subject to discretionary surcharges, up to $40,000,000 of
invoices factored, 0.50 percent over $40,000,000 of invoices factored and 0.35
percent for accounts which we bear the credit risk. As of August 31, 2010, the Chase prime
rate was 3.25 percent.
25
Table of Contents
We
have also established a letter of credit facility with CIT to allow us to open
letters of credit for a fee of 0.25 percent of the letter of credit face value
with international and domestic suppliers, subject to cash availability on our
inventory line of credit.
As
of August 31, 2010, we had a net loan balance of $11,163,000 with CIT for
factored receivables, a loan balance of $5,650,000 for inventory advances and
three letters of credit outstanding in the aggregate amount of $51,000.
For
the remainder of fiscal 2010, our primary capital needs are for (i) operating
expenses; (ii) working capital necessary to fund inventory purchases; (iii) capital
expenditures to support additional retail store openings; (iv) financing
extensions of trade credit to our customers; and (v) payment for the
contingent consideration pursuant to the merger agreement with JD Holdings. We
anticipate funding our operations through working capital generated by the
following: (i) cash flow from sales of our products; (ii) managing
our operating expenses and inventory levels; (iii) maximizing trade
payables with our domestic and international suppliers; (iv) increasing
collection efforts on existing accounts receivables; and (v) utilizing our
receivable and inventory-based agreements with CIT.
Based
on our cash on hand, cash flow from operations and the expected cash
availability under both of our agreements with CIT, we believe that we have the
working capital resources necessary to meet our projected operational needs for
the remainder of fiscal 2010. However, if we require more capital for growth or
experience operating losses, we believe that it will be necessary to obtain
additional working capital through credit arrangements or debt or equity
financings. We believe that any additional capital, to the extent needed, may
be obtained from additional sales of equity securities or other loans or credit
arrangements. There can be no assurance that this or other financings will be
available if needed. Our inability to fulfill any interim working capital
requirements would force us to constrict our operations.
We
believe that the rate of inflation over the past few years has not had a significant
adverse impact on our net sales or income (losses) from operations.
Off
Balance Sheet Arrangements
We
do not have any off balance sheet arrangements.
Managements Discussion of Critical Accounting Policies
We
believe that the accounting policies discussed below are important to an
understanding of our financial statements because they require management to
exercise judgment and estimate the effects of uncertain matters in the
preparation and reporting of financial results. Accordingly, we caution that
these policies and the judgments and estimates they involve are subject to
revision and adjustment in the future. While they involve less judgment,
management believes that the other accounting policies discussed in Notes to
Consolidated Financial Statements - Note 2 Summary of Significant Accounting
Policies included in our Annual Report on Form 10-K for the year ended November 30,
2009 previously filed with the SEC are also important to an understanding of
our financial statements. We believe that the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue
Recognition
Wholesale
revenues are recorded on the accrual basis of accounting when title transfers
to the customer, which is typically at the shipping point. We record estimated reductions to revenue for
customer programs, including co-op advertising, other advertising programs or
allowances, based upon a percentage of sales.
We also allow for returns based upon pre-approval or in the case of
damaged goods. Such returns are estimated based on historical experience and an
allowance is provided at the time of sale.
26
Table
of Contents
Retail
store revenue is recognized net of estimated returns at the time of sale to
consumers. E-commerce sales of products
ordered through our retail internet site known as www.joesjeans.com are
recognized upon estimated delivery and receipt of the shipment by the
customers. E-commerce revenue is also reduced by an estimate of returns. Retail
store revenue and E-commerce revenue exclude sales taxes. Revenue from licensing arrangements are
recognized when earned in accordance with the terms of the underlying
agreements, generally based upon the higher of (a) contractually
guaranteed minimum royalty levels; and (b) estimates of sales and royalty
data received from our licensees. Payments
received in consideration of the grant of a license or advanced royalty
payments are recognized ratably as revenue over the term of the license
agreement and are reflected under the caption of Deferred Licensing Revenue
on the Condensed Consolidated Balance Sheets.
The revenue recognized ratably over the term of the license agreement
will not exceed royalty payments received.
The unrecognized portion of the upfront payments are included in
deferred royalties and accrued expenses depending on the long or short term
nature of the payments to be recognized.
As of August 31, 2010, we have received total advanced payments of
$1,184,000 of the advanced payments under our licensing agreements and have
recognized the entire amount as income.
Accounts
Receivable, Due To Factor and Allowance for Customer Credits and Doubtful
Allowances
We
evaluate our ability to collect on accounts receivable and charge-backs
(disputes from the customer) based upon a combination of factors. In circumstances where we are aware of a
specific customers inability to meet its financial obligations (e.g.,
bankruptcy filings, substantial downgrading of credit sources), a specific
reserve for bad debts is taken against amounts due to reduce the net recognized
receivable to the amount reasonably expected to be collected. For all other
customers, we recognize reserves for bad debts and charge-backs based on our
historical collection experience. If
collection experience deteriorates (i.e., an unexpected material adverse change
in a major customers ability to meet its financial obligations to us), the
estimates of the recoverability of amounts due to us could be reduced by a
material amount.
The
balance in the allowance for customer credits and doubtful accounts as of August 31,
2010 and November 30, 2009 was $896,000 and $831,000 for non-factored
accounts receivables.
Inventory
We
continually evaluate the composition of our inventories, assessing
slow-turning, ongoing product as well as product from prior seasons. Market value of distressed inventory is
valued based on historical sales trends on our individual product lines, the
impact of market trends and economic conditions, and the value of current
orders relating to the future sales of this type of inventory. Significant changes in market values could
cause us to record additional inventory markdowns.
Valuation
of Long-lived and Intangible Assets and Goodwill
We
assess the impairment of identifiable intangibles, long-lived assets and
goodwill annually or whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors considered important that
could trigger an impairment review other than on an annual basis include the
following:
·
A significant
underperformance relative to expected historical or projected future operating
results;
·
A significant
change in the manner of the use of the acquired asset or the strategy for the
overall business; or
·
A significant
negative industry or economic trend.
In
fiscal 2007, we acquired through merger JD Holdings, which included all of the
goodwill and intangible assets goodwill related to the Joes®, Joes Jeans and
JD® logo and marks. For fiscal 2009, we did not recognize any impairment related
to the goodwill or intangible assets of our Joes® brand. We have assigned an
indefinite life to these intangible assets and therefore, no amortization
expenses are expected to be recognized. However, we test the assets for
impairment annually in accordance with our critical accounting policies.
27
Table
of Contents
Under
the Financial Accounting Standards Board, or FASB, standards, we are required
to evaluate goodwill and other indefinite lived intangible assets at least
annually using a two-step process. The
first step is to determine the fair value of each reporting unit and compare
this value to its carrying value. If the
fair value exceeds the carrying value, no further work is required and no
impairment loss would be recognized. The
second step is performed if the carrying value exceeds the fair value of the
assets. The implied fair value of the
reporting units goodwill or indefinite lived intangible assets must be
determined and compared to the carrying value of the goodwill or indefinite
lived intangible assets.
Our
annual impairment testing date is September 30 of each year. For fiscal 2009, we determined that there was
no impairment of our goodwill or indefinite lived intangible assets.
Additional
Merger Consideration (Contingent Consideration)
In
connection with the merger with JD Holdings, we agreed to pay to Mr. Dahan
the following contingent consideration in the applicable fiscal year for 120
months following October 25, 2007:
·
No contingent
consideration if the gross profit is less than $11,250,000 in the applicable
fiscal year;
·
11.33% of the
gross profit from $11,251,000 to $22,500,000;
·
an additional
3% of the gross profit from $22,501,000 to $31,500,000;
·
an additional
2% of the gross profit from $31,501,000 to $40,500,000; and
·
an additional
1% of the gross profit above $40,501,000.
The
additional merger consideration, or contingent consideration, is paid in
advance on a monthly basis based upon estimates of gross profits after the
assumption that the payments are likely to be paid. At the end of each quarter,
any overpayments are offset against future payments and any significant
underpayments are made.
Under
the FASB standards for accounting for consideration transferred to settle a
contingency based on earnings or other performance measures, certain criteria
is used to determine whether contingent consideration based on earnings or
other performance measures should be accounted for as (1) adjustment of
the purchase price of the acquired enterprise or (2) compensation for
services, use of property or profit sharing.
The determination of how to account for the contingent consideration is
a matter of judgment that depends on the relevant facts and circumstances. The
advanced contingent consideration payments are accounted for as operating
expense.
Income
Taxes
As
part of the process of preparing our consolidated financial statements,
management is required to estimate income taxes in each of the jurisdictions in
which we operate. The process involves estimating actual current tax expense
along with assessing temporary differences resulting from differing treatment
of items for book and tax purposes. These timing differences result in deferred
tax assets and liabilities, which are included in our consolidated balance
sheet. Management records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. Management
has considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance. Increases in the valuation
allowance result in additional expense to be reflected within the tax provision
in the consolidated statement of income. Reserves are also estimated for
ongoing audits regarding federal and state issues that are currently
unresolved. We routinely monitor the potential impact of these situations. Based on managements assessment of these
items during fiscal 2009, we determined that it was more likely than not that
the deferred tax assets would be fully utilized. Accordingly, the valuation
allowance of $20,291,000 as of November 30, 2008 was released and recorded
as a credit to income tax benefit during fiscal 2009.
Contingencies
We account for contingencies
in accordance with FASB standards that require we record an estimated loss from
a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as legal and income tax matters requires management to
use judgment. Many of these legal and tax contingencies can take years to be
resolved. Generally, as the time period increases over which the uncertainties
are resolved, the likelihood of changes to the estimate of the ultimate outcome
increases. Management believes that the accruals for these matters are
adequate. Should events or circumstances change, we could have to record
additional accruals.
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Table of Contents
Stock Based Compensation
We account for stock-based
compensation in accordance with the FASB standards. We elected the modified
prospective method where prior periods are not revised for comparative
purposes. Under the fair value recognition provisions, stock based compensation
is measured at grant date based upon the fair value of the award and expense is
recognized on a straight-line basis over the vesting period. We use the
Black-Scholes option pricing model to determine the fair value of stock
options, which requires management to use estimates and assumptions. The
determination of the fair value of stock based option awards on the date of
grant is based upon the exercise price as well as assumptions regarding subjective
variables. These variables include our expected life of the option, expected
stock price volatility over the term of the award, determination of a risk free
interest rate and an estimated dividend yield. We estimate the expected life of
the option by calculating the average term based upon historical experience. We
estimate the expected stock price volatility by using implied volatility in
market traded stock over the same period as the vesting period. We base the
risk-free interest rate on zero coupon yields implied from U.S. Treasury issues
with remaining terms similar to the term on the options. We do not expect to
pay dividends in the foreseeable future and therefore use an expected dividend
yield of zero. If factors change or we employ different assumptions for
estimating fair value of the stock option, our estimates may be different than
future estimates or actual values realized upon the exercise, expiration, early
termination or forfeiture of those awards in the future. At this time, we believe
that our current method for accounting for stock based compensation is
reasonable. Furthermore, an entity may elect either an accelerated recognition
method or a straight-line recognition method for awards subject to graded
vesting based on a service condition, regardless of how the fair value of the
award is measured. For all stock based compensation awards that contain graded
vesting based on service conditions, we have elected to apply a straight-line
recognition method to account for these awards. However, guidance is relatively
new and the application of these principles over time may be subject to further
interpretation or refinement. See Notes to Consolidated Financial Statements
Note 8 Stockholders Equity Stock Incentive Plans for additional
discussion.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued a standard on business combinations that
significantly changes the accounting for business combinations. Under the
standard, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value
with limited exceptions and includes a substantial number of new disclosure
requirements. The standard applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which is the year beginning December 1, 2009 for
us. We do not expect that this standard
will have any impact on our financial statements unless we enter into an
applicable transaction in the future.
In
December 2007, the FASB issued a standard that establishes new accounting
and reporting standards for a non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements separate from the parents equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net income on the
face of the income statement. The
standard clarifies that changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will
be measured using the fair value of the non-controlling equity investment on
the deconsolidation date and includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. The standard is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008, which is the year beginning December 1, 2009 for
us. We do not expect that it will have
any impact on our financial statements unless we enter into an applicable transaction
in the future.
29
Table of Contents
In
April 2008, the FASB issued a standard that amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset in order to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset. The standard is effective for financial
statements issued for fiscal years beginning after December 15, 2008,
which is the year beginning December 1, 2009 for us, and interim periods
within that fiscal year. The adoption of
this standard did not have a material impact on our financial position or
results from operations.
In
April 2009, the FASB issued changes regarding interim disclosures about
fair value of financial instruments. The changes enhance consistency in
financial reporting by increasing the frequency of fair value disclosures from
annually to quarterly. The changes require disclosures on a
quarterly basis of qualitative and quantitative information about fair value
estimates for all those financial instruments not measured on the balance sheet
at fair value. The disclosure requirement became effective beginning with our
first interim reporting period ending after June 15, 2009. The adoption of
this change did not have a material impact on our results of operations or
financial condition.
In
May 2009, the FASB issued a standard related to subsequent
events. The standard is effective for interim or annual periods
ending after June 15, 2009 and establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. In February 2010, the FASB issued an update to the
standard related to subsequent events effective for all financial statements of
SEC filers issued after February 24, 2010, which removed the requirement
to disclose the date through which subsequent events were evaluated. The adoption of this update to the standard
did not have a material impact on its financial position or results from operations.
In
June 2009, the FASB issued a standard related to the FASB accounting
standards codification and the hierarchy of generally accepted accounting
principles. The standard will become the source of authoritative
U.S. generally accepted accounting principles, or GAAP, recognized by the FASB
to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the
effective date of this standard, the codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the
codification will become non-authoritative. This standard is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The adoption of this standard did not
have a material impact on our results of operations, financial condition or
cash flows.
In
June 2009, the FASB issued an amendment to a standard related to the
accounting for transfer of financial assets.
The amendment consists of the removal of the concept of a
special-purpose entity, the elimination of the exception of qualifying
special-purpose entities from the consolidation guidance and clarifies the unit
of account eligible for sale accounting.
The standard is effective as of the beginning of the first annual
reporting period that begins after November 15, 2009, which is the year
beginning December 1, 2009 for us, and interim periods within that fiscal
year. The adoption of this standard did
not have a material impact on our financial position or results from
operations.
In
December 2009, we adopted an update to a standard related to determining
whether instruments granted in share-based payment transactions are
participating securities. This update defines unvested share-based payment
awards that contain nonforfeitable rights to dividends as participating
securities that should be included in computing EPS using the two-class method.
Certain of our non-vested restricted stock awards previously granted qualify as
participating securities. As required, all current and prior period EPS were
evaluated. The adoption did not have a material impact on our EPS.
In
February 2010, the FASB issued an update to a standard to amend the topic
of Subsequent Events. As a result of this update, we will no longer disclose
the date through which we evaluated subsequent events in the financial
statements - either in originally issued financial statements or reissued
financial statements. This change addresses practice issues for us with respect
to processes around issuing financial statements and Securities and Exchange
Commission, or SEC, registration requirements (e.g., incorporation by reference
of previously issued financial statements). In addition, we will not have to
disclose the date that financial statements were reissued unless the financial
statements are revised - for either an error correction or other retrospective
application of GAAP. We will evaluate subsequent events through the date that
the financial statements are issued. We have adopted this guidance in the
second fiscal quarter of 2010, and this guidance did not have a material impact
on our financial statements.
30
Table of Contents
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not
applicable as a Smaller Reporting Company.
Item 4T.
Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
of August 31, 2010, the end of the period covered by this periodic report,
our management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures pursuant to Rule 13a-15(b) and
15d-15(b) under the Exchange Act.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms. In addition, disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that the information required to be disclosed by us in the reports we
file or submit under the Exchange Act is accumulated and communicated to
management, including our principal executive and principal financial officers
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosures.
Management recognizes that a control system, no matter how well
conceived and operated, can provide only reasonable assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues within the company have been detected. Therefore, assessing the costs and benefits
of such controls and procedures necessarily involves the exercise of judgment
by management. Our disclosure controls
and procedures are designed to provide reasonable assurance of achieving their
objectives.
As
of the end of the period covered by this report, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
We
made no change in our internal control over financial reporting during the
third quarter of the fiscal year covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1.
Legal
Proceedings.
We are a party to lawsuits
and other contingencies in the ordinary course of our business. We do not believe that we are a party to any
material pending legal proceedings or that it is probable that the outcome of
any individual action would have an adverse effect in the aggregate on our
financial condition. We do not believe
that it is likely that an adverse outcome of individually insignificant actions
in the aggregate would be sufficient enough, in number or in magnitude, to have
a material adverse effect in the aggregate on our financial condition.
Item 1A.
Risk
Factors.
In
addition to the other information set forth in this Quarterly Report, you
should carefully consider the factors discussed under Risk Factors in our
Annual Report on Form 10-K for the fiscal year ended November 30,
2009 as filed with the SEC. These risks could materially and adversely
affect our business, financial condition and results of operations. The
risks described in our Form 10-K are not the only risks we face. Our
operations could also be affected by additional factors that are not presently
known to us or by factors that we currently consider immaterial to our
business.
31
Table of Contents
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults
upon Senior Securities.
None.
Item 4.
Removed
and Reserved.
Item 5.
Other
Information.
(a)
None.
(b)
There have been
no material changes to the procedures by which security holders may recommend
nominees to our board of directors, including adoption of procedures by which
our stockholders may recommend nominees to the our board of directors.
Item 6. Exhibits.
Exhibits
(listed according to the number assigned in the table in Item 601 of Regulation
S-K):
Exhibit
No.
|
|
Description
|
|
Document if Incorporated
by Reference
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
32
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
32
Table
of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
JOES JEANS INC.
|
|
|
October 14,
2010
|
/s/
Marc B. Crossman
|
|
Marc
B. Crossman
|
|
Chief
Executive Officer (Principal Executive Officer),
President and Director
|
|
|
|
|
October 14,
2010
|
/s/
Hamish Sandhu
|
|
Hamish
Sandhu
|
|
Chief
Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
33
Table
of Contents
EXHIBIT INDEX
Exhibit
No.
|
|
Description
|
|
Document if Incorporated by
Reference
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
|
|
Filed
herewith
|
|
|
|
|
|
32
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
34
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