UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2005
COMMISSION FILE NUMBER: 000-33297
BLUE HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0450923
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5804 E. SLAUSON AVE., COMMERCE, CA 90040
(Address of principal executive offices)
(323) 725-5555
(Issuer's telephone number)
MARINE JET TECHNOLOGY CORP.
936A BEACHLAND BOULEVARD, SUITE 13
VERO BEACH, FL 32963
(Former Name or Former Address, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of July 15, 2005, 25,454,978 shares of the registrant's common stock
were outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes [_] No [X]
TABLE OF CONTENTS
Page
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PART I Financial Information
Item 1. Financial Statements
a. Balance Sheet (Unaudited) 3
b. Statement of Operations (Unaudited) 4
c. Statement of Shareholders' Equity (Unaudited) 5
d. Statement of Cash flows (Unaudited) 6
e. Notes to the Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Controls and Procedures 25
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a. BALANCE SHEET
BLUE HOLDINGS INC. (FORMERLY KNOWN AS MARINE JET TECHNOLOGY CORP.)
CONDENSED & CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2005
ASSETS
Current Assets:
Cash ....................................................... $ 31,539
Due from Factor, net of reserves of $293,949 .............. 448,621
Accounts Receivable, net of reserves of $200,000 ........... 36,713
Inventories ................................................ 5,430,657
Due From Related Parties ................................... 180,345
Prepaid Expenses and Other Current Assets .................. 294,445
----------
Total Current Assets .................................... 6,422,320
Deferred Income Taxes ....................................... 197,580
Property and Equipment
less Accumulated Depreciation ............................. 9,427
----------
Total Assets .................................................. $6,629,327
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable ........................................... 2,288,180
Due to Related Parties ..................................... 150,995
Income Taxes Payable ....................................... 333,064
Accrued Expenses and Other Current Liabilities ............. 95,653
----------
Total Current Liabilities ............................... 2,867,892
----------
Stockholders' Equity
Common Stock $0.001 par value .............................. 25,442
Authorized 75,000,000 shares
Issued and outstanding 25,441,628
Common Stock to be Issued .................................. 177,617
Additional Paid-in Capital ................................. 3,031,568
Retained Earnings .......................................... 526,808
----------
Total Equity .............................................. $3,761,435
----------
Total Liabilities and Stockholders' Equity .................... $6,629,327
==========
See Notes to Condensed Consolidated Financial Statements
3
b. STATEMENT OF OPERATIONS
BLUE HOLDINGS INC. (FORMERLY KNOWN AS MARINE JET TECHNOLOGY CORP.)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
THREE MONTHS SIX MONTHS
----------- -----------
Net Sales .......................................... $ 4,434,853 $ 8,854,228
Cost of Goods Sold ................................. 2,084,044 4,389,431
----------- -----------
Gross Profit ....................................... 2,350,809 4,464,797
Selling, distribution & administrative expenses .... 1,206,306 2,192,334
----------- -----------
Income before expenses relating to exchange
transaction and provision for income taxes ...... 1,144,503 2,272,463
Expenses relating to exchange transaction .......... 477,617 477,617
----------- -----------
Income before provision for income taxes ........... 666,886 1,794,846
Provision for income taxes ......................... 135,484 136,284
----------- -----------
Net Income ......................................... $ 531,402 $ 1,658,562
=========== ===========
Earnings per share, Basic and Diluted .............. $ 0.02 $ 0.07
=========== ===========
Weighted Average number of common shares
outstanding, basic and diluted ................... 25,441,628 25,441,628
See Notes to Condensed Consolidated Financial Statements
4
c. STATEMENT OF SHAREHOLDERS' EQUITY
BLUE HOLDINGS INC. (FORMERLY KNOWN AS MARINE JET TECHNOLOGY CORP.)
CONDENSED & CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005
SHARES ISSUED
------------------------- COMMON STOCK ISSUABLE
PAR PAID -------------------------
MEMBERS VALUE IN
EQUITY NUMBER 0.001 CAPITAL NUMBER AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
Beginning Balance, January 1,
2005 ..................... $ 39,056 -- -- -- -- --
Contributions ............... 1,886,200 -- -- -- -- --
Issuance of shares upon
reverse merger ........... -- 24,447,783 24,448 (24,448) -- --
Old Marine Jet shares ....... -- 993,845 994 (994) -- --
Change in tax status from
LLC to Corp. .............
upon exchange transaction .. (1,925,256) -- -- 3,057,010 -- --
Shares to be issued to Finder -- -- -- -- 102,079 177,617
Net Income for the period ... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Ending Balance June 30, 2005 -- 25,441,628 $ 25,442 $ 3,031,568 102,079 $ 177,617
=========== =========== =========== =========== =========== ===========
RETAINED
EARNINGS TOTAL
----------- -----------
Beginning Balance, January 1,
2005 ..................... -- $ 39,056
Contributions ............... -- 1,886,200
Issuance of shares upon
reverse merger ........... -- --
Old Marine Jet shares ....... -- --
Change in tax status from
LLC to Corp. .............
upon exchange transaction .. (1,131,754) --
Shares to be issued to Finder -- 177,617
Net Income for the period ... 1,658,562 1,658,562
----------- -----------
Ending Balance June 30, 2005 $ 526,808 $ 3,761,435
=========== ===========
See Notes to Condensed Consolidated Financial Statements
5
d. STATEMENT OF CASH FLOWS
BLUE HOLDINGS INC. (FORMERLY KNOWN AS MARINE JET TECHNOLOGY CORP.)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005
CASH FLOWS TO OPERATING ACTIVITIES
Net Income ..................................................... $ 1,658,562
Adjustments to income not effecting use of cash:
Depreciation .......................................... 1,056
Stock based exchange transaction expense .............. 177,617
Changes in assets and liabilities
Accounts Receivable .......................... 88,960
Other Receivable ............................. (235,883)
Inventories .................................. (3,418,469)
Due from Related Parties ..................... (178,762)
Due to Related Parties ....................... (95,861)
Deferred Income Taxes ........................ (197,580)
Prepaid Expenses and other current assets .... (43,938)
Income tax payable ........................... 333,064
Accounts Payable ............................. 1,292,960
Due to Customers ............................. (90,000)
Other current liabilities .................... 49,817
-----------
Net cash used in operating activities ................. (658,457)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional Paid-in Capital ............................ 686,200
Due from Factor ....................................... (70,027)
-----------
Net cash provided by financing activities ............. 616,173
-----------
NET (DECREASE) IN CASH AT THE END OF PERIOD .................... (42,284)
CASH, BEGINNING OF PERIOD ...................................... 73,823
-----------
CASH, END OF PERIOD ............................................ $ 31,539
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes 800
Non-cash Transactions:
During 2005, a member contributed inventory valued at its
historical cost of $1,200,000.
During 2005, the Company will issue common stock valued at
$177,617 in settlement of an expense related to the exchange
transaction.
See Notes to Condensed Consolidated Financial Statements
6
e. NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
(a) ORGANIZATION:
Blue Holdings, Inc. (a Nevada corporation formerly known as
Marine Jet Technology Corp.) was incorporated in the State of Nevada on February
9, 2000. On April 14, 2005, Blue Holdings entered into an Exchange Agreement
with Antik Denim, LLC ( "Antik"). At the closing of the transactions
contemplated by the exchange agreement, which occurred on April 29, 2005, Blue
Holdings acquired all of the outstanding membership interests of Antik (the
"Interests") from the members of Antik, and the members contributed all of their
Interests to Blue Holdings. In exchange, Blue Holdings issued to the members
843,027 shares of Series A Convertible Preferred Stock, par value $0.001 per
share, of Blue Holdings ("Preferred Shares"), which, on June 7, 2005, as a
result of a change to Marine Jet Technology Corp.'s name to Blue Holdings, Inc.
and a 1 for 29 reverse stock split, were converted into 24,447,783 shares of
Blue Holding's common stock on a post-reverse stock split basis. As such,
immediately following the closing and upon the conversion of the Preferred
Shares, the Antik members owned 95.8% of the total issued and outstanding common
stock of Blue Holdings on a fully-diluted basis. Following completion of the
exchange transaction, Antik became a wholly-owned subsidiary of Blue Holdings.
The acquisition is accounted for as a reverse merger (recapitalization) in the
accompanying financial statements with Antik deemed to be the accounting
acquirer, and Blue Holdings deemed to be the legal acquirer. As such the
financial statements herein are those of Antik since September 13, 2004 (the
date of its inception). All assets and liabilities of Marine Jet Technology
Corp. were assumed by the major shareholder of Blue Holdings, Inc. prior to the
exchange transaction and were inconsequential to the merged companies.
On June 7, 2005, Marine Jet Technology Corp. changed its name
to Blue Holdings Inc., and increased its authorized number of common stock to
75,000,000.
Pursuant to the provisions of the Exchange Agreement with
Antik, the former members of Antik agreed that, in the event that the
stockholders' equity of Blue Holdings (on a consolidated basis following the
closing of the transactions contemplated by the Exchange Agreement) as reported
in Blue Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 (the "Consolidated Equity") was less than $5,000,000, the former members
would contribute, within fifteen (15) days following the filing of such periodic
report, equity capital to Blue Holdings in an amount equal to the difference
between $5,000,000 and the actual Consolidated Equity reported in such periodic
report ("Required Contribution"). In the case of such Required Contribution,
each of the Antik members agreed that no additional shares of capital stock of
Blue Holdings would be issued in consideration of such Required Contribution,
and therefore, the existing shareholders of Blue Holdings, including Antik's
former members, would not be further diluted. By an amendment dated June 27,
2005, the date of June 30, 2005 for calculation of the consolidated equity was
amended to September 30, 2005.
(b) NATURE OF OPERATIONS:
The Company operates exclusively in the wholesale apparel
industry. The Company designs, develops, markets and distributes high fashion
jeans and accessories under the brand name "Antik Denim," and as of July 5,
2005, under the brand name "Yanuk." The Company's products include jeans,
jackets, belts, purses and T-shirts. The Company currently sells its products in
the United States, Canada, Japan and the European Union directly to department
stores and boutiques and through distribution arrangements in certain foreign
jurisdictions. The Company is headquartered in Commerce, California and
maintains two showrooms in New York and Los Angeles.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
7
(b) INVENTORY VALUATION:
Inventories are stated at the lower of cost (first-in, first
-out method) or market.
(c) REVENUE RECOGNITION:
Revenue is recognized when merchandise is shipped to the
customer based upon agreed terms and is recorded net of estimated returns,
charge backs and markdowns based upon management's estimates and historical
experience. We sometimes arrange, on behalf of manufacturers, for the purchase
of fabric from a single supplier. We have the fabric shipped directly to the
cutting factory and invoice the factory for the fabric. The factories then pay
us for the fabric with offsets against the price of the finished goods.
(d) ADVERTISING:
Advertising costs are expensed as of the first date the
advertisements take place. Advertising expenses included in selling expenses
approximated $32,300 and $61,501 for the three and six months ended June 30,
2005.
(e) PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is
provided by the straight-line method at rates calculated to amortize cost over
the estimated useful lives of the respective assets.
Upon sale or retirement of such assets, the related cost and
accumulated depreciation are eliminated from the accounts and gains or losses
are reflected in operations. Repairs and maintenance expenditures not
anticipated to extend asset lives are charged to operations as incurred.
(f) INCOME TAXES:
Antik Denim was a limited liability company with four
individual members up until April 29. After the exchange transaction, Blue
Holdings Inc. became the sole member of the limited liability company. As a
result, the company's tax status changed from a limited liability company to a
corporation, Antik is no longer a pass through entity for U.S. income tax
purposes. Federal and State income tax obligations for the period prior to April
29, 2005, were passed through to the previous members of Antik, and the Company
recorded no provision for such taxes. The Company has agreed with the previous
members of the limited liability company that the Company will not make any
distributions to pay tax liabilities, if any, on income earned prior to the
acquisition date, April 29, 2005. Consequently, the taxes on the income of the
limited liability company are payable individually by each member.
The Company uses the asset and liability method to account for
its income taxes. The Company's provision for income taxes at June 30, 2005 was
based on income for the period from April 30, 2005 to June 30, 2005 as adjusted
for timing differences outstanding at the date that Blue Holdings became the
sole member of the limited liability company.
The Company recognizes deferred taxation on temporary
differences between income tax liability for financial statement and income tax
purposes. At June 30, 2005 the deferred tax asset amounted to $197,580 relating
principally to the reserves.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES:
Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
8
(h) CONCENTRATION OF CREDIT RISK:
Financial instruments, which potentially expose us to
concentration of credit risk, consist primarily of cash, trade accounts
receivable, and amounts due from the factor. Concentration of credit risk with
respect to trade accounts receivable at June 30, 2005 is limited due to the
number of customers comprising the Company's customer base and their dispersion
throughout the United States. The Company extends unsecured credit to its
customers in the normal course of business.
The Company's cash balances on deposit with banks are
guaranteed by the Federal Deposit Insurance Corporation up to $100,000. The
Company may be exposed to risk for the amounts of funds held in one bank in
excess of the insurance limit. In assessing the risk, the Company's policy is to
maintain cash balances with high quality financial institutions.
The Company's products are primarily sold to department stores
and specialty retail stores. These customers can be significantly affected by
changes in economic, competitive or other factors. The Company makes substantial
sales to a relatively few, large customers. In order to minimize the risk of
loss, the Company assigns certain amount of domestic accounts receivable to a
factor without recourse or requires letters of credit from its customers prior
to the shipment of goods. For non-factored receivables, account-monitoring
procedures are utilized to minimize the risk of loss. Collateral is generally
not required. No single customer accounted for more than 10% of total sales in
the three and six months ended June 30, 2005, and only one customer accounted
for 7.7% and 4.2% respectively of total sales.
(i) MERCHANDISE RISK:
The Company's success is largely dependent upon its ability to
gauge the fashion tastes of its targeted consumers and provide merchandise that
satisfies consumer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company's business, operating results and financial condition.
(j) ACCOUNTS RECEIVABLE - ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD
DEBTS:
The Company evaluates the collectibility of accounts
receivable and chargebacks (disputes from the customer) based upon a combination
of factors. In circumstances where the Company is aware of a specific customer's
inability to meet its financial obligations (such as in the case of bankruptcy
filings or substantial downgrading by credit sources), a specific reserve for
bad debts is taken against amounts due to reduce the net recognized receivable
to the amount reasonably expected to be collected. For all other customers, the
Company recognizes reserves for bad debts and uncollectible charge backs based
on its historical collection experience. If collection experience deteriorates
(for example, due to an unexpected material adverse change in a major customer's
ability to meet its financial obligations to the Company), the estimates of the
recoverability of amounts due could be reduced by a material amount.
(k) SHIPPING AND HANDLING COSTS:
Freight charges are included in selling, distribution and
administrative expenses in the statement of operations and approximated $63,617
and $117,933 for the three and six months ended June 30, 2005.
NOTE 3 - DUE FROM FACTOR
The Company uses a factor for working capital and credit
administration purposes. Under the factoring agreement, the factor purchases a
substantial portion of the trade accounts receivable and assumes all credit risk
with respect to such accounts. The factor agreement, which terminates on October
18, 2005, provides that the Company can borrow an amount up to 85% of the value
of its approved factored customer invoices, less a reserve of 15% of unpaid
accounts purchased and 100% of all such accounts which are disputed.
The amount of reserve held by the Factor was approximately
$464,000 as of June 30, 2005.
9
The factor commission is 0.08% of the customer invoice amount
for terms up to 90 days, plus one quarter of one percent (.25%) for each
additional thirty-day term. Receivables sold in excess of maximums established
by the factor are subject to recourse in the event of nonpayment by the
customer. The Company is contingently liable to the factor for merchandise
disputes, customer claims and the like on receivables sold to the factor. Items
subject to recourse approximated $998,863 as of June 30, 2005. To the extent
that the Company draws funds prior to the deemed collection date of the accounts
receivable sold to the factor, interest is charged at the rate of 1% over the
factor's prime lending rate per annum. Factor advances and ledger debt are
collateralized by the non-factored accounts receivable, inventories and the
personal guarantee of the majority shareholder and a company co-owned by the
majority shareholder.
NOTE 4 - INVENTORIES
Inventories at June 30, 2005 are summarized as follows:
Raw Materials ............ $2,511,503
Work-in-process .......... 1,301,764
Finished goods ........... 1,617,390
----------
$5,430,657
==========
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Furniture .......................... $ 1,064
Leasehold improvements ............. 7,000
Computer equipment ................. 2,808
-------
10,872
Less: Accumulated depreciation
and Amortization ($917 for the
three months ended March 31, 2005) 1,445
-------
$ 9,427
=======
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company had sales to related parties of $67,476 and
$766,511 during the three and six months ended June 30, 2005. Before the
exchange transaction, the sales terms were at a mark-up over cost approximately
20% discount from regular wholesale price. The terms were changed to regular
wholesale prices after the exchange transaction with Antik.
The Company also purchased fabric at cost from Blue Concept
LLC, an entity co-owned by Paul and Elizabeth Guez, the Company's Chairman,
Chief Executive Officer and President, and Chief Operating Officer, respectively
("Blue Concept"), for $361,084 and $459,864 during the three and six months
ended June 30, 2005. During the three and six months ended June 30,2005 we
reimbursed $312,148 and $624,295 respectively for certain expenses (consisting
of salaries, payroll taxes, utilities, common area services, rent, insurance and
other office services) to Blue Concept. The arrangement was formalized under a
Service Agreement signed on May 18, 2005.
10
The majority shareholders and Blue Concept have personally
guaranteed all advances and ledger debt due to the Company's factor.
NOTE 7 - DUE FROM/TO RELATED PARTIES
The related parties are the majority shareholder and Limited
Liability Companies that are co-owned by a majority shareholder of the Company
(see Note 11). These amounts are all unsecured and non-interest bearing. All
non-trade related advances from related parties have been repaid. Trade-related
outstanding items follow regular payment terms as invoiced.
NOTE 8 - MAJOR SUPPLIERS
During the three months ended June 30, 2005, two suppliers
comprised greater than 10% of the Company's purchases. Purchases from these
suppliers were 11.1% and 18.5%, respectively. During the six months ended June
30, 2005 one supplier comprised greater than 10% of the Company's purchases.
Purchases from this supplier comprised 13.3%.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash, Due from factor, Accounts
receivable, Due from affiliates, Accounts payable, Due to Affiliates, Due to
customers, Accrued expenses and other current liabilities approximate fair value
because of the short maturity of these items.
NOTE 10 - OFF-BALANCE SHEET RISK
Financial instruments that potentially subject the Company to
off-balance sheet risk consist of factored accounts receivable. As described in
Note 3, the Company sells the majority of its trade accounts receivable to a
factor and is contingently liable to the factor for merchandise disputes and
other customer claims. At June 30, 2005, total factor receivables approximated
$449,000.
NOTE 11 - CAPITAL CONTRIBUTION
Since the beginning of 2005, Mr. Guez has personally
contributed $1,200,000 in fabric inventory and $686,200 in cash to the Company.
From time to time, he also supports the Company with temporary advances. As of
June 30, 2005, the Company had advances totaling $141,549 from Mr. Guez which
are included in due to related parties on the accompanying balance sheet.
NOTE 12 - SUBSEQUENT EVENTS
On July 5, 2005, the Company entered into a ten-year license
agreement with Yanuk Jeans LLC ("Yanuk"). Under the terms of the agreement, the
Company will be the exclusive licensor for the design, development, manufacture,
sale, marketing and distribution of Yanuk's products. The Company will pay to
Yanuk a royalty of six percent of all net sales and shall pay a guaranteed
minimum royalty on a quarterly basis. Also the company has the option to
purchase from Yanuk the property licensed under the agreement.
On July 8, 2005, we entered into an Employment Agreement with
Philippe Naouri. Mr. Naouri was engaged by us as a fashion director and senior
vice president in charge of design, development, manufacturing, marketing and
wholesale of apparel and related accessories bearing the "Antik Denim" trademark
for a term of 5 years commencing on July 11, 2005 and terminating on July 10,
2010. Mr. Naouri will receive an annual salary of $240,000 and a 1% commission
on the net sales of all Antik Denim brand apparel sold by us. Mr. Naouri is
entitled to participate in our bonus, incentive stock option, savings and
retirement plans as such plans become available.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-QSB (the "Quarterly Report") that are
not historical or current facts are "forward-looking statements" made pursuant
to the safe harbor provisions of Section 27A of the Securities Act of 1933, as
amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends that such forward-looking
statements be subject to the safe harbors for such statements. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Form 10-QSB
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved. The
Company disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statement
or to reflect the occurrence of anticipated or unanticipated events.
The words "we," "us," "our," and the "Company," refer to Blue Holdings,
Inc. The words or phrases "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate," or "continue," "would be," "will allow," "intends
to," "will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions, or the negative thereof, are
intended to identify "forward-looking statements." Actual results could differ
materially from those projected in the forward looking statements as a result of
a number of risks and uncertainties, including but not limited to: (a) our
failure to implement our business plan within the time period we originally
planned to accomplish; and (b) other risks that are discussed in this Form
10-QSB or included in our previous filings with the Securities and Exchange
Commission ("SEC").
DESCRIPTION OF BUSINESS
CORPORATE HISTORY
Blue Holdings, Inc. was incorporated in the State of Nevada on February
9, 2000 under the name Marine Jet Technology Corp. Since our inception and
through January 2005, we focused on developing and marketing boat propulsion
technology. Between January and February 2005, we entered into separate
transactions whereby, among other matters, Keating Reverse Merger Fund, L.L.C.
("KRM Fund"), an existing shareholder of the Company, agreed to purchase a
substantial majority of our outstanding common stock, and Intellijet Marine,
Inc., a company formed by our former majority shareholder and principal
executive officer and director, Jeff P. Jordan, acquired all of our boat
propulsion technology assets and assumed all of our then existing liabilities.
Between February 4, 2005 and April 29, 2005, we existed as a public
"shell" company with nominal assets whose sole business was to identify,
evaluate and investigate various companies to acquire or with which to merge.
On April 14, 2005, we entered into an Exchange Agreement (the "Exchange
Agreement") with Antik Denim, LLC, a California limited liability company
("Antik"), the members of Antik (the "Antik Members"), and KRM Fund. The closing
of the transactions contemplated by the Exchange Agreement occurred on April 29,
2005. At the closing, we acquired all of the outstanding membership interests of
Antik (the "Interests") from the Antik Members, and the Antik Members
contributed all of their Interests to us. In exchange, we issued to the Antik
Members 843,027 shares of our Series A Convertible Preferred Stock, par value
$0.001 per share (the "Preferred Shares"), which, as a result of the approval by
a substantial majority of our outstanding shareholders entitled to vote and the
approval by our Board of Directors, of amendments to our Articles of
Incorporation that (i) changed our name to Blue Holdings, Inc., (ii) increased
our authorized number of shares of common stock to 75,000,000, and
12
(iii) adopted a 1-for-29 reverse stock split, on June 7, 2005 converted into
708,984,875 shares of our common stock on a pre-reverse stock split basis and
24,447,783 shares of our common stock on a post-reverse stock split basis.
At the closing, Antik became our wholly-owned subsidiary. The exchange
transaction was accounted for as a reverse merger (recapitalization) with Antik
deemed to be the accounting acquirer, and us deemed to be the legal acquirer.
As a result of the closing of the transactions contemplated by the
Exchange Agreement, the Antik Members (together with Elizabeth Guez, our Chief
Operating Officer) hold approximately 95.8% of the outstanding shares of our
common stock, and our shareholders existing immediately prior to the closing
hold approximately 969,745 shares of our common stock, representing
approximately 3.8% of our outstanding shares of common stock.
Following the closing of the transactions contemplated by the Exchange
Agreement, Paul Guez, one of the former Antik Members, became our Chairman,
Chief Executive Officer and President. Mr. Guez has over 30 years experience in
the apparel industry and is best known as the founder of Sasson Jeans, which he
founded in 1976. Since 1989, Mr. Guez has engaged in the design, marketing,
manufacturing and wholesale distribution of premium fashion and denim
collections, including for a growing stable of contemporary brands, such as U,
Taverniti So Jeans, Duarte Jeans, Elvis, Memphis Blues and Grail Jeans.
Additionally, Philippe Naouri and Alexandre Caugant, French denim
innovators, Antik's principal designers, and two of the former Antik Members
continue to provide design services to us. Mr. Naouri has worked on such
international brands as Diesel, Levi's and G-Star, and Mr. Caugant has worked on
the GOA brand in France.
RECENT DEVELOPMENTS
On July 5, 2005, we entered into a ten-year License Agreement,
effective July 1, 2005, with Yanuk Jeans, LLC ("Yanuk"). Under the terms of the
License Agreement, we became the exclusive licensor for the design, development,
manufacture, sale, marketing and distribution of Yanuk's products to the
wholesale and retail trade. We will pay to Yanuk a royalty of six percent (6%)
of all net sales of the products licensed under the agreement and a guaranteed
minimum royalty on a quarterly basis as further set forth in the License
Agreement. In addition, during the term of the License Agreement, we have the
option to purchase from Yanuk the property licensed under the License Agreement,
consisting of certain trademarks and a design patent, at the fair market value
of such property on the date of the exercise of the purchase option. Yanuk is
wholly-owned by Paul Guez, our Chairman, Chief Executive Officer and President,
and a majority shareholder. The License Agreement was approved by a majority of
our Board of Directors including all of our independent directors.
OUR BUSINESS
GENERAL OVERVIEW
We, directly and through our wholly-owned subsidiary, Antik Denim, LLC,
which was formed in September 2004, design, develop, manufacture, market,
distribute and sell high end fashion jeans, apparel and accessories. We market,
distribute and sell "Antik Denim" and, as a result of recent license agreement
with Yanuk, "Yanuk" brand products in the United States, and internationally in
countries that include, but are not limited to, Canada, Belgium, France,
Germany, Sweden, Italy, Korea, and Japan.
We market and distribute our products by participating in industry
trade shows, as well as through our show rooms in Los Angeles and New York. We
maintain distributor relationships in the United Kingdom, France, Germany,
Sweden, Greece, Belgium, Italy and Japan. With respect to the Antik Denim brand,
except for Japan we currently have no exclusive or long term distribution
agreements with any party covering any territory, and do not depend on any
single distributor to distribute our products. With respect to the Yanuk brand,
except for Japan , we currently have no exclusive or long term distribution
agreements with any party covering any territory, and do not depend on any
single distributor to distribute our products. Our distributors often, but not
always, purchase products from us at a discount for resale to their customers in
their respective territories. Our distributors warehouse our products at their
expense and they ship to and collect payment from their customers directly.
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Our products are sold in the United States to department stores and
boutiques such as Saks Fifth Avenue, Neiman Marcus, Nordstrom, Barney's,
Bloomingdales, Bergdorf Goodman, Atrium, Fred Segal, Intermix, Kitson, and
Bendel, as well as smaller boutiques throughout the country.
Our products are sold internationally to department stores and
boutiques such as Lane Crawford in Hong Kong, Harrods and Harvey Nichols in the
United Kingdom, Barneys and Isetan in Japan, Galleries Lafayette in France, and
Holt Renfrew in Canada.
We intend to operate certain flagship stores domestically and to
license overseas operators to open retail stores that focus on high end fashion
denim generally, and the Antik Denim and Yanuk brands, in particular. While
there is no existing plan with respect to the roll-out of such stores, we
anticipate that the first retail store will open on August 18, 2005 on Melrose
Avenue in Los Angeles.
EMPLOYEES
As of July 31, 2005, we had 79 employees, not including our three
executive officers, Paul Guez, our Chairman, Chief Executive Officer and
President, Elizabeth Guez, our Chief Operating Officer, and Patrick Chow, our
Chief Financial Officer and Secretary. Of those employees, 17 are employed on a
full time basis. The remaining 62 employees are part-time and season based
employees. All of our employees are allocated under a service agreement with
Blue Concept, LLC, an entity co-owned by Paul and Elizabeth Guez. A description
of that service agreement is set forth below in the section entitled
"Description of Property." Mr. Guez leads our product development, marketing and
sales, and Ms. Guez oversees all product production, including our contract
manufacturing activities. Our employees are not unionized and except as
described in the paragraph below, no employees are subject to existing
employment agreements.
Antik executed a letter agreement dated March 21, 2005 with Messrs.
Naouri and Caugant, two of its principal designers and former members, pursuant
to which Antik agreed that, to the extent Antik closed its exchange transaction
with us, Antik would, or would use its best efforts to cause us to, enter into
employment agreements with each of Messrs. Naouri and Caugant whereby such
individuals would (i) perform fashion design services for Antik or us, (ii) be
entitled to receive annual salaries of $240,000, plus bonuses based on net sales
arising from "Antik Denim" brand apparel, and (iii) be entitled to receive such
other benefits as Antik or we may elect to offer to our other employees from
time to time. On July 8, 2005, we entered into an Employment Agreement with
Philippe Naouri based on the foregoing letter agreement entered into with Antik.
Mr. Naouri was engaged by us as a fashion director and senior vice president in
charge of design, development, manufacturing, marketing and wholesale of apparel
and related accessories bearing the "Antik Denim" trademark for a term of 5
years commencing on July 11, 2005 and terminating on July 10, 2010. Mr. Naouri
will receive an annual salary of $240,000 and a 1% commission on the net sales
of all Antik Denim brand apparel sold by us. Mr. Naouri is entitled to
participate in our bonus, incentive stock option, savings and retirement plans
as such plans become available. We have not yet entered into an agreement with
Mr. Caugant but anticipate doing so on or before the end of the year.
OUR PRODUCTS
Our principal products are high end fashion jeans that we design,
manufacture, market, distribute and sell, including through our wholly-owned
subsidiary, Antik Denim, LLC, under the "Antik Denim" and "Yanuk" labels. These
jeans are sold in the United States and abroad to upscale retailers and
boutiques.
We currently sell men's and women's styles and are in the process of
launching a children's line, Antik Denim and Yanuk brand jeans are made from
high quality fabrics milled in the United States, Japan, Italy and Spain and are
processed with cutting edge treatments and finishes. Our concepts and designs,
including Antik Denim's distinct vintage western flair, and our extraordinary
fit, embellishments, patent pending pockets, unique finishes, hand stitching,
embroidery detail and other attention to detail and quality give Antik Denim and
Yanuk brand jeans and apparel a competitive advantage in the high end fashion
jean market.
Our jeans are available in multiple combinations of washes, fabrics and
finishes, with as many as 20 different combinations of colors, fabrics and
finishes on certain styles. Indeed, we introduce new versions of our major
styles each month - in different colors, washes and finishes.
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Although the majority of our sales arise from the sale of jean
products, our product line is balanced by tops, including knits and wovens, and
accessories, the sales of which we anticipate will continue to grow.
PRODUCT STRATEGY
Our overall product strategy is to offer multiple brands of apparel in
the premium and better denim segments. As a result of the License Agreement with
Yanuk Jeans, LLC, we currently market our products under the Antik Denim and
Yanuk brands and plan to continue to further expand our brand portfolio by
acquisition and/or license of existing apparel companies and/or brands, as
applicable, in the premium or better segments of the industry, or the creation
of new brands by our internal design team. While no definitive arrangement or
plan is currently in place, we expect our management to periodically review
potential acquisition targets and/or license partners and to make
recommendations to our Board of Directors. Our goal to employ a multi-brand
strategy diversifies the fashion and other risks associated with reliance on
limited product lines. We believe the increase in demand for premium denim
products over the last couple of years and relatively high retail price points
for premium jeans, ranging from approximately $200 to $400, offers us a
significant opportunity to increase our revenues and improve our profitability.
Over the last thirty years, Mr. Guez, our Chairman, Chief Executive
Officer and President, has engaged in the design, marketing, manufacturing and
wholesale distribution of premium fashion and denim collections, including
Sasson Jeans and more recently, a growing stable of contemporary brands, such as
U, Taverniti So Jeans, Duarte Jeans, Elvis, Memphis Blues and Grail Jeans. Our
principle designers, Philippe Naouri and Alex Caugant have previously assisted
world-renowned casual apparel companies such as Chevignon, Diesel, GOA, and
Replay in the design and development of successful brands and products.
OPERATING STRATEGY
Our operating strategy is to continue to build on our strengths in
brand development, marketing, distribution, and product sourcing capabilities to
become the leading company in the high fashion denim apparel industry. Our goal
is to leverage the expertise and relationships gained by our executive
management and product design teams' prior experience in creating and developing
premium denim apparel brands, product sourcing and manufacturing in the US,
Mexico, and Asia, and distributing to high-end retail channels both domestically
and internationally
Additionally, with our service agreement with Blue Concept, we have
established a full team of professionals responsible for coordinating product
manufacturing, material sourcing, and sales and marketing, all of whom have
significant prior experience and established relationships in the denim apparel
industry.
GROWTH STRATEGY
We plan to continue to expand our operations, revenues, and profits
through our internal growth and the acquisition and/or license of complimentary
apparel brands or companies that we may identify from time to time. We
anticipate that our internal growth will be driven by (1) expansion of our
product lines by introducing new styles and complimentary products and
accessories, (2) expansion of our wholesale distribution, both domestically and
internationally through high end retailers, and (3) the opening of select retail
flagship stores domestically and the licensing of operators overseas to open
stores to promote the identity of our brands The first retail store we are going
to operate is anticipated to open on August 18, 2005 on Melrose Avenue in Los
Angeles. We anticipate that our growth strategy through acquisitions and/or
licenses will involve the acquisition or license of additional companies and/or
brands, as applicable, depending upon a company's and/or a brand's sales
revenues, name and brand recognition, and/or synergies with the Antik Denim and
Yanuk brands, with the ultimate goal of building a portfolio of lifestyle brands
in the premium and better segments of the denim industry. While no definitive
arrangement or plan is currently in place, we expect our management to
periodically review potential acquisition targets and/or licensing partners and
to make recommendations to our Board of Directors.
SUPPLY STRATEGY
We purchase our fabric, thread and other raw materials from various
industry suppliers within the United States and abroad. We do not currently have
any long-term agreements in place for the supply of our fabric, thread or other
raw materials. The fabric, thread and other raw materials used by us are
available from a large number of
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suppliers worldwide. During the six months ended June 30, 2005 only one supplier
comprised greater than 10% of the Company's purchases. Purchases from this
supplier comprised 13.3%.
MANUFACTURING
We presently outsource all of our manufacturing to contract vendors
using just in time ordering. We use several contract vendors for our
manufacturing needs with the bulk of purchases (approximately 80%) currently
occurring from domestic (U.S.) factories. We also use factories in Mexico and
the Far East. We are not reliant on any one manufacturer and manufacturing
capacity is readily available to meet our current and planned needs. We maintain
rigorous quality control systems for both raw and finished goods. To maintain
low fixed expenses, we will continue to outsource the vast majority of our
production. We will add additional contractors as required to meet our needs.
We believe we can realize significant cost savings in product
manufacturing because of our strong relationships with a diverse group of U.S.
and international contract manufacturers established by our management team
through their prior experience in the apparel industry. Also the increase in
production volume as a result of our multi-brand strategy will give us economies
of scale to achieve more cost savings..
COMPETITION
The high-end fashion denim industry is very competitive and fragmented.
Our competitors are companies such as Levi Strauss, Calvin Klein, Joe's Jeans,,
True Religion Apparel , Seven For All Mankind and Citizens of Humanity.
Our competitive edge lies in our ability to create innovative concepts
and designs, to develop products with extraordinary fit, and to expand our high
quality fabrics and finishes, treatments and embellishments (including our
patent pending pockets, hand stitching and embroidery detail). We believe that
we offer value products that can successfully compete in the high end fashion
denim industry.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
Antik is the holder of trademark applications for the "Antique Denim"
and "Antik Denim" marks in the United States and various other foreign
jurisdictions. Antik also owns several proprietary concepts and designs,
including pending trademark and patent applications on its pocket designs.
Yanuk, from whom we hold an exclusive license to exploit products based on the
"Yanuk" brand, is the holder of several United States and foreign trademarks. We
anticipate continuing to expand the Antik Denim and Yanuk brands, and their
proprietary trademarks and designs, worldwide.
GOVERNMENT REGULATION AND SUPERVISION
We benefit from certain international treaties and regulations, such as
the North American Free Trade Agreement (NAFTA), which allows for the duty and
quota free entry into the United States of certain qualifying merchandise.
International trade agreements and embargoes by entities such as the World Trade
Organization also can affect our business, although their impact has
historically been favorable as it relates to Antik and Yanuk.
We have implemented various programs and procedures, including
unannounced inspections, to ensure that all of the apparel manufacturers with
whom we contract fully comply with employment and safety laws and regulations
governing their place of operation.
RESEARCH AND DEVELOPMENT
Mr. Guez, along with a team of designers, is responsible for the design
and development of our product lines. There is no formal research and
development plan at this time, however, since inception, We have apportioned
significant resources on our research and development activities related to our
designs.
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PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 5804 E. Slauson Ave.,
Commerce California 90040. Our telephone number is (323) 725-5555.
DESCRIPTION OF PROPERTY
Our offices and warehouse are located in Commerce, California. It is
from this facility that we conduct all of our executive and administrative
functions, and ship Antik Denim and Yanuk brand products to our customers. We
also maintain showrooms in both Los Angeles and New York City. The cost of
operations at the Commerce facility and the showrooms is shared by several
companies and is allocated to us pursuant to our service agreement with Blue
Concept, LLC. We utilize approximately 15,000 sq. ft of the Commerce, California
facility and pay approximately $15,000 per month pursuant to this agreement with
Blue Concept, LLC. We believe that the facilities utilized by us are well
maintained, in good operating condition and adequate to meet our current and
foreseeable needs.
The service agreement with Blue Concept also provides that (i) in
consideration of a monthly service fee of $78,500, Blue Concept provides us
services in the following areas: MIS, human resources, sales, customer service,
EDI Support, quality control, purchasing, import/export services, graphic
design, laundry and distribution; and (ii) we share with Blue Concept 15% of the
actual telephone, utilities and office supply expenses incurred by Blue Concept,
as evidenced by actual invoices presented to us.
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of 2005, Mr. Guez has personally contributed
$1,200,000 in fabric inventory and $686,200 in cash to Antik. From time to time,
he also supports us with temporary advances. As of June 30, 2005, we had
advances totaling $141,549 from Mr. Guez.
We use a factor for working capital and credit administration purposes.
Under the factoring agreement, the factor purchases a substantial portion of the
trade accounts receivable and assumes all credit risk with respect to such
accounts.
The factor agreement, which terminates on October 18, 2005, provides
that we can borrow an amount up to 85% of the value of our approved factored
customer invoices, less a reserve of 15% of unpaid accounts purchased and 100%
of all such accounts which are disputed. As of June 30, 2005, the amount of the
reserve held by the factor was approximately $464,000. The factor commission is
0.08% of the customer invoice amount for terms up to 90 days, plus one quarter
of one percent (.25%) for each additional thirty-day term.
Receivables sold in excess of maximums established by the factor are
subject to recourse in the event of nonpayment by the customer. At June 30,
2005, items subject to recourse approximated $998,863. We are contingently
liable to the factor for merchandise disputes, customer claims and the like on
receivables sold to the factor.
To the extent that we draw funds prior to the deemed collection date of
the accounts receivable sold to the factor, interest is charged at the rate of
1% over the factor's prime lending rate per annum. Factor advances and ledger
debt are collateralized by the non-factored accounts receivable, inventories and
the personal guarantee of Mr. Guez and Blue Concept, LLC, a company co-owned by
him and Elizabeth Guez.
Our primary source of liquidity is expected to be cash flow generated
from operations, cash and cash equivalents currently on hand, and working
capital attainable through our factor.
Additionally, pursuant to the provisions of the Exchange Agreement
among us, Antik, and the members of Antik, the members of Antik agreed that, in
the event that our stockholders' equity (on a consolidated basis following the
closing of the transactions contemplated by that agreement) as reported in our
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005 (the
"Consolidated Equity") was less than $5,000,000, the members would contribute,
within fifteen (15) days following the filing of such periodic report, equity
capital to us in an amount equal to the difference between $5,000,000 and the
actual Consolidated Equity reported in such periodic report ("Required
Contribution"). In the case of such Required Contribution, each of the Antik
members
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agreed that no additional shares of the Registrant's capital stock would be
issued in consideration of such Required Contribution, and therefore, the
existing shareholders, including Antik's members, would not be further diluted.
On June 27, 2005, the Registrant, Antik, Antik's former members (i.e., the
members of Antik prior to the closing of the transactions contemplated by the
Exchange Agreement), and Keating Reverse Merger Fund, a beneficiary of certain
provisions of the Exchange Agreement, amended the Exchange Agreement to require
that the Required Contribution is to be made, if at all, in connection with the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30,
2005.
RESULTS OF OPERATIONS
The acquisition of Antik Denim, LLC ("Antik") is accounted for as a
reverse merger (recapitalization) in the accompanying financial statements with
Antik deemed to be the accounting acquirer, and Blue Holdings deemed to be the
legal acquirer. Accordingly the financial statements herein are those of Antik
since September 13, 2004 (the date of inception). As such, there are no
comparisons with previous periods.
SIX MONTHS ENDED JUNE 30, 2005
Net cash used by operating activities for the six months ended June 30,
2005 was ($0.66 million). The deficit was created by an increase of $3.42
million in inventory and was financed by an increase of $1.29 million in
accounts payable and by additional contributions/paid-in capital of $0.69
million from Mr. Guez.
We recorded sales of $8.85 million for the six months ending June 30,
2005. Sales in 2005 are related to sales of products by Antik. Gross profit for
the six months ending June 30, 2005 was $4.46 million, or 50%. Management
expects that sales will continue to increase in the quarter ended September 30,
2005, although the rate of this increase will depend on the co-ordination of our
vendors to catch up with the increased amount of purchase orders.
Selling, distribution and administrative expenses totaled $2.19 million
and included purchases of sample fabric, freight, advertising, commissions,
travel and trade show expense. The principal components were professional and
consulting fees ($0.34 million), and fees paid to Blue Concept, LLC under the
service agreement ($0.63 million).
Net Income after provision for taxes was $1.66 million. Other than the
minimum tax of $800 for the State of California, previous members of Antik have
agreed not to require distributions for their individual tax liabilities for the
period up to the exchange transaction. Therefore our tax provisions were based
on the income between April 30 and June 30, 2005. Net Income was adversely
affected in the second quarter by the costs associated with the exchange
transaction with Antik, namely $0.30 million on professional fees and $0.18
million in accrual for the cost of issuing 102,079 post-reverse-stock-split
shares as a finders' fee to the facilitator of the transaction.
THREE MONTHS ENDED JUNE 30, 2005
We recorded sales of $4.43 million for the three months ending June 30,
2005. Sales in 2005 are related to sales of products by Antik Denim LLC. Gross
profit for the three months ending June 30, 2005 was $2.35 million, or 53%.
Selling, distribution and administrative expenses totaled $1.21 million
and included purchases of sample fabric, freight, advertising, commissions,
travel and trade show expense. The principal components were professional and
consulting fees ($0.13 million), and fees paid to Blue Concept, LLC under the
service agreement ($0.31 million).
Net Income after provision for taxes was $0.53 million. Other than the
minimum tax of $800 for the State of California, former members of Antik have
undertaken not to take further distributions for their individual tax
liabilities. Therefore, our tax provisions were based on the income between
April 30 and June 30, 2005. Net income was adversely affected in the quarter by
the costs associated with the exchange transaction with Antik, namely $0.30
million on professional fees and $0.18 million in accrual for the cost of
issuing 102,079 post-reverse-stock-split shares as a finders' fee to the
facilitator of the transaction.
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CRITICAL ACCOUNTING POLICIES
Revenue is recognized when merchandise is shipped to the customer based
upon agreed terms and is recorded net of estimated returns, charge backs and
markdowns based upon management's estimates and historical experience.
Trade accounts receivable are recorded at invoiced amounts, less
amounts accrued for returns, discounts and allowances. An allowance is provided
for specific customer accounts where collection is doubtful and for inherent
risk in ultimate collectibility. There is no off-balance sheet credit exposure
related to customer receivables.
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first -out ("FIFO") method.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS DESCRIPTION BEFORE PURCHASING SHARES OF OUR COMMON
STOCK OR OTHER SECURITIES. INVESTING IN BLUE HOLDINGS' COMMON STOCK INVOLVES A
HIGH DEGREE OF RISK. IF ANY OF THE FOLLOWING EVENTS OR OUTCOMES ACTUALLY OCCURS,
OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. AS
A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE
ALL OR PART OF THE MONEY YOU PAID TO PURCHASE OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
ANTIK, OUR WHOLLY-OWNED SUBSIDIARY, HAS A LIMITED OPERATING HISTORY, MAKING IT
DIFFICULT TO EVALUATE WHETHER IT WILL OPERATE PROFITABLY.
Antik was formed in September 2004 to design, develop, manufacture, market,
distribute and sell high end fashion jeans, apparel and accessories. As a
result, it does not have a meaningful historical record of sales and revenues
nor an established business track record. While our management believes that we
have an opportunity to be successful in the high end fashion jean market, there
can be no assurance that we will be successful in accomplishing our business
initiatives, or that we will achieve any significant level of revenues, or ever
recognize net income, from the sale of our products.
Unanticipated problems, expenses and delays are frequently encountered in
increasing production and sales and developing new products, especially in the
current stage of our business. Our ability to continue to successfully develop,
produce and sell our products and to generate significant operating revenues
will depend on our ability to, among other matters:
- successfully market, distribute and sell our products or enter
into agreements with third parties to perform these functions
on our behalf; and
- obtain the financing required to implement our business plan.
Given Antik's limited operating history, our new license agreement with Yanuk,
our lack of long-term sales history and other sources of revenue, there can be
no assurance that we will be able to achieve any of our goals and develop a
sufficiently large customer base to be profitable.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.
We may not be able to fund our future growth or react to competitive pressures
if we lack sufficient funds. Currently, management believes we have sufficient
cash on hand and cash available through our factor to fund
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existing operations for the foreseeable future. However, in the future, we may
need to raise additional funds through equity or debt financings or
collaborative relationships, including in the event that we lose our
relationship with our factor. This additional funding may not be available or,
if available, it may not be available on economically reasonable terms. In
addition, any additional funding may result in significant dilution to existing
shareholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through collaborative partners that may require
us to release material rights to our products.
FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.
Management believes that we, including our Antik Denim subsidiary specifically,
are poised for significant growth in 2005. However, no assurance can be given
that we will be successful in maintaining or increasing our sales in the future.
Any future growth in sales will require additional working capital and may place
a significant strain on our management, management information systems,
inventory management, sourcing capability, distribution facilities and
receivables management. Any disruption in our order processing, sourcing or
distribution systems could cause orders to be shipped late, and under industry
practices, retailers generally can cancel orders or refuse to accept goods due
to late shipment. Such cancellations and returns would result in a reduction in
revenue, increased administrative and shipping costs and a further burden on our
distribution facilities.
Additionally, we intend from time to time to open and/or license retail stores
focusing on the Antik Denim, Yanuk and other brands, and to acquire and/or
license other businesses and brands, as applicable, as we deem appropriate. If
we are unable to adequately manage our retail operations, or to properly
integrate any business or brands we acquire and/or license, this could adversely
affect our results of operation and financial condition.
WE CURRENTLY OWN OR LICENSE, AND OPERATE, ONLY TWO BRANDS, ANTIK DENIM AND
YANUK. IF WE ARE UNSUCCESSFUL IN MARKETING AND DISTRIBUTING THOSE BRANDS OR IN
EXECUTING OUR OTHER STRATEGIES, OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION WILL BE ADVERSELY AFFECTED.
While our goal is to employ a multi-brand strategy that will ultimately
diversify the fashion and other risks associated with reliance on a limited
product line, we currently operate, directly and through our wholly-owned
subsidiary, Antik Denim, LLC, only two brands, Antik Denim and Yanuk, one of
which, Yanuk, is being operated pursuant to a very recent license agreement. If
we are unable to successfully market and distribute the Antik Denim and Yanuk
brands, or if the recent popularity of premium denim brands decreases, or if we
are unable to execute on our multi-brand strategy to acquire and/or license
additional companies and/or brands, as applicable, identified by our management
from time to time, our results of operations and financial condition will be
adversely affected.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Management expects that we will experience substantial variations in our net
sales and operating results from quarter to quarter. We believe that the factors
which influence this variability of quarterly results include:
- the timing of its introduction of new product lines;
- the level of consumer acceptance of each new product line;
- general economic and industry conditions that affect consumer
spending and retailer purchasing;
- the availability of manufacturing capacity;
- the seasonality of the markets in which it participates;
- the timing of trade shows;
- the product mix of customer orders;
- the timing of the placement or cancellation of customer
orders;
- the weather;
- transportation delays;
- quotas and other regulatory matters;
- the occurrence of charge backs in excess of reserves; and
- the timing of expenditures in anticipation of increased sales
and actions of competitors.
As a result of fluctuations in our revenue and operating expenses that may
occur, management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is possible
that in some future quarter or quarters, our operating results will be below the
expectations of securities analysts or investors. In that case, our common stock
price could fluctuate significantly or decline.
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THE FINANCIAL CONDITION OF OUR CUSTOMERS COULD AFFECT OUR RESULTS OF OPERATIONS.
Certain retailers, including some of our customers, have experienced in the
past, and may experience in the future, financial difficulties, which increase
the risk of extending credit to such retailers and the risk that financial
failure will eliminate a customer entirely. These retailers have attempted to
improve their own operating efficiencies by concentrating their purchasing power
among a narrowing group of vendors. There can be no assurance that we will
remain a preferred vendor for our existing customers. A decrease in business
from or loss of a major customer could have a material adverse effect on our
results of operations. There can be no assurance that our factor will approve
the extension of credit to certain retail customers in the future. If a
customer's credit is not approved by the factor, we could assume the collection
risk on sales to the customer itself, require that the customer provide a letter
of credit, or choose not to make sales to the customer.
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.
A portion of our import operations are subject to tariffs imposed on imported
products and quotas imposed by trade agreements. In addition, the countries in
which our products are imported may from time to time impose additional new
duties, tariffs or other restrictions on its imports or adversely modify
existing restrictions. Adverse changes in these import costs and restrictions,
or our suppliers' failure to comply with customs or similar laws, could harm our
business. We cannot assure that future trade agreements will not provide our
competitors with an advantage over us, or increase our costs, either of which
could have an adverse effect on our business and financial condition.
Our operations are also subject to the effects of international trade agreements
and regulations such as the North American Free Trade Agreement, and the
activities and regulations of the World Trade Organization. Generally, these
trade agreements benefit our business by reducing or eliminating the duties
assessed on products or other materials manufactured in a particular country.
However, trade agreements can also impose requirements that adversely affect our
business, such as limiting the countries from which we can purchase raw
materials and setting duties or restrictions on products that may be imported
into the United States from a particular country.
Our ability to import raw materials in a timely and cost-effective manner may
also be affected by problems at ports or issues that otherwise affect
transportation and warehousing providers, such as labor disputes. These problems
could require us to locate alternative ports or warehousing providers to avoid
disruption to our customers. These alternatives may not be available on short
notice or could result in higher transit costs, which could have an adverse
impact on our business and financial condition.
OUR DEPENDENCE ON INDEPENDENT MANUFACTURERS AND SUPPLIERS OF RAW MATERIALS
REDUCES OUR ABILITY TO CONTROL THE MANUFACTURING PROCESS, WHICH COULD HARM OUR
SALES, REPUTATION AND OVERALL PROFITABILITY.
We depend on independent contract manufacturers and suppliers of raw materials
to secure a sufficient supply of raw materials and maintain sufficient
manufacturing and shipping capacity in an environment characterized by declining
prices, labor shortage, continuing cost pressure and increased demands for
product innovation and speed-to-market. This dependence could subject us to
difficulty in obtaining timely delivery of products of acceptable quality. In
addition, a contractor's failure to ship products to us in a timely manner or to
meet the required quality standards could cause us to miss the delivery date
requirements of our customers. The failure to make timely deliveries may cause
our customers to cancel orders, refuse to accept deliveries, impose
non-compliance charges through invoice deductions or other charge-backs, demand
reduced prices or reduce future orders, any of which could harm our sales,
reputation and overall profitability.
We do not have long-term contracts with any of our independent contractors and
any of these contractors may unilaterally terminate their relationship with us
at any time. While management believes that there exists an adequate supply of
contractors to provide products and services to us, to the extent we are not
able to secure or maintain relationships with independent contractors that are
able to fulfill its requirements, our business would be harmed.
We have initiated standards for our suppliers, and monitor our independent
contractors' compliance with applicable labor laws, but we do not control our
contractors or their labor practices. The violation of federal, state or foreign
labor laws by one of our contractors could result in us being subject to fines
and our goods that are manufactured in violation of such laws being seized or
their sale in interstate commerce being prohibited. To date, we have not been
subject to any sanctions that, individually or in the aggregate, have had a
material adverse effect on our business,
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and we are not aware of any facts on which any such sanctions could be based.
There can be no assurance, however, that in the future we will not be subject to
sanctions as a result of violations of applicable labor laws by our contractors,
or that such sanctions will not have a material adverse effect on our business
and results of operations.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
The loss of or inability to enforce our trademark "Antik Denim," our licensed
trademark "Yanuk" or any of our other proprietary or licensed designs, patents,
know-how and trade secrets could adversely affect our business. If any third
party copies or otherwise gains access to our trademarks or other proprietary
rights, or develops similar products independently, it may be costly to enforce
our rights and we would not be able to compete as effectively. Additionally, the
laws of foreign countries may provide inadequate protection of intellectual
property rights, making it difficult to enforce such rights in those countries.
We may need to bring legal claims to enforce or protect our intellectual
property rights. Any litigation, whether successful or unsuccessful, could
result in substantial costs and diversions of resources. In addition,
notwithstanding the rights we have secured in our intellectual property, third
parties may bring claims against us alleging that we have infringed on their
intellectual property rights or that our intellectual property rights are not
valid. Any claims against us, with or without merit, could be time consuming and
costly to defend or litigate and therefore could have an adverse affect on our
business.
THE LOSS OF PAUL GUEZ OR OUR LEAD DESIGNERS WOULD HAVE AN ADVERSE EFFECT ON OUR
FUTURE DEVELOPMENT AND COULD SIGNIFICANTLY IMPAIR OUR ABILITY TO ACHIEVE OUR
BUSINESS OBJECTIVES.
Our success is largely dependent upon the expertise and knowledge of our
Chairman, Chief Executive Officer and President, Paul Guez, our lead designers,
Philippe Naouri and Alexandre Caugant, and our ability to continue to hire and
retain other key personnel. The loss of Mr. Guez, or any of our other key
personnel, could have a material adverse effect on our business, development,
financial condition, and operating results. We do not maintain "key person" life
insurance on any of our management or key personnel, including Mr. Guez.
RISKS RELATED TO OUR INDUSTRY
OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.
Apparel is a cyclical industry that is heavily dependent upon the overall level
of consumer spending. Purchases of apparel and related goods tend to be highly
correlated with cycles in the disposable income of our consumers. Our customers
anticipate and respond to adverse changes in economic conditions and uncertainty
by reducing inventories and canceling orders. As a result, any substantial
deterioration in general economic conditions, increases in interest rates, acts
of war, terrorist or political events that diminish consumer spending and
confidence in any of the regions in which we compete, could reduce our sales and
adversely affect our business and financial condition.
OUR BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON CONSUMER SPENDING PATTERNS.
The apparel industry is highly competitive. We face a variety of competitive
challenges including:
- anticipating and quickly responding to changing consumer
demands;
- developing innovative, high-quality products in sizes and
styles that appeal to consumers;
- competitively pricing our products and achieving customer
perception of value; and
- the need to provide strong and effective marketing support.
WE MUST SUCCESSFULLY GAUGE FASHION TRENDS AND CHANGING CONSUMER PREFERENCES TO
SUCCEED.
Our success is largely dependent upon our ability to gauge the fashion tastes of
our customers and to provide merchandise that satisfies retail and customer
demand in a timely manner. The apparel business fluctuates according to changes
in consumer preferences dictated in part by fashion and season. To the extent we
misjudge the market for our merchandise, our sales may be adversely affected.
Our ability to anticipate and effectively respond to changing fashion trends
depends in part on our ability to attract and retain key personnel in our
design, merchandising and marketing staff. Competition for these personnel is
intense, and we cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods.
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OUR BUSINESS MAY BE SUBJECT TO SEASONAL TRENDS.
In the experience of our management, operating results in the high end fashion
denim industry have been subject to seasonal trends when measured on a quarterly
basis. This trend is dependent on numerous factors, including:
- the markets in which we operate;
- holiday seasons;
- consumer demand;
- climate;
- economic conditions; and
- numerous other factors beyond our control.
OTHER RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR SHAREHOLDERS' OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED.
Our business strategy may include expansion through internal growth, by
acquiring complementary businesses, by acquiring or licensing additional brands,
or by establishing strategic relationships with targeted customers and
suppliers. In order to do so, or to fund our other activities, we may issue
additional equity securities that could dilute our shareholders' stock
ownership. We may also assume additional debt and incur impairment losses
related to goodwill and other tangible assets if we acquire another company and
this could negatively impact our results of operations.
INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OUR
SHAREHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.
As of July 31, 2005, our Chief Executive Officer, Paul Goez, Chief Operating
Officer, Elizabeth Guez, and three members of our design team, Messrs. Naouri,
Caugant and Meyer Abbou, all former members of Antik, owned approximately 95.8%
of the outstanding shares of our common stock. Paul and Elizabeth Guez alone own
approximately 72.2% of the outstanding shares of our common stock at July 31,
2005. Accordingly, our executive officers and key personnel have the ability to
affect the outcome of, or exert considerable influence over, all matters
requiring shareholder approval, including the election and removal of directors
and any change in control. This concentration of ownership of our common stock
could have the effect of delaying or preventing a change of control of us or
otherwise discouraging or preventing a potential acquirer from attempting to
obtain control of us. This, in turn, could have a negative effect on the market
price of our common stock. It could also prevent our shareholders from realizing
a premium over the market prices for their shares of common stock.
OUR STOCK PRICE HAS BEEN VOLATILE.
Our common stock is quoted on the Over-The-Counter Bulletin Board, and there can
be substantial volatility in the market price of our common stock. The market
price of our common stock has been, and is likely to continue to be, subject to
significant fluctuations due to a variety of factors, including quarterly
variations in operating results, operating results which vary from the
expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by us or
our competitors of a material nature, loss of one or more customers, additions
or departures of key personnel, future sales of common stock and stock market
price and volume fluctuations. In addition, general political and economic
conditions such as a recession, or interest rate or currency rate fluctuations
may adversely affect the market price of our common stock.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have affected the market price of our common stock.
Often, price fluctuations are unrelated to operating performance of the specific
companies whose stock is affected. In the past, following periods of volatility
in the market price of a company's stock, securities class action litigation has
occurred against the issuing company. If we were subject to this type of
litigation in the future, we could incur substantial costs and a diversion of
our management's attention and resources, each of which could have a material
adverse effect on our revenue and earnings. Any adverse determination in this
type of litigation could also subject us to significant liabilities.
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ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends, particularly in general
downturns in the stock market. We have not declared or paid any cash dividends
on our common stock. We currently intend to retain any future earnings for
funding growth, and we do not currently anticipate paying cash dividends on our
common stock in the foreseeable future. Because we may not pay dividends, your
return on this investment likely depends on your selling our stock at a profit.
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ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2005, the end of the period covered by this Report, the Company
conducted an evaluation, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the
1934 Act. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There was no change in the Company's internal control over financial reporting
during the Company's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
As set forth in a Definitive Information Statement on Schedule 14C,
filed by us with the Securities and Exchange Commission on May 16, 2005, and
pursuant to a Certificate of Amendment to our Articles of Incorporation, as
filed with the Secretary of State of the State of Nevada on May 27, 2005,
effective as of June 7, 2005, we:
- changed our name to Blue Holdings, Inc.,
- caused an increase to our authorized shares of Common Stock
from 45,000,000 to 75,000,000 shares, and
- caused a 1-for-29 reverse stock split.
Shareholders holding an aggregate of 98.5% of our total combined voting
power approved the foregoing actions on May 4, 2005 by delivering an executed
shareholder written consent to our Board of Directors. Pursuant to the
shareholder written consent, our Board of Directors approved the foregoing
actions also on May 4, 2005.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Service Agreement dated May 18, 2005, between the
Company and Blue Concept, LLC.
31.1 Certification by Chief Executive Officer and
President pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as
amended.
31.2 Certification by Chief Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer and
President pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K The following current reports were filed
during the quarter ended June 30, 2005:
DATE OF FILING ITEM REPORTED
April 15, 2005 Execution of Exchange Agreement dated
April 14, 2005, among the Registrant,
Antik Denim, LLC and the members of Antik
Denim, LLC.
April 29, 2005 Closing of transactions contemplated by
Exchange Agreement.
May 4, 2005 Press release announcing the anticipated
net sales and pre-tax income of Antik
Denim, LLC for quarter ended March 31,
2005.
May 5, 2005 Change of certifying accountant to
Weinberg & Company, P.A.
June 7, 2005 Effectiveness of name change, increase in
authorized shares of common stock and
reverse stock split.
June 8, 2005 Amendment to Current Report on Form 8-K
filed on April 29, 2005, to included
unaudited financial statements of Antik
Denim, LLC for period ended March 31,
2005, and corresponding pro forma
financials.
June 10, 2005 Press release announcing first quarter
earnings of Antik Denim, LLC.
June 30, 2005 Amendment to Exchange Agreement to extend
certain obligations thereunder.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUE HOLDINGS, INC.
Date: August 12, 2005 By: /S/ PATRICK CHOW
----------------------
Patrick Chow
Chief Financial Officer and Secretary
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- --------------------------------------------------------------
10.1 Service Agreement dated May 18, 2005, between the Company and
Blue Concept, LLC.
31.1 Certification by Chief Executive Officer and President
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934, as amended.
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer and President
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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