Item 1A. Risk Factors
Our business operations are subject to a number of risks and uncertainties, including, but not limited to those set forth below:
Risks Related to our Business
Dependence on Key Personnel
The future success of our company depends largely on the talents and efforts of our principal designer, Master Horiyoshi III, as well as on the talents and abilities of other key members of our team, including our Director and Chief Executive Officer and our independent contractors. Although we believe that our continued operation and growth might be sustained without the ongoing contributions of Master Horiyoshi III or of other personnel; no assurance can be given that our business would not be adversely affected if certain key members of our production team or management ceased to be active in our business. Master Horiyoshi III is also integral to our marketing efforts and his absence would have a material adverse effect on our business. We do not currently maintain key-person life insurance on the life of Master Horiyoshi III or any long term employment/retention contract.
Fashion and Apparel Industry Risks
We believe that our success depends in substantial part on our ability to stimulate and capture consumer interest with appealing designs, as well as to anticipate and react to changing consumer demands in a timely manner. Although, judging by the industry and media response to our first collections, we have been successful in this regard, there can be no assurance that our success will continue. As we expand our production and distribution, we will be required increasingly to anticipate orders for our products. Although we intend to mitigate the risks of unsold products by securing pre-orders for the bulk of our products, we will nevertheless be required to produce a certain surplus volume of goods in order to anticipate subsequent order and re-orders. Accurately gauging and maximizing the size of our production runs will allow us to minimize our per-unit production costs by maximizing production efficiencies. For example, the cost of producing 1,000 t-shirts in a single run may be significantly lower than the cost of producing two staggered runs of 500 t-shirts. However, if we misjudge the market for our productions, we may be faced with a significant amount of unused fabrics and other materials, or a surplus of unsold finished goods.
We anticipate that the demand for our products will follow the cyclical patterns typical of the fashion and apparel industry. Demand for fashion and apparel products is cyclical and tends to decline in recessionary or politically or economically unstable periods, whether on a global, national or regional level. We believe that the sale of our productions, from their introduction to the retail market in 2009 through December 31, 2011, was undoubtedly hampered by a stagnant, recessionary global retail environment.
Consumer demand for our products is invariably affected by the demand for the products of our competitors. The segment of the fashion apparel industry in which we operate is highly competitive, with numerous regional, national and multi-national designers of apparel and accessories operating worldwide. While none of these designers or manufacturers accounts for a significant percentage of total industry sales, many are significantly larger and have substantially greater resources than we do. In addition, with adequate financial support, appealing independent designers can become competitors within several years of establishing a new label. We believe that the appeal of brands associated with lower market segment products are frequently short-lived or cyclical, often succumbing to the novelty of new competitors in the marketplace. Meanwhile the appeal of exclusive luxury brands tend to withstand shifting fashion trends and competition. Accordingly, we intend to establish and maintain a competitive industry position by maintaining the exclusivity, quality, and longevity of our brand. We intend to achieve this by diligently scrutinizing and monitoring the scope and quality of our product line and retail distribution.
However, there can be no assurance that we will achieve any growth in revenues or earnings, achieve profitability, or sustain or operations, particularly if the current retail environment remains stagnant or further declines, if we fail to accurately gauge our products and production to accommodate shifting retail demand, or if our brand or products fail to achieve or maintain a competitive appeal in the marketplace.
Dependence on and protection of Intellectual Property Rights
On June 1, 2011, Horiyoshi the Third Limited entered into an amended License Agreement with Stone Corporation Inc. d/b/a (Stone Japan), for the grant of the exclusive, worldwide rights to use, and sublicense to use, rights related to the mark “HORIYOSHI”, and all derivatives thereof, in connection with the manufacture, promotion, sale and distribution of all products, goods, and services, in all categories, without limitation. The agreement expires on May 31, 2012 and contains five extension options in five year increments. Stone Japan is a Japanese corporation that is 80% owned by Lone Star Capital Limited, (a Hong Kong company and our principal shareholder), and 20% owned by Yoshihito Nakano, Master Horiyoshi III, and is considered a related party.
There is no restriction on the transferability of shares of Stone Japan. We consider our rights under the License Agreement to be material, and as a result, termination of the License Agreement and the loss of the right to use the Licensed Intellectual Property would have a material adverse effect upon our company. We intend to devote substantial resources to the registration, maintenance, and protection of our intellectual property rights. However, there can be no assurance that any protective action taken by us will prevent imitation of our products or infringement of our intellectual property rights by others, or prevent an ensuing loss of revenue or other damages. Furthermore, as we expand our intellectual property rights by producing new products, creating new trademarks, and distributing our collections in new jurisdictions, our efforts may attract third party claims that question the validity of our intellectual property rights. There can be no assurance that any such claims will not succeed in frustrating, restricting, or blocking our ability to produce certain designs or to use certain trademarks in certain countries.
Changes in the Retail Industry could have a material adverse impact on our business.
The retail industry periodically experiences business consolidations, restructurings, reorganizations and other ownership changes. Any of the retailers that carry our products may undergo such changes in the future, which could result in a significant contraction of the retail outlets carrying our products, which in turn could have a material adverse impact on our business.
Dependence on Certain Customers and Licenses could have a material adverse impact on our business
Certain of our retail customers have accounted for a significant portion of our gross revenues. For the year ended December 31, 2011, we had one retail distribution customer that represented greater than 10% of total sales revenue. Harvey Nichols Group Ltd., represented 10.9% of total sales revenue and 27.1% of accounts receivables for the year ended December 31, 2011. For the year ended December 31, 2010 there was one retail distribution customer representing greater than 10% of total sales revenue. Harvey Nichols Group Ltd., represented 11.1% of total sales revenue and 9.7% of accounts receivables for the year ended December 31, 2010. The balance of our revenues were derived from over 44 other retailers located in Australia, Canada, Dubai, France, the French West Indies, Italy, Japan, Kuwait, Mexico, the United Kingdom, and the United States.
We have incurred net losses since commencing business and expect losses to continue for the foreseeable future.
We had nominal revenues of $684,500 and $496,083 for the years ended December 31, 2011 and 2010, respectively. For the years ended December 31, 2011 and 2010, we had incurred net losses of $2,895,995 and $595,581, respectively. We expect our losses to continue for the foreseeable future as we endeavor to grow our business. Our inability to manage or recoup our losses may impede our ability to secure additional financing or credit, and may ultimately result in the failure of our business and the loss of your investment.
Our ability to continue as a going concern is in substantial doubt.
The ability of our company to continue as a going concern is in substantial doubt and is dependent on achieving profitable operations and obtaining the necessary financing in order to develop our business. The outcome of these matters cannot be predicted at this time. Our future operations are dependent on the market’s acceptance of our products in order to ultimately generate future profitable operations, and our ability to secure sufficient financing to fund future expansion or operations. There can be no assurance that our products will be able to secure market acceptance. Management plans to raise additional equity financing to enable our company to complete our development plans. However, there can be no assurance that we will be successful in raising additional financing. Our financial statements do not include any adjustments that might result from the outcome of these uncertainties.
We have limited financial and management resources to pursue our growth strategy.
Our growth strategy may place a significant strain on our management, operational and financial resources. We have negative cash flow from operations and continue to seek additional capital. We will have to obtain additional capital either through debt or equity financing. There can be no assurance, however, that we will be able to obtain such financing on terms acceptable to our company.
If we raise additional funds through the issuance of equity or convertible securities, these new securities may contain certain rights, preferences or privileges that are senior to those of our common shares. Additionally, the percentage of ownership of our company held by existing shareholders will be reduced.
Risks Associated with Our Common Stock
Trading on the OTC Bulletin Board may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common stock is quoted on the OTC Bulletin Board service of the Financial Industry Regulatory Authority. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like Amex. Accordingly, shareholders may have difficulty reselling any of their shares.
Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations and FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our common stock.
In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the Financial Industry Regulatory Authority believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The Financial Industry Regulatory Authority requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that we may be party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price increases, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.
Our officers, directors, and principal stockholders (greater than 5% stockholders) collectively control approximately 27% of our outstanding common stock. As a result, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect or delaying or preventing a change in 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 stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
Other Risks
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our common stock.
Item 1B.
Item 1B. Unresolved Staff Comments
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 2.
Item 2. Properties
Our executive office is located at 3113 S. Grand Avenue, Los Angeles, CA, USA.
Item 3.
Item 3. Legal Proceedings
We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our company.
Item 4.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares are quoted on the Over-the-Counter Bulletin Board under the symbol “HHWW.” The following quotations, obtained from Quotemedia.com, reflect the high and low bids for our common shares based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
The high and low bid prices of our common stock for the periods indicated below are as follows:
(1) Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.
(2) No trades occurred during this period. Our first trade occurred on November 1, 2010.
Our common shares are issued in registered form. Island Stock Transfer Inc., 100 Second Avenue South, Suite 705S, St. Petersburg, Florida 33701 Telephone: (727) 289-0010; Facsimile: (772) 289-0069 is the registrar and transfer agent for our common shares.
On December 31, 2011, the shareholders' list showed 6 registered shareholders and 6,351,406 common shares outstanding.
Dividend Policy
We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our board of directors.
Equity Compensation Plan Information
On January 1, 2011, we entered into a consulting agreement with Raymond A. Catroppa, CFA. Pursuant to the terms of the consulting agreement, Mr. Catroppa will act as our Chief Financial Officer at an annual base salary of $60,000. Upon execution of the consulting agreement, we provided Mr. Catroppa with 400,000 warrants to purchase equity shares at $0.50 per share. The consulting agreement was ended on December 31, 2011 and was not renewed. All warrants were fully vested and expensed as of December 31, 2011.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
We did not sell any equity securities which were not registered under the Securities Act during the year ended December 31, 2011 that were not otherwise disclosed on our quarterly reports on Form 10-Q or our current reports on Form 8-K filed during the year ended December 31, 2011.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during our fourth quarter of our fiscal year ended December 31, 2011.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated audited financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors" beginning on page 8 of this annual report.
Our consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Executive Summary
Horiyoshi Worldwide, Inc. (HHWW) is a clothing and accessories design and distribution company whose products are inspired by the artwork of Japanese master tattoo artist Yoshihito Nakano - better known as Horiyoshi III. The Horiyoshi name has been internationally recognized for decades and Horiyoshi III is considered by his peers and followers as a legend in his field. The business was established September 1, 2008 to capitalize on the multi-generational legacy of the Tattoo Masters by offering consumers a unique collection of knitwear, t-shirts and accessory items. The company began selling its products in 2009. The “Horiyoshi” Collection retails at a suggested price point of approximately $140-160 for T-shirts, $480-945 for knits, $600-800 for hoodies, and $280-420 for scarves. In December 2011, the Company launched the “Heroes & Demons” collection of men’s t-shirts which retail at a suggested price point of $50-$75. The rights to the Horiyoshi III design catalogue are exclusively licensed to Horiyoshi the Third, Inc. (HTT) a wholly owned subsidiary of HHWW (“the Company”). Horiyoshi Worldwide [U.K.] Limited, another subsidiary wholly owned by HHWW, was created in 2011 and operates the Company’s first branded retail outlet in London.
The company’s design teams are passionate about the art work of Horiyoshi III and take great care integrating the imagery into the company’s garments. HHWW’s management feels that it is positioning the company to take advantage of the increasing inflection of design, art and culture in today’s fashion world. By introducing quality clothes that infuse the internationally recognized art work of Horiyoshi III the company believes it is at the vanguard of a growing interest in unique aspects of the art and cultural imagery of the Far East. Our goal is to build a brand that is recognized throughout the world for creating quality products with universal appeal.
Strategic Initiatives
Grow the distribution platform of boutiques and luxury department stores:
The Company is engaged in attending important trade shows and reaching out to the global retail community. The Company has had success in increasing the number of stores that know the brand and have begun offering the lines to their customer base. Our management team is focused on accelerating this process and broadening the type of stores that will carry our lines in the future.
Expand our initial luxury line of clothes:
In the future HHWW expects to add resort and outerwear, leather goods, shoes, bags and jewelry collections as part of the luxury line. We also intend to work with our distribution partners to evolve the line as they get feedback from their customers and as we get feedback from our new distribution partnerships.
Line Extension:
Through the addition of a category of clothes and accessories sold at lower price points, HHWW is currently working on various initiatives to diversify products and revenue streams. In the near term, the Company is focusing on developing geographical partnerships and working closely with local marketers to assemble customized collections for those particular markets. These lines are focused on “jerseys” and “tees” and the Company believes that there is significant demand that will in turn have a positive effect on future revenues. The Company also believes that there are a number of additional categories that at a lower price point can have a positive effect on both revenue growth and brand recognition.
Branded Retail Stores:
The Company opened its first branded retail store in London, England in October 2011 and will continue to look for additional opportunities to open additional branded stores in the near future. The Company believes that additional branded stores will have a positive impact on future revenues as well as brand recognition.
Licensing agreements and partnerships:
The Company believes there is the potential to develop relationships with key partners in various product categories including eyewear, fragrances, timepieces, home décor and linens, fabrics and action sport recreational products utilizing the Horiyoshi Worldwide art catalogue and brand name. Such partnerships will serve to expand brand recognition and demographic outreach with the goal of adding to the existing revenue stream.
Expand the infrastructure of the firm:
The Company will continue to strengthen management and build the internal infrastructure of the firm to facilitate a successful growth strategy and build the Horiyoshi brand.
Results of Operations
The following summary of our results of operations should be read in conjunction with our audited financial statements for the years ended December 31, 2011 and 2010.
Our operating results for the years ended December 31, 2011 and 2010 are summarized as follows:
Revenue
We earned revenues of $684,500 for the year ended December 31, 2011 compared to revenues of $496,083 for the year ended December 31, 2010. Increased revenues in 2011 can be attributed to increased awareness of Horiyoshi the Third products, expansion of our sales effort to new customers, the opening of our first branded retail store, and the launch of the Heroes & Demons line.
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2011 were $591,089 compared to $215,106 for the year ended December 31, 2010. Cost of goods sold in 2011 represented 86% of sales as compared to 43% in 2010. This increase in COGS as a percentage of sales can be attributed to rising costs of production in Japan, the weakness of the United States Dollar against the Japanese Yen, and markdowns of out of season and slow moving inventory on hand.
Expenses
Our total expenses for the years ended December 31, 2011 and December 31, 2010 are outlined in the table below:
Expenses for the years ended December 31, 2011, increased by 241% as compared to the comparative period in 2010 primarily as a result of a significant increases in sales and marketing activities, development of new clothes lines and distribution channels, expansion of personnel, and additional costs associated with the development of our first branded retail outlet in London.
Liquidity and Financial Condition
We will require additional funds to fund our budgeted expenses in the future. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There is no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on their investment in our common stock. Further, we may continue to be unprofitable. Additionally, there is no assurance that any party will advance additional funds to us in order to enable us to sustain our plan of operations or to repay our liabilities.
Liquidity and Capital Resources
Growth of our operations will be based on our ability to internally finance from cash flow and raise equity and/or debt to increase sales and production. Our primary sources of liquidity are: (i) cash from sales of our products; and (ii) financing activities. Our cash balance as of December 31, 2011 is $1,117,750.
As of December 31, 2011, our company was obligated to Steve Suk, a Director of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $30,511.
As of December 31, 2011, our company was obligated to Lone Star Capital Limited, a related party, for a non-interest bearing demand loan with a balance of $737,553.
Plan of Operation and Cash Requirements
Our wholly-owned subsidiary, Horiyoshi the Third Limited, began selling its products in 2009. Our wholly owned subsidiary Horiyoshi Worldwide [U.K.] limited, began operating our first branded retail outlet in London in 2011. Our plan of action over the next twelve months is to continue to market and sell the Horiyoshi and Heroes & Demons collections and raise additional capital financing as necessary, to grow operations.
The success of our operations will be based on our ability to grow by financing the operation through internal cash flow or to raise funds through equity and/or debt financing to invest in marketing, sales and distribution of our product line. The challenging markets for credit and for the sale of luxury apparel resulting from the recent financial crisis and current period of economic stagnation have negatively affected the markets for many luxury goods. The availability of equity and/or debt financings remains uncertain.
Over the next 12 months we anticipate that the company will require funds of approximately $1,700,000 to meet our working capital requirements. These funds will be required for the following initiatives.
Marketing Campaign: Including trade shows, sales events and press events
Public Relations Outreach: Hiring outside public relations consultants to increase brand recognition
Celebrity Outreach Program: Engaging certain celebrities to promote the Horiyoshi and Heroes and Demons brands to the public
Line Extension: Continue to develop additional categories of clothes and accessories
Internal Infrastructure: Evaluate personnel and systems to meet the growth needs of the company
Branded Stores: Development of additional branded retail outlets
As a result of these initiatives if we are unable to increase sales and cash flow we may not have sufficient working capital to implement our strategy and we will be forced to scale down our business plan. Over time this could cause us to curtail or suspend our operations and may eventually cause our business to fail.
Going Concern
For the year ended December 31, 2011, our company has incurred losses of $2,895,995 and has an accumulated deficit of $3,732,640. Our company intends to fund operations through operational cash flow and equity/debt financing arrangements. These sources may be insufficient to fund its capital expenditures, working capital and other cash requirements for the future. In response to these problems, management intends to raise additional funds through public or private placement offerings. These factors, among others, raise substantial doubt about our company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Seasonality
To date, with the majority of the company’s revenues coming from the luxury segment there is seasonality in the revenue steam. The company attends important design shows that are focused on the Women’s and Men’s spring season and Women’s and Men’s fall season which occur in March and September. This translates into the company booking a large portion of orders and corresponding revenues in the first and third quarter on a yearly basis. However, the introduction of the Heroes and Demons collection as well as the opening of our branded retail outlet in London will serve to smooth out earnings on a yearly basis going forward.
Critical Accounting Policies
Use of estimates
In preparing financial statements in conformity with US GAAP, our management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates and assumptions also affect the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.
Our financial statements include some amounts that are based on our management's best estimates and judgments. The most significant estimates relate to the valuation allowance for accounts receivable, returns, inventory, deferred taxes and various contingent liabilities. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.
Revenue recognition
Our revenue recognition policy is in accordance with generally accepted accounting principles, which requires the recognition of sales when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectability of revenue is reasonably assured. We record sales upon shipment of product to customers and transfer of title under standard commercial terms.
Deferred revenue as of December 31, 2011 and December 31, 2010 were $48,435 and $18,062, respectively. Deferred revenue represents prepayments and deposits required from certain customers before delivery of Horiyoshi the Third and Heroes and Demons products.
Return policy
Customers have the right to return merchandise and the return policy is set by senior management and consistent among all of our client relationships. Based on historical experience, actual returns by our clients have been rare and immaterial across our client base. Management monitors returns by clients carefully as we increase the number of retail outlets within our distribution network. Reserves are established to reflect actual and anticipated losses. Currently we estimate returns to be 1% of our sales and reserves have been made accordingly each reporting period. The return reserve based on this percentage of sales has been consistent with actual returns in our brief operating history. The balances of the return reserve for the years ended December 31, 2011 and 2010 were $2,313 and $3,974, respectively.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Customer accounts with balances over 90 days old are considered delinquent. The carrying amount of accounts receivable are reduced by an allowance for doubtful accounts that reflects our Company's best estimate of the amounts that will not be collected. Our Company reviews outstanding accounts and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Our Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Our Company has assessed accounts receivable and determined that a reserve is necessary. At December 31, 2011 and 2010 the allowance for doubtful accounts was $8,429 and $1,696, respectively.
Cost of goods sold
Cost of goods sold consists of cost of purchases for resale to stores located in Australia, Canada, Dubai, France, the French West Indies, Italy, Japan, Kuwait, Mexico, the United Kingdom, and the United States. It also consists of cost of purchases for resale of our branded online Horiyoshi the Third and Heroes and Demons stores as well as our branded retail outlet in London. Through May 31, 2011 the Company purchased 100% of its merchandise for the from Stone Corporation Inc. Stone Corporation Inc. is organized and operates in Japan, and is 80% owned by Lone Star Capital Limited, a Hong Kong company and our principal shareholder and 20% owned by Master Horiyoshi III. Stone managed the process of contracting manufacturers and purchasing the materials that were used to produce our clothing and other products. Stone was invoiced by the producers and suppliers and passed those charges through to Horiyoshi Worldwide, Inc. As of June 1, 2011 the Company ceased its manufacturing relationship with Stone Corporation, Inc. and began sourcing from producers and suppliers directly. Our clients are required to pay all shipping costs for the delivery of their orders. As we increase product sales and require larger production runs, and move manufacturing out of Japan, we believe that our cost of goods sold as a percentage of revenue will decrease due to economies of scale.
Inventory
Inventories, consisting of finished goods, work in process, and raw materials are valued at the lower of cost, as determined by the average cost, or market. Cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in saleable condition. Prior to June 1, 2011, the Company carried no saleable inventory and shipped manufactured goods related to purchase orders directly from Stone Corporation. At December 31, 2011 inventory consists of $816,304 of finished goods, $34,650 of work in process, and $26,298 of raw materials. Work in process inventory consists of blank t-shirts which were procured and in the process of being printed as of December 31, 2011.
The Company maintains perpetual inventory and report by product. This is updated on a daily basis upon shipping and sales reports. Due to the high style nature of the Company’s merchandise, reserves are recorded to reduce the carrying value of slow moving, out of season, and broken style merchandise to market value and as additional cost of sales. As of December 31, 2011 and 2010, there have been reserves of $108,809 and $0, respectively made for inventory on hand.
Income Taxes
The Company accounts for income taxes in accordance with the FASB Codification Topic 740-10-25 (“ASC 740-10-25”), which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, it requires recognition of future tax benefits, such as carry forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency other than an entity's functional currency and from foreign-denominated revenues translated into U.S. dollars. Changes in currency exchange rates may affect the relative prices at which we and our foreign competitors sell products in the same market and collect receivables from such sales. We generally sell our products in U.S. dollars.
Changes in currency rates may affect prices at which we conduct business with our vendors and our employees. Payments subject to foreign currency translation are executed at our deposit bank currency spot rate at the time of payment, generally at each month’s end.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Horiyoshi Worldwide, Inc.
We have audited the accompanying consolidated balance sheets of Horiyoshi Worldwide, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2011. Horiyoshi Worldwide, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horiyoshi Worldwide, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, these conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Rochester, New York	
March 30, 2012
HORIYOSHI WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements
HORIYOSHI WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements
_____________________
2 Earnings (loss) per share of common stock and weighted average shares of common stock outstanding have been retroactively restated to reflect a 10:1 reverse stock split on January 12, 2012. These transactions are more fully described in the Notes to the Financial Statements
HORIYOSHI WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
The accompanying notes are an integral part of the financial statements
_____________________
1 The shareholders’ equity section has been retroactively restated to reflect a 10:1 reverse stock split on January 12, 2012. These transactions are more fully described in the Notes to the Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Business description
Horiyoshi Worldwide, Inc. (HHWW) is a clothing and accessories design and distribution company whose products are inspired by the artwork of Japanese master tattoo artist Yoshihito Nakano - better known as Horiyoshi III. The Horiyoshi name has been internationally recognized for decades and Horiyoshi III is considered by his peers and followers as a legend in his field. The business was established September 1, 2008 to capitalize on the multi-generational legacy of the Tattoo Masters by offering consumers a unique collection of knitwear, t-shirts and accessory items. The Company began selling its products from the “Horiyoshi” collection in 2009. The “Horiyoshi” collection retails at a suggested price point of approximately $140-160 for T-shirts, $480-945 for knits, $600-800 for hoodies, and $280-420 for scarves. In 2011, the Company launched the Heroes & Demons collection of men’s t-shirts which retails at a suggested price point of approximately $60-$75. The rights to the Horiyoshi III design catalogue are exclusively licensed to Horiyoshi the Third, Inc. (HTT) a wholly owned subsidiary of HHWW (“the Company”).
We were incorporated as Kranti Resources, Inc. (Kranti), in the State of Nevada on November 3, 2006 to engage in the acquisition, exploration, and development of mineral deposits and reserves. The company discontinued its planned mining activities and eventually adopted a new strategy to pursue opportunities in the fashion apparel industry. On May 18, 2010, Benny Gill and Rimpal Samra resigned as Directors of the company and Jaskarn Samra resigned as President. On May 18, 2010, Mitsuo Kojima was appointed as President of Kranti Resources, Inc.
On June 21, 2010, Kranti effected a 2.1622 for one (1) forward stock split of outstanding stock. As a result, the company’s outstanding share count increased from 4,387,500 shares of common stock to 9,486,653 shares of common stock, all with a par value of $0.01. In addition, on June 21, 2010, the company changed its name to Horiyoshi Worldwide Inc. to coincide with the redirection of its business toward fashion apparel. On September 1, 2010, the company entered into a share exchange agreement with Horiyoshi the Third Limited, a Hong Kong corporation, and the shareholders of Horiyoshi the Third Limited for purchase of the company.
On November 5, 2010, President Mitsuo Kojima affected a Share Cancellation Agreement with Kranti and surrendered for cancellation all 6,486,600 shares held by him in common stock which left a total of 3,000,053 shares outstanding.
The share exchange agreement with Horiyoshi the Third Limited was subsequently amended and on November 5, 2010 the acquisition of all of the issued and outstanding common shares of Horiyoshi the Third Limited occurred. In accordance with the closing, Horiyoshi Worldwide, Inc. issued 3,000,000 shares of common stock to the former shareholders of Horiyoshi the Third Limited in exchange for the acquisition of all 10,000 Horiyoshi the Third Limited shares issued and outstanding. Upon close of the acquisition Horiyoshi Worldwide, Inc. had a total of 6,000,053 shares issued and outstanding.
On June 15, 2011, Horiyoshi Worldwide [UK] Limited (HHWW UK) was incorporated. HHWW UK is a wholly owned subsidiary of HHWW, and is a United Kingdom Corporation. HHWW UK is the owner and operator of the Company’s first branded retail outlet, which opened in London in October 2011.
All share and per share amounts presented in the financial statements have been retroactively restated to reflect a 10:1 reverse stock split which occurred on January 12, 2012.
Basis of presentation
The Company’s accounting policies used in the preparation of the accompanying consolidated financial statements conform to accounting principles generally accepted in the United States of America ("US GAAP") and have been consistently applied.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Horiyoshi The Third Limited and Horiyoshi [UK] Worldwide Limited. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include: revenue recognition; sales returns and other allowances; allowance for doubtful accounts; valuation of inventory; valuation and recoverability of long-lived assets; property and equipment; contingencies; and income taxes.
On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Cash and cash equivalents
The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of their acquisition date. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value. The Company’s main banking relationship is with HSBC Bank at branches in Los Angeles, Hong Kong and London. For cash management purposes the company concentrates its cash holdings in accounts at HSBC Bank. The balances in these accounts may exceed the federally insured limit of $ 250,000 per account by the Federal Deposit Insurance Corporation (FDIC) in case of bank failure. This would have a significantly negative impact on the company’s ability to continue operations.
Revenue recognition
Our revenue recognition policy is in accordance with generally accepted accounting principles, which requires the recognition of sales when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectability of revenue is reasonably assured. We generally record sales upon shipment of product to customers and transfer of title under standard commercial terms. All sales at our branded retail outlet in London are recognized at the point of sale.
Deferred revenue as of December 31, 2011 and December 31, 2010 were $48,435 and $18,062, respectively. Deferred revenue represents prepayments and deposits required from certain customers before delivery of Horiyoshi the Third and Heroes & Demons products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Return policy
Customers have the right to return merchandise and the return policy is set by senior management and consistent among all of our client relationships. Based on historical experience, actual returns by our clients have been rare and immaterial across our client base. Management monitors returns by clients carefully as we increase the number of retail outlets within our distribution network. Reserves are established to reflect actual and anticipated losses resulting from the returns of defected and unsold merchandise based on historical information. Currently we estimate returns to be 1% of our sales and reserves have been made accordingly each reporting period. The return reserve based on this percentage of sales has been consistent with actual returns in our brief operating history. The balances of the return reserve for the years ended December 31, 2011 and 2010 were $2,313 and $3,974, respectively.
Cost of sales
Cost of goods sold consists of cost of purchases for resale to stores located in Australia, Canada, Dubai, France, the French West Indies, Italy, Japan, Kuwait, Mexico, the United Kingdom, and the United States. It also consists of cost of purchases for resale of our branded online Horiyoshi the Third and Heroes and Demons stores as well as our branded retail outlet in London. Through May 31, 2011 the Company purchased 100% of its merchandise for the from Stone Corporation Inc, a related party. Stone Corporation Inc. is organized and operates in Japan, and is 80% owned by Lone Star Capital Limited, a Hong Kong company and our principal shareholder and 20% owned by Master Horiyoshi III. Stone Corporation Inc. managed the process of contracting manufacturers and purchasing the materials that were used to produce our clothing and other products. Stone Corporation Inc. was invoiced by the producers and suppliers and passed those charges through to Horiyoshi Worldwide, Inc. As of June 1, 2011 the Company ceased its manufacturing relationship with Stone Corporation Inc. and began sourcing from producers and suppliers directly. Our customers are required to pay all shipping costs for the delivery of their orders.
Accounts receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Customer accounts with balances over 90 days old are considered delinquent. The carrying amount of accounts receivable are reduced by an allowance for doubtful accounts that reflects our Company's best estimate of the amounts that will not be collected. Our Company reviews outstanding accounts and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Our Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Our Company has assessed accounts receivable and determined that a reserve is necessary and at December 31, 2011 and 2010, the allowance for doubtful accounts was $8,429 and $1,696, respectively.
Earnings (Loss) per Share
The Company presents earnings (loss) per share (“EPS”) in accordance with ASC 260,“Earnings per Share. ASC 260 requires dual presentation of basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Due to the net loss during the year ended December 31, 2011, the assumed exercise of stock warrants was anti-dilutive. Therefore, basic and diluted losses per share are the same for all periods presented. At December 31, 2011 there were 400,000 stock warrants that could dilute future earnings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Foreign currency translation
Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency other than an entity's functional currency and from foreign-denominated revenues translated into U.S. dollars. Changes in currency exchange rates may affect the relative prices at which we and our foreign competitors sell products in the same market and collect receivables from such sales. We generally sell our products in U.S. dollars.
Changes to currency rates may affect the prices at which we conduct business with our vendors and our employees. Payments subject to foreign currency translation are executed at our deposit bank’s currency spot rate at the time of payment, generally at each month’s end.
During the year ended December 31, 2011 we incurred a foreign currency translation loss of $4,655, which is included as part of accumulated other comprehensive income.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carry-forwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carry-forwards is provided when it is determined that such assets will more likely than not go unrealized. If it becomes more likely than not that a tax asset will be realized, the related valuation allowance on such assets would be reversed.
The Company accounts for income taxes in accordance with the ASC 740-10-25, which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, it requires recognition of future tax benefits, such as carry forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
Inventories
Inventories, consisting of finished goods, work in process, and raw materials are valued at the lower of cost, as determined by the average cost, or market. Cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in saleable condition. Prior to June 1, 2011, the Company carried no saleable inventory and shipped manufactured goods related to purchase orders directly from Stone Corporation. At December 31, 2011 inventory consists of $816,304 of finished goods, $34,650 of work in process, and $26,298 of raw materials.
The Company maintains perpetual inventory and report by product. This is updated on a daily basis upon shipping and sales reports. Due to the high style nature of the Company’s merchandise, reserves are recorded to reduce the carrying value of slow moving, out of season, and broken style merchandise to market value and as additional cost of sales. As of December 31, 2011 and 2010, there have been reserves of $108,809 and $0, respectively made for inventory on hand.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Property and equipment
Property and equipment are recorded at cost and valued at $138,892 for the year ending December 31, 2011. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which is five years for the office equipment, websites, and computers, three years, for software, and seven years for leasehold improvements for financial reporting purposes. Depreciation for the year ended December 31, 2011 and 2010 were $12,431 and $1,279 respectively.
Prepaid Expenses and Other Current Assets
The Company realized a significant decrease in prepaid expense for the year ended December 31, 2011 attributed to the receipt of inventory, payments for licensing rights, and termination of manufacturing agreement with Stone Corporation, a related party.
Prior to the quarter ended June 30, 2011, Stone Corporation was the sole manufacturing supplier and important design and development resource to Horiyoshi Worldwide, Inc. Stone Corporation, a Japanese corporation, is 80% owned by Lone Star Capital Limited, a Hong Kong company and principal shareholder of the Company, and 20% owned by Yoshihito Nakano, Master Horiyoshi III, also a significant shareholder of the Company.
The services rendered by Stone Corporation encompass design, development and production services. A portion of the decrease in prepaid expenses can be attributed to receipt of inventory from Stone Corporation as a result of the services rendered.
On June 1, 2011, Horiyoshi The Third Limited amended its License Agreement with Stone Corporation. Pursuant to the amended license agreement, the Company holds the exclusive, worldwide rights to use, and sublicense to use, rights related to the mark “HORIYOSHI”, and all derivatives thereof, in connection with the manufacture, promotion, sale and distribution of all products, goods, and services, in all categories, without limitation. The amended license agreement expires on May 31, 2021 and contains five extension options in five year increments. During the quarter ended June 30, 2011, the Company paid Stone Corporation consideration of $750,000 as a non-refundable entry fee into the license agreement and $45,000 as a flat license fee for the month of June 2011. During the quarter ended September 30, 2011 the Company paid Stone Corporation license fees of $90,000. The Company will continue to pay Stone Corporation a flat monthly license fee of $30,000 from October 1, 2011 through May 31, 2012 with a running royalty calculated as 6% of net sales commencing on June 1, 2012 and continuing through the date of expiration. On June 1, 2011, $750,000 related to the non-refundable entry fee into the license agreement was reclassified from prepaid expenses to licensing rights on the balance sheet. For the years ended December 31, 2011 and December 31, 2010, the amount of licensing rights capitalized on the balance sheet was $706,250, net of $43,750 of accumulated amortization, and $0, net of $0 of accumulated amortization, respectively.
On June 30, 2011 Horiyoshi The Third Limited entered into an Agreement For Settlement of Prepaid Assets and Forgiveness of Debt with Stone Corporation and Lonestar Capital Limited, a Hong Kong company and 80% owner of Stone Corporation. Pursuant to the agreement, the Company absolved its right to receive $629,169 of prepaid assets from Stone Corporation in exchange for Lonestar Capital Limited forgiving $629,169 of debt owed by the Company under its demand loan agreement. The transaction did not have an impact on net income for the year ended December 31, 2011.
Prepaid expenses and other current assets for the year ended December 31, 2011 were $62,166 and $1,037,251 for the year ended December 31, 2010. Prepaid expenses and other current assets at December 31, 2011 represent deposits on operating leases and amounts paid for goods and services yet to be received.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Accrued Expenses and Other Current Liabilities
Accounts payable are those funds owed to our business partners for goods and services rendered which are related to our business operations. Our accounts payable for the years ended December 31, 2011 and 2010 were $218,458 and $40,991, respectively.
The Company accrues expenses related to business travel, professional services rendered but not yet paid for and various office expenses and reimbursements. As a result of the limited number of employees and short term nature of their employment it has not been necessary for the Company to separately accrue for vacation or payroll time for the year ended December 31, 2011. Our accrued expenses were $24,869 and $45,377 for the years ended December 31, 2011 and 2010, respectively.
Licensing Rights
On June 1, 2011, Horiyoshi The Third Limited amended its License Agreement with Stone Corporation. As a result, the Company paid Stone Corporation consideration of $750,000 as a non-refundable entry fee into the amended license agreement. For the year ended December 31, 2011, the $750,000 non-refundable entry fee has been capitalized as licensing rights on the balance sheet, net of accumulated amortization of $43,570. The cost of the licensing rights is being amortized over 120 months on a straight-line basis.
For the year ended December 31, 2011, $43,750 of amortization expense related to licensing rights has been included in cost of goods sold.
Fair Value of Financial Instruments
The carrying amount reported in the accompanying consolidated balance sheets for cash, accounts receivable, inventory, accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. It was not practicable to estimate the fair value of notes payable to related parties.
Segment reporting
The Company considers its operations to constitute a single segment which is the design and distribution of clothes and accessories. The company does not operate under a multiple segment reporting model.
Recent accounting pronouncements
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (ASU 2011-05), Comprehensive Income which amends ASC Topic 220. Under the amendment, all nonowner changes in stockholders’ equity must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. Retrospective adoption is required. Early adoption is permitted, because compliance with the amendments is already permitted. The Company has not elected to adopt ASU 2011-05 in its financial statements for the year ended December 31, 2011.
3. GOING CONCERN
As of December 31, 2011, our company has accumulated losses of $3,732,640 since inception. Our company intends to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2012. In response to these problems, management intends to raise additional funds through public or private placement offerings. These factors, among others, raise substantial doubt about our company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
4. INTANGIBLE ASSET
Scheduled amortization is currently estimated as follows:
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Depreciation expense for the year ended December 31, 2011 and 2010 was $12,431 and $1,279, respectively.
6. SUBORDINATED NOTES PAYABLE TO RELATED PARTY
As of December 31, 2011 and December 31, 2010, our Company was obligated to Steve Suk, a Director of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $30,511 and $94,292, respectively.
As of December 31, 2010, our Company was obligated to Eric Kyu Tae Chung, a Director of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $18,479. This loan was paid down in 2011.
As of December 31, 2010, our Company was obligated to Mitsuo Kojima, a Director and CEO of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $38,384. This loan was paid down in 2011.
As of December 31, 2011 and December 31, 2010, our Company was obligated to Lone Star Capital Limited, for a non-interest bearing demand loan with a balance of $737,553 and $2,235,734, respectively.
7. RELATED PARTY TRANSACTIONS
On September 17, 2008, Horiyoshi III Worldwide Ltd. (as we then were) entered into a License Agreement with Stone Corporation Inc. d/b/a Stone Japan, a Japanese corporation that is 80% owned by Lone Star Capital Limited, (a Hong Kong company and our principal shareholder) and 20% owned by Yoshihito Nakano, Master Horiyoshi III. Pursuant to the license agreement we hold an exclusive, worldwide, 35 year license, effective September 17, 2008, to use all copyright and trademark rights associated with our products and brand, and to exclusively manufacture and distribute apparel, beauty products, and other products related to our business. No third party is permitted to use the IP licensed to us for the production of non-apparel merchandise. We paid consideration of $10 in respect of the licensed rights. In the event that Stone Japan intends to sell the intellectual property rights licensed to us, we shall have a first right of purchase for those rights so long as the license agreement is in effect to purchase those rights at any time in the seven (7) years preceding the termination of the license agreement. The purchase price shall be equal to two (2) times the average annual gross sales turnover of our products based on the licensed rights during the three years preceding the date of exercise of the right of purchase.
7. RELATED PARTY TRANSACTIONS (CONT.)
On June 1, 2011, as a result of rising costs in Japan and weakness of the United States Dollar against the Japanese Yen, our Company ceased its manufacturing relationship with Stone Corporation and entered into an amended agreement for licensing rights. Pursuant to the amended license agreement we hold the exclusive, worldwide rights to use, and sublicense to use, rights related to the mark “HORIYOSHI”, and all derivatives thereof, in connection with the manufacture, promotion, sale and distribution of all products, goods, and services, in all categories, without limitation. The amended license agreement expires on May 31, 2021 and contains five extension options in five year increments. During the year ended December 31, 2011, as consideration for the IP rights, we paid Stone Corporation license fees of $165,000.
The Company will continue to pay Stone Corporation a flat monthly license fee of $30,000 from January 1, 2012 through May 31, 2012 with a running royalty calculated as 6% of net sales commencing on June 1, 2012 and continuing through the date of expiration.
On June 30, 2011, Horiyoshi the Third Limited entered into an Agreement For Settlement of Prepaid Assets and Forgiveness of Debt with Lonestar Capital Limited and Stone Corporation. Pursuant to the agreement, our Company absolved its rights to obtain $629,169 of prepaid assets from Stone Corporation in consideration of Lonestar Capital Limited forgiving $629,169 of indebtedness owed under our revolving line of credit.
8. STOCK-BASED COMPENSATION AND WARRANTS
Stock Awards
On January 1, 2011, we entered into a consulting agreement with Raymond A. Catroppa, CFA. Pursuant to the terms of the consulting agreement, we provided Mr. Catroppa with 400,000 warrants to purchase equity shares at $0.50 per share. The vesting period was from January 1, 2011 to December 31, 2011. The amount is now fully vested at December 31, 2011.
The fair value of each warrant granted is estimated on the date of the grant using the Black-Scholes Model. The Black-Scholes Model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the warrant and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The expected life of a warrant grant is based on management’s estimate. The fair value of each warrant grant is recognized as a compensation expense over the vesting period of the warrant on a straight line basis. Warrant expense related to the warrants issued using this estimate was $602,655 for the year ending December 31, 2011. All warrants were vested and expensed as of December 31, 2011. There were not awards for 2010.
The following weighted-average assumptions were utilized in the fair value calculations for warrants granted:
The warrants have no expiration date.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Prior to September 30, 2011, the Company’s executive offices, sales showroom and support staff were located in the Mandel Building located at 711 S. Olive Street, #504 Los Angeles, CA 90014. These offices were leased under an operating lease which expired in November 2011.
In August 2011, the Company entered into an operating lease agreement and moved our executive offices, sales showroom, and support staff to 3113 S. Grand Avenue, Los Angeles, CA 90007. The lease has term of 2 years and one month and expires in August 2013.
In September 2011, the Company entered into an agreement to lease a building for its first retail store at 19 Connaught Street, London W2. The lease has a term of 7 years and expires at the end of August 2018. The Company accounts for this lease as an operating lease.
The Company also leases certain office equipment under operating lease agreements.
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2011:
Operating lease rent expense (including real estate taxes and common area maintenance costs) was approximately $120,417 for the year ended December 31, 2011. Rent expense is allocated to operating expenses in the accompanying consolidated statements of income.
10. CONCENTRATIONS
Our products are distributed through a growing number of non-affiliated apparel retailers worldwide. For the year ended December 31, 2011, we had one retail distribution customer that represented greater than 10% of total sales revenue. Harvey Nichols Group Ltd., represented 10.9% of total sales revenue and 27.1% of accounts receivables for the year ended December 31, 2011. For the year ended December 31, 2010 there was one retail distribution customer representing greater than 10% of total sales revenue. Harvey Nichols Group Ltd., represented 11.1% of total sales revenue and 9.7% of accounts receivables for the year ended December 31, 2010. The balance of our revenues were derived from over 44 other retailers located in Australia, Canada, Dubai, France, the French West Indies, Italy, Japan, Kuwait, Mexico, the United Kingdom, and the United States.
11. SUBSEQUENT EVENTS
In January 2012, we enacted a 10 to 1 reverse stock split which decreased the number of shares issued and outstanding to 6,351,406. All share and per share amounts presented in the financial statements have been retroactively adjusted to reflect the effect of the reverse stock split.
On February 28, 2012, Raymond A. Catroppa, CFA resigned as secretary and chief financial officer of our Company. Concurrently with Mr. Catroppa’s resignation, we promoted Darren Takemoto as secretary and Chief Financial Officer to fill the ensuing vacancy.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On February 11, 2011, the Board of Directors dismissed Child, Van Wagoner & Bradshaw, PLLC (“Child”) as the independent auditors of the Registrant and engaged EFP Rotenberg, LLP, an Independent Registered Public Accounting Firm, to serve as the Registrant’s independent auditors.
During the Registrant’s two most recent fiscal years and the subsequent interim period through the date Child was dismissed, Child did not advise the Registrant as to any reportable events as set forth in Item 304(a)(1)(v)(A) through (D) of Regulation S-K and there were no disagreements between the Registrant and Child on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Child’s satisfaction, would have caused Child to make reference to the subject matter of the disagreement in connection with its reports.
For more information regarding the change in accountants, please see the Registrant’s Current Report on Form 8-K filed with the SEC on March 2, 2011.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain and develop disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and financial officers. Under the new management team, as required by SEC Rule 15d-15(b), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive and our principal financial officer concluded that while we believe we have effective disclosure controls and procedures we will to continue to develop such controls and procedures to assure their effectiveness. The policies we have developed are instituted firm wide and management will require testing of these controls and procedures in the future. The management team will also provide guidance to employees to ensure clear understanding of the controls and procedures. The firm will utilize its technology to assist in the process of overseeing its business practices.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes these policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions or our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepting accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Until after the November 5, 2010 Reorganization, Horiyoshi the Third, the operating entity and accounting acquirer were not required to assess and evaluate internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”). In addition, we devoted substantial time and resources during our Reorganization. For the foregoing reasons, management’s assessment of the effectiveness of our internal control over financial reporting is not complete.
Management is committed to take appropriate steps to implement compliance with SOX 404 and is in the process of preparing to document and identify any deficiencies or material weaknesses, evaluate and implement recommended changes and test our internal control over financial reporting.
In making our assessment of internal control over financial reporting , management is using the criteria established I the “Internal Control - Integrated Framework” issued but the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because our evaluation of internal control over financial reporting is not yet complete, we cannot assure you that we will not discover material weaknesses: however, management will work towards compliance with SOX 404 as of December 31, 2011.
No change in our internal control over financial reporting occurred during the last fiscal quarter of the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
All directors of our company hold office until the next annual meeting of the security holders or until their successors have been elected and qualified. The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office. Our directors and executive officers, their ages, positions held, and duration as such, are as follows:
Business Experience
The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee of our company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Mitsuo Kojima - President, Chief Executive Officer, Treasurer and Director
For the past five years, Mitsuo Kojima has been the licensing agent for Manhattan based fashion designer Pinky Wolman of Pinky & Dianne New York. He has developed and licensed over 20 distinctive product categories on behalf of Pinky & Dianne, propelling the company to an award winning and internationally acclaimed fashion business.
During his thirty-plus-year career, he has held numerous senior management and advisory positions in fashion retailing, marketing and licensing, having worked with international brands such as Paul Smith, Seven Jeans, Lanvin, Von Dutch, Porter Bags, Popeye, UT by Uniqlo, Nicky Hilton Group and Sonia Rykiel.
From 1969 to 1986, Mr. Kojima was the lead buyer at Isetan Co., one of Asia’s leading department store chains.
Mr. Kojima holds a degree in law from Gakushuin University located in Toyko, Japan.
With a vast growing network of contacts within the fashion industry, Mr. Kojima seeks emerging business opportunities in the fashion and apparel business to create shareholder value.
Darren Takemoto, CPA - Chief Financial Officer and Secretary, Director
Mr. Takemoto has extensive experience in accounting, auditing, and financial analysis that comes from the 8 years he has spent working with top firms in public accounting and capital markets such as Deloitte LLP, Gursey | Schneider LLP, and Aria Partners G.P, LLC. In 2008, he received the designation of Certified Public Accountant (CPA) from the California Board of Accountancy. He holds a B.S. in Accounting from the University of Southern California.
Raymond A. Catroppa, CFA - Director
Mr. Catroppa has an extensive background in capital markets and financial analysis that comes from the 26 years he has spent with top Wall Street firms in New York City, including Credit Suisse First Boston (CSFB), First Manhattan Corporation, Neuberger Berman and Cameron Associates. Mr. Catroppa has advised numerous public companies listed on the NASDAQ, NYSE and AMEX. In 2002, he received the designation of Chartered Financial Analyst (CFA) from the CFA Institute. He holds a B.A. in Economics from Stony Brook University and an M.B.A. in Finance from Fordham University in New York City. On February 28, 2012, Mr. Catroppa resigned from his positions as Chief Financial Officer and Secretary.
Kerry Chung - Director
Mr. Chung has extensive experience in garment manufacturing and operations management that comes from the 10 years he has spent in apparel production in Los Angeles. He graduated with honors from the University of California, San Diego with a B.S. in Management Science and holds an M.B.A. from the University of Southern California where he specialized in Operations Consulting and Finance.
Employment Agreements
Other than as set out below, we have no formal employment agreements with any of our employees, directors or officers.
On January 1, 2011, we entered into a consulting agreement with Raymond A. Catroppa, CFA. Pursuant to the terms of the consulting agreement, Mr. Catroppa will act as our Chief Financial Officer at an annual base salary of $60,000. Upon execution of the consulting agreement, we provided Mr. Catroppa with 400,000 warrants to purchase equity shares at $0.50 per share. The consulting agreement was for a period of twelve months and was not renewed.
Family Relationships
There are no family relationships between any of our directors, executive officers and proposed directors or executive officers.
Involvement in Certain Legal Proceedings
None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past five years:
1. A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
2. Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
3. Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
i.
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity
ii.
Engaging in any type of business practice; or
iii.
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
4. Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;
5. Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
6. Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
7. Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
i.
Any Federal or State securities or commodities law or regulation; or
ii.
Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
iii.
Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
8. Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and persons who own more than 10% of our common stock to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.
Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended December 31, 2011, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
Code of Ethics
In 2008 we adopted a Code of Ethics that applies to all of our employees. A copy of our Code of Ethics will be provided to any person requesting same without charge. To request a copy of our Code of Ethics, please make written request to our President c/o Horiyoshi Worldwide Inc. at 3113 S. Grand Avenue, Los Angeles, CA 90007.
Board and Committee Meetings
Our board of directors currently consists of Mitsuo Kojima, Raymond A. Catroppa, Darren Takemoto, and Kerry Chung. The Board held no formal meetings during the year ended December 31, 2011. As the company develops a more comprehensive Board of Directors all proceedings will be conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada General Corporate Law and our Bylaws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
Nomination Process
As of December 31, 2011, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. Our board of directors does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our board of directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the president of our company at the address on the cover of this annual report.
Audit Committee
Currently the company is continuing to develop a comprehensive Board of Directors and does not have a specified Audit Committee. The company intends to appoint audit, compensation and other applicable committee members as it appoints individuals with pertinent expertise in 2012.
Audit Committee Financial Expert
Our board of directors does not have a member that qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K.
Item 11.
Item 11. Executive Compensation
The particulars of the compensation paid to the following persons:
(a)
our principal executive officer;
(b)
each of our two most highly compensated executive officers who were serving as executive officers at the end of the years ended December 31, 2011 and 2010; and
(c)
up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the years ended December 31, 2011 and 2010, who we will collectively refer to as the named executive officers of our company, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year:
(1)
Mr. Kojima was appointed President, Chief Executive Officer, Treasurer and a director of our company on May 18, 2010.
(2)
Mr. Catroppa was appointed Chief Financial Officer and Secretary of our company on November 5, 2010. He resigned on February 28, 2012.
(3)
Mr. Samra resigned as President, Chief Executive Officer and as a Director of our company on May 18, 2010.
Other than set out below there are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. Our directors and executive officers may receive share options at the discretion of our board of directors in the future. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that share options may be granted at the discretion of our board of directors.
2011 Grants of Plan-Based Awards
There were no grants of plan based awards during the year ended December 31, 2011.
Outstanding Equity Awards at Fiscal Year End
At December 31, 2011there were 400,000 warrants to purchase equity shares at $0.50 per share outstanding.
On January 1, 2011, we entered into a consulting agreement with Raymond A. Catroppa, CFA. Pursuant to the terms of the consulting agreement, we provided Mr. Catroppa with 400,000 warrants to purchase equity shares at $0.50 per share. The consulting agreement was for a period of twelve months and was not renewed.
Option Exercises and Stock Vested
During our fiscal year ended December 31, 2011 there were 400,000 warrants to purchase equity shares at $0.50 per share which vested. There were no options exercised by our named officers during the year ended December 31, 2011.
Compensation of Directors
We do not have any agreements for compensating our directors for their services in their capacity as directors, although such directors are expected in the future to receive stock options to purchase shares of our common stock as awarded by our board of directors.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
Indebtedness of Directors, Senior Officers, Executive Officers and Other Management
None of our directors or executive officers or any associate or affiliate of our company during the last two fiscal years, is or has been indebted to our company by way of guarantee, support agreement, letter of credit or other similar agreement or understanding currently outstanding.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 31, 2011, certain information with respect to the beneficial ownership of our common shares by each shareholder known by us to be the beneficial owner of more than 5% of our common shares, as well as by each of our current directors and executive officers as a group. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.
(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on December 31, 2011. As of December 31, 2011 there were 63,514,058 shares of our company’s common stock issued and outstanding
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our company.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as disclosed herein, no director, executive officer, shareholder holding at least 5% of shares of our common stock, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction since the year ended December 31, 2011, in which the amount involved in the transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at the year end for the last three completed fiscal years.
As of December 31, 2011, our company was obligated to Steve Suk, a Director of Horiyoshi the Third Limited, for a non-interest bearing demand loan with a balance of $30,511.
As of December 31, 2011, our company was obligated to Lone Star Capital Limited, for a non-interest bearing demand loan with a balance of $737,553.
On September 17, 2008, Horiyoshi III Worldwide Ltd. (as we then were) entered into a License Agreement with Stone Corporation Inc. d/b/a Stone Japan, a Japanese corporation that is 80% owned by Lone Star Capital Limited, (a Hong Kong company and our principal shareholder) and 20% owned by Yoshihito Nakano, Master Horiyoshi III. Pursuant to the license agreement we hold an exclusive, worldwide, 35 year license, effective September 17, 2008, to use all copyright and trademark rights associated with our products and brand, and to exclusively manufacture and distribute apparel, beauty products, and other products related to our business. No third party is permitted to use the IP licensed to us for the production of non-apparel merchandise. We paid consideration of $10 in respect of the licensed rights. In the event that Stone Japan intends to sell the intellectual property rights licensed to us, we shall have a first right of purchase for those rights so long as the license agreement is in effect to purchase those rights at any time in the seven (7) years preceding the termination of the license agreement. The purchase price shall be equal to two (2) times the average annual gross sales turnover of our products based on the licensed rights during the three years preceding the date of exercise of the right of purchase.
On June 1, 2011, as a result of rising costs in Japan and weakness of the United States Dollar against the Japanese Yen, our Company ceased its manufacturing relationship with Stone Corporation and entered into an amended agreement for licensing rights. Pursuant to the amended license agreement we hold the exclusive, worldwide rights to use, and sublicense to use, rights related to the mark “HORIYOSHI”, and all derivatives thereof, in connection with the manufacture, promotion, sale and distribution of all products, goods, and services, in all categories, without limitation. The amended license agreement expires on May 31, 2021 and contains five extension options in five year increments. During the year ended December 31, 2011, as consideration for the IP rights, we paid Stone Corporation license fees of $165,000.
The Company will continue to pay Stone Corporation a flat monthly license fee of $30,000 from January 1, 2012 through May 31, 2012 with a running royalty calculated as 6% of net sales commencing on June 1, 2012 and continuing through the date of expiration.
On June 30, 2011, Horiyoshi the Third Limited entered into an Agreement For Settlement of Prepaid Assets and Forgiveness of Debt with Lonestar Capital Limited and Stone Corporation. Pursuant to the agreement, our Company absolved its rights to obtain $629,169 of prepaid assets from Stone Corporation in consideration of Lonestar Capital Limited forgiving $629,169 of indebtedness owed under our revolving line of credit.
Director Independence
We currently act with one (4) directors, consisting of Mitsuo Kojima, Raymond A. Catroppa, Darren Takemoto, and Kerry Chung.
We have determined that we do not have any directors who are independent directors, as that term is used in Rule 4200(a) (15) of the Rules of National Association of Securities Dealers.
Currently we do not have audit, nominating or compensation committees or committees performing similar functions. There has not been any defined policy or procedure requirements for shareholders to submit recommendations or nomination for directors. Our board of directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the president of our company at the address on the cover of this annual report.
Our board of directors has determined that it does have a member of its audit committee who qualifies as an “audit committee financial expert” as defined in as defined in Item 407(d) (5) (ii) of Regulation S-K.
From inception to present date, we believe that the members of our audit committee and the board of directors have been and are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.
Item 14.
Item 14. Principal Accounting Fees and Services
The aggregate fees billed for the most recently completed fiscal year ended December 31, 2011 and for fiscal year ended December 31, 2010 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
Our board of directors has considered the nature and amount of fees billed by our independent auditors and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independent auditors’ independence.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)
Financial Statements
(1)
Financial statements for our company are listed in the index under Item 8 of this document
(2)
All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto.
(b)
Exhibits
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
HORIYOSHI WORLDWIDE INC.
(Registrant)
Dated: March 30, 2012 /s/ Mitsuo Kojima
Mitsuo Kojima
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: March 30, 2012 /s/ Darren Takemoto
Darren Takemoto, CPA
Chief Financial Officer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 30, 2012 /s/ Mitsuo Kojima
Mitsuo Kojima
President, Chief Executive Officer and Director
(Principal Executive Officer)