NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Organization and Business
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 rights to the 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.
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 365,625 shares of common stock to 790,554 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, then President, Mitsuo Kojima affected a Share Cancellation Agreement with Kranti and surrendered for cancellation
all 540,550 shares held by him in common stock which left a total of 250,004 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 250,000 shares of common stock to the former shareholders of Horiyoshi the Third Limited in exchange for
the acquisition of all 83 Horiyoshi the Third Limited shares issued and outstanding. Upon close of the acquisition Horiyoshi Worldwide,
Inc. had a total of 500,004 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.
On
January 12, 2012, Horiyoshi Worldwide, Inc. enacted a 10 to 1 reverse stock split which decreased the number of shares issued
and outstanding to 529,333.
On
February 12, 2013, Mitsuo Kojima resigned from his positions as President, Chief Executive Officer, Treasurer and Director of
the Company. Concurrently with Mitsuo Kojima’s resignation, Kerry Chung was appointed as President, Chief Executive Officer,
and Treasurer to fill the ensuing vacancy.
In
March 2013, the management and directors of Horiyoshi Worldwide, Inc. authorized the conversion of $50,000 of debt held by Lonestar
Capital Limited, into restricted shares of HHWW common stock to be valued at $0.015. This transaction increased the number of
shares issued and outstanding to 810,180.
In
April 2013, Horiyoshi Worldwide, Inc. enacted a 12 to 1 reverse stock split which decreased the number of shares issued and outstanding
to 810,180. All share and per share amounts have been retroactively restated to reflect the effects of this transaction.
Going
Concern, Liquidity and Management's Plan
As
of March 31, 2014 our Company has accumulated losses of $8,387,684 since inception and has earned no net income 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, 2014. 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.
Note
2. Summary of Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
unaudited consolidated financial statements include the accounts of Horiyoshi Worldwide, Inc. and its wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated upon consolidation.
The
accompanying unaudited Horiyoshi Worldwide, Inc. consolidated financial statements have been prepared by the Company in accordance
with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and
are presented in accordance with the requirements of Form 10-Q and Article 8 of Regulation S-X. Accordingly, these unaudited consolidated
financial statements do not include all of the information and notes required by GAAP for complete financial statements and should
be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2013
included in the Company's Annual Report on Form 10-K. In the opinion of management, the interim unaudited consolidated financial
statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly
the Company's financial position, the results of operations and cash flows for the periods presented.
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 March 31, 2014 and December 31, 2013 was $12,908 and $13,214, respectively. Deferred revenue represents prepayments
and deposits required from certain customers before delivery of Horiyoshi the Third, The Thiiird, and Heroes & 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 resulting from the returns of defected and unsold merchandise
based on historical information. Currently we estimate returns to be approximately 1.2% 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 at March 31, 2014 and December 31, 2013 was $10,317.
Cost
of sales
Cost
of goods sold consists of cost of purchases for resale to stores located in in Canada, Dubai, France, Italy, Japan, Kuwait, Mexico,
Saudi Arabia, Russia, Hong Kong the United Kingdom, and the United States. It also consists of cost of purchases for resale
of our branded online Horiyoshi the Third, The Thiiird, and Heroes and Demons stores as well as our branded retail outlet in London.
In addition, write offs of obsolete inventory, changes in the inventory reserve, and shrinkage are included in cost of goods sold.
Generally, our customers are required to pay all shipping costs for the delivery of their orders.
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 March 31,
2014 and December 31, 2013 the allowance for doubtful accounts was $20,994 and $21,495, 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 three month periods ended March 31, 2014 and 2013, the assumed exercise of stock warrants was anti-dilutive.
Therefore, basic and diluted losses per share are the same for all periods presented. At March 31, 2014 and 2013 there were 3,333
stock warrants that could dilute future earnings.
Foreign
currency transactions
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. Products are generally sold in U.S. dollars (USD) or British pound sterlings (GBP).
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.
The
functional currency of the Company’s subsidiaries outside the U.S. is the respective local currency. The translation from
the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the
balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. The resulting translation
adjustments are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”).
During
the three months ended March 31, 2014, we incurred a foreign currency transaction gain of $9,822, which has been included as part
of net income, and a foreign currency translation loss of $8,601, which has been included as part of AOCI.
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.
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 a saleable
condition. At March 31, 2014 and December 31, 2013, inventory consists of $288,558 and $332,102 of finished goods, and $65,600
and $55,524 of raw materials, respectively.
The
Company maintains a perpetual inventory and report by product. This is updated daily based 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 March 31, 2014 and December
31, 2013, there have been reserves of $122,798 made for inventory on hand.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets at March 31, 2014 and December 31, 2013 were $46,570 and $31,784, respectively. Prepaid expenses
and other current assets represent deposits on operating leases and amounts paid for goods and services yet to be received.
Property
and Equipment
Property
and equipment are record at cost. 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.
Accounts
payable and accrued expenses
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 at March 31, 2014 and December 31, 2013 were $323,637 and $354,609, 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 was not necessary
for the Company to separately accrue for vacation or payroll time for the three months ended March 31, 2014. Our accrued expenses
were $798,440 at March 31, 2014 and $671,229 at December 31, 2013.
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.
Note
3. Property and equipment
Property
and equipment consisted of the following:
|
|
March 31, 2014
|
|
December 31, 2013
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
73,886
|
|
|
$
|
73,558
|
|
Computers and software
|
|
|
19,711
|
|
|
|
19,711
|
|
Website
|
|
|
25,052
|
|
|
|
25,052
|
|
Leasehold improvements
|
|
|
33,039
|
|
|
|
34,743
|
|
|
|
$
|
151,688
|
|
|
$
|
151,064
|
|
Less, accumulated depreciation
|
|
|
(66,542
|
)
|
|
|
(59,552
|
)
|
Property and equipment, net
|
|
$
|
85,146
|
|
|
$
|
91,512
|
|
Depreciation
expense for the three months ended March 31, 2014 and 2013 were $6,729 and $7,637, respectively.
Note
4. Subordinated Notes Payable and Demand Loans
As
of March 31, 2014 and December 31, 2013, 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 $94,518 and $95,018, respectively. This amount is included on the balance
sheet under “Due to shareholders”.
As
of March 31, 2014 and December 31, 2013, our Company was obligated to Lone Star Capital Limited, for a non-interest bearing demand
loan with a balance of $1,807,610 and $1,672,520, respectively. This amount is included on the balance sheet under “Related
party, demand loan”. Interest has been imputed on this note at 3.25% per annum. Total imputed interest was $13,941 for the
three month period ended March 31, 2014.
On
August 30, 2012, our Company entered into a credit facility agreement with AMS Holdings Limited. The credit facility has an aggregate
principal amount of $300,000 and can be drawn on at any time. Any amounts outstanding are due on the demand of the lender and
are non-interest bearing. As of March 31, 2014 and December 31, 2013, our Company was obligated to AMS Holdings Limited for $150,000.
This amount is included on the balance sheet under “Demand loans”.
Note
5. 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.
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 expired on May 31,
2012 and contains five extension options in five year increments. During the three months ended March 31, 2014, as consideration
for the IP rights, we recognized $90,000 of expenses related to license fees, all of which have been included in accrued expenses
at March 31, 2014.
The
Company will continue to pay Stone Corporation a flat monthly license fee of $30,000 until the termination of the licensing agreement.
In
March 2013, the management and directors of the Company authorized the conversion of $50,000 of debt held by Lonestar Capital
Limited, into restricted shares of HHWW common stock to be valued at $0.015 per share. This transaction increased the number of
shares issued and outstanding to 810,180.
Note
6. 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 3,333 warrants to purchase equity shares at $0.50 per share. The vesting period was from
January 1, 2011 to December 31, 2011. The amount 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. All warrants were vested and expensed as of December
31, 2011. The warrants have no expiration date. There were no additional awards granted during the three months ended March 31,
2014.
Note
7. Commitments and Contingencies
Operating
Leases
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
non-cancelable lease terms in excess of one year as of March 31, 2014:
2014
– remainder
|
$
|
34,799
|
2015
|
|
45,694
|
2016
|
|
44,990
|
2017
|
|
43,582
|
2018
|
|
32,686
|
Total
|
$
|
201,751
|
Operating
lease rent expense (including real estate taxes and common area maintenance costs) was approximately $15,637 and $33,317 for the
three months March 31, 2014 and 2013. Rent expense is allocated to operating expenses in the accompanying consolidated statements
of operations.
Note
8. 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 large
portions of
revenues when spring and fall seasonal orders are delivered.
End
of Notes to Financials