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WASHINGTON, D.C. 20549
Commission File Number 000-53099
INDUSTRY CONCEPT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
4501 E 50 th St.
Vernon CA 90058
(Address of principal executive offices)
(Issuer’s Telephone Number)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes [_] No x
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No x
The aggregate market value of the shares of voting stock held by non-affiliates of the Registrant as of March 16, 2010 was $6,180,000.
As of March 31, 2010, the Registrant had 21,510,000 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE - None
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. The statements regarding Industry Concept Holdings Inc. contained in this report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.
Important factors known to us that could cause such material differences are identified in this report and in our “Risk Factors” in Item 1A. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.
We were incorporated in the State of Colorado on February 21, 2007 under the name “Your Way Holding Corp.” During our fiscal year ended October 31, 2009 our business consisted of development, ownership and operation of a catering business in Colorado through our subsidiary corporation, Your Way Gourmet, Inc. Through this catering business, we organized and catered a number of different events, from cocktail parties, to buffets of various kinds, to multi-course plated dinners.
On October 29, 2009 we executed an agreement to acquire Industry Concepts LLC (“IC”) and Primp LLC ("Primp") (IC and Primp hereinafter jointly referred to as the “Acquired Companies”) and their members, in which we agreed to issue an aggregate of 20,430,000 shares of our Common Stock, including 16,430,000 shares to the members of IC and 4,000,000 shares to the members of Primp, in exchange for all of the issued and outstanding member interests of the Acquired Companies. In addition, to facilitate this transaction and eliminate dilution of minority shareholders, members of our then current management agreed to voluntarily redeem an aggregate of 20,430,000 shares back to us. Also as a result of this transaction the holders of a majority of our issued and outstanding voting stock have authorized changing our name to “Industry Concept Holdings, Inc.”
We entered into this transaction because of our former management’s belief that by doing so we will significantly increase our shareholder’s future opportunity to enhance the value of their respective ownership in our Company. In addition, our former Board of Directors approved a “spin-off” of our wholly owned subsidiary company, Your Way Gourmet, Inc. The terms of this “spin-off” provide for a dividend to be issued to our shareholders of one share of common stock for every share that our shareholders owned as of October 28, 2009, the record date of the dividend. It is expected that this company will be “spun-off” in the near future by former management filing a registration statement with the SEC pursuant to the Securities Act of 1933, as amended.
The relevant agreement with the Acquired Companies provided that the transaction would become effective upon the issuance of audited financial statements for the Acquired Companies and confirmation that the financial condition of the Acquired Companies was consistent with the financial condition as represented. We subsequently learned that the financial condition of IC was not consistent with the representations we previously received and as a result, we terminated the acquisition of IC. We did acquire Primp, along with all of the rights applicable to the tradename “Love Crush” from IC. On March 16, 2010, we executed an amendment to the original agreement between us and the Acquired Companies (the “Amendment”) to reflect this change. This Amendment provides for
the acquisition of Primp in accordance with the original terms, including the issuance of 4,000,000 shares of our Common Stock and the issuance of 2,000,000 shares of our Common Stock to IC.
As a result of the transaction described above we have revised our current business plan to that of a company engaged in the garment industry. Following is a description of the business of Primp.
DESCRIPTION OF CURRENT BUSINESS
Our operations can be characterized as textile and garment manufacturing businesses specializing in knit goods. Primp was founded in 2004 and emphasizes a contemporary lifestyle line of clothing for women ranging in age from 16 to 50.
Today’s knit market has grown exponentially, creating even greater demands and making casual knit goods one of the most important items in the garment industry and in everyone’s wardrobe. We believe that “T-shirt and Jeans” has come to define more than a trend; it’s a lifestyle that is here to stay. In addition, there has been an increased focus on design at a value in the mid and lower tier markets which has helped bridge the style gap that once distinguished these markets from the contemporary marketplace, creating a much larger customer base for similar products than ever before.
By spanning the production process from fiber to finished garment, we strive to bring contemporary trends to the marketplace with speed and value. Drawing on our management teams past experience we have been able to develop new trends in fabrication which has been instrumental in enabling the success of many product lines, including American Apparel and Dickies.
Primp is a completely vertical entity in the knit manufacture industry. Production sites in Los Angeles, Mexico, and China further enable us to produce quickly and efficiently. The infrastructure is capable of engineering fabrics and designing prints and styles that directly reference current trends and offer them at competitive prices in the market. Our goal is to extend our capabilities to an even greater customer base.
We have developed Primp to earmark customers seeking highly sellable retail merchandise at the higher tier. Launched by Wells Butler in 2004, Primp is a fashion-forward and comfortable collection of knits and basics with a contemporary lifestyle feel. In its first year at retail, Primp was supported by the hippest leading, fashion-driven boutiques in Los Angeles and at several leading boutiques around the country such as Lisa Kline, Kitson, Harvey Nichols, Revolve Clothing and Planet Blue. Primp is currently sold at higher end department stores including Saks Fifth Avenue, Nordstrom, Neiman Marcus and Bloomingdales, and at nearly 300 leading boutiques with launches currently in major foreign markets including Japan and Britain. Management believes that once Jessica Simpson wore Primp on the reality show, “The Newlyweds,” the brand exploded onto the scene as a favorite of Hollywood’s “it” girls and the brand continues to enjoy an overwhelming following in the entertainment world. Primp products are also routinely worn by numerous top stars in the weekly magazines, newspapers and on the TV and internet. Sasha Obama wore a Primp hoodie for her first day of school following the move to the White House. Owing to its casual comfort and unique luxury styling, management believes that Primp is respected by the fashion industry as upstairs luxury casual wear knits and basics, under the twin monikers “Primp” and “Primp Basics.”
In 2007-2008, Primp expanded its product line to include “tween, toddler and baby,” which management believes has been successful. One of Brad Pitt and Angelina Jolie’s toddlers wore Primp in the 2008 “People” magazine spread, the most expensive celebrity photo in the magazine’s history. The expansion of the Primp product line continued with the release of branded men’s t-shirts in October/November 2009. Numerous additional products are being developed and are expected to be released in the foreseeable future.
In addition to our Los Angeles based production facilities, we have developed strategic alliances with production facilities in Mexico and China to drive mass market sales. The facility in Mexico is a 200,000 square feet cutting and sewing entity with 1800 sewing machines and the ability to produce 2 million t-shirts per month. Approximately 10% if this capacity is utilized by Primp during any given month. We also procure textiles and full package garments from various sources in China. Off-shore production generates cost savings on large scale production orders. For short turn, smaller orders, production is conducted domestically. For volume orders with at least a 5 to 6 week lead time, production can be placed in Mexico to capture lower labor and energy input costs. For
mass volume or long lead time production orders, placement in China generates even lower production cost. There are customers who insist on products exclusively manufactured in Los Angeles or “Made in the USA” as this base results in a premium wholesale/retail price. For domestic based operations, we lease a 45,000 square foot warehouse which allows us to directly manage inventory and fulfill both wholesale, retail and e-commerce based orders. Placement of the order ultimately depends on customer demands, fabric composition, delivery date, quantity and price point. This manufacturing paradigm enables Primp to build upon a vertical cost structure to ensure the lowest costs when producing garments.
Primp sales are obtained through an in-house sales force that deals with department stores, mass retailers and wholesale branded customers. In-house sales personnel are compensated with a bonus structure that rewards performance, while international distributors are rewarded with a bulk discount from traditional wholesale prices. Primp has entered into multiple licensing initiatives both domestically and internationally using licensing agents based in the US that are rewarded on a commission basis. Distributors typically receive a 20% discount from wholesale charges. In-house sales agents receive anywhere between 3-12% of the gross wholesale price, depending upon the sale price obtained from the customer. As a licensor, Primp will earn a 6% to 10% royalty from the gross sales; the licensing agent earning 30% of that royalty rate.
Primp negotiates directly with buyers from retailers and wholesale customers. Our management also attends both domestic and international conventions to expand brand recognition and distribution.
Primp is a lifestyle brand that withholds distribution from the marketplace and only sells to stores and customers that fit within the representation of the lifestyle of the brand. With additional funding we intend to expand the development of Primp and also incubate new brands that target different sectors of the marketplace. We estimate that we will need approximately $3-5 million to successfully expand as described. As of the date of this Report, we have had discussions with various investment banking firms and others but there has been no definitive agreement with any third party wherein a commitment has been received to raise these funds and there can be no assurances that such an agreement will be forthcoming in the near future, or at all. Failure to obtain additional capital will have a negative impact on our ability to expand as described herein.
Primp currently operates one retail location and has intentions to roll out additional stores in premium locations throughout Southern California, Nevada, Arizona, Florida and New York. These locations would be premium retail locations as well as factory outlet locations. This expansion is dependent upon our ability to raise additional working capital.
Primp is trademarked domestically and internationally and many of its print designs are copyright protected. Primp’s website and webstore, www.itsprimp.com , was launched in December 2009.
Shipping is handled in-house at our corporate warehouse in Vernon CA. With respect to shipments to major retailers, the orders, shipment documentation and invoices are handled through electronic data interchange (EDI). Fulfillment for our retail locations and e-commerce site are handled internally as well.
We have an ongoing relationship with a factor company (“the Factor”), which manages and collects our accounts receivable and loans money to us with the receivables as collateral, due on demand, with interest generally at 2% over the prime rate. At the end of 2009 and 2008, we had assets of uncollected receivables on account with the Factor of $29,013 and $311,178. Also at end of 2009 and 2008, we had a balance due to the Factor for loan advances of $329,222 and $408,935. Interest expense charged by the Factor in 2009 and 2008 was $25,000 and $47,000. See “Part II, Item 8, Financial Statements.”
As of the date of this Report we have eight (8) employees including our management, plus one (1) person in accounting, two (2) persons in design/development and sales, and two (2) persons involved in order fulfillment, shipping, distribution and inventory. In addition, we contract services from independent contractors in the categories of sales (5), production (3), sampling (2), consulting (2) and accounting (2). We anticipate that if we receive financing we will hire additional employees in the areas of accounting, regulatory affairs, marketing and design.
We compete with publicly and privately held companies engaged in the textile industry. There are numerous other entities engaged in this business that have greater resources, both financial and otherwise, than the resources presently available to us. Our principal competitors include Juicy Couture, Splendid Mills, and James Perse.
Primp holds various design print copyrights, including VA0001387500, a visual art copyright of a design print pattern which is used on fabric for ultimate manufacturer of a garment; VA 0001387501, a pony print; and VA0001406629, a swan print. It also holds a trademark/wordmark for the name “Primp,” Serial No. 78434993. Primp also has a trademark registered in Japan.
In addition, as part of the acquisition described above, we acquired all rights to the tradename “Love Crush.” As of the date of this report no formal filing reserving this tradename has been made, but it is anticipated that applicable filings will be undertaken in the very near future in order to perfect our rights to this tradename.
We are not subject to any extraordinary governmental regulations.
An investment in our Common Stock is a risky investment. Prospective investors should carefully consider the following risk factors before purchasing shares of our Common Stock. We believe that we have included all material risks.
RISKS RELATED TO OUR OPERATIONS
We may not be able to continue as a going concern or fund our existing capital needs.
Our independent registered public accounting firm included an explanatory paragraph in their report included herein on our financial statements related to the uncertainty in our ability to continue as a going concern. The paragraph stated that we do not have sufficient cash on-hand or other funding available to meet our obligations and sustain our operations, which raises substantial doubt about our ability to continue as a going concern. Our cash and cash equivalents were sufficient to fund our existing development commitments, indebtedness and general operating expenses through December 31, 2009. However, we may not have sufficient cash or other funding available to complete our anticipated business activities during 2010.
We have an outstanding balance owed to the Internal Revenue Service, who has placed a lien on all of our assets
At December 31, 2009 and 2008 we owed approximately $143,000 and $128,000, respectively, in unpaid federal and state payroll taxes. In response the Internal Revenue Service has filed a lien on all our assets. The outstanding taxes currently remain unpaid. What actions, if any, authorities may take to collect the taxes are unknown at the present time. However, through counsel we have contacted the IRS agent in charge of our account and settlement discussions have commenced. As of the date of this report no settlement has been reached in this matter. Failure to resolve this matter could result in the IRS executing their rights under their lien, which would have a significant negative impact on our ability to continue in business.
We have incurred losses to date.
As of December 31, 2009, we had an accumulated deficit of ($1,267,621) and incurred a net loss of $1,263,932 in 2009. As of December 31, 2008, we had an accumulated deficit of ($3,689) and incurred a net loss of $87,912. There can be no assurances that we will not continue to incur losses in the future. We are currently in
discussions with various investment bankers and other potential sources of capital in order to raise up to $5 million to fund our propose expansion described elsewhere herein, but there are no assurances that we will be able to raise any capital, either debt or equity to fund our operations. There are no assurances that we will be able to attain, sustain or increase profitability on a quarterly or annual basis. A continued economic downturn would significantly and adversely affect our sales and profitability.
Our business may be negatively impacted by general economic conditions and the current global financial crisis.
Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also retailers, our largest direct customers. Consumer spending recently has deteriorated significantly and may remain depressed, or be subject to further deterioration for the foreseeable future. The worldwide apparel industry is heavily influenced by general economic cycles. Purchases of high-fashion apparel and accessories tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines. Many factors affect the level of consumer spending in the apparel industries, including, among others: prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new retail stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a percentage of net sales. As a result, our operating results may be adversely and materially affected by downward trends in the United States or global economy. Furthermore, in anticipation of continued increases in net sales, we have significantly expanded our infrastructure and workforce. Because these expenses are fixed in the short term, our operating results and margins will be adversely impacted if we do not continue to grow as anticipated.
Our continued operations depend on current fashion trends. If our designs and products do not continue to be fashionable, our business could be adversely affected.
Our success depends in large part on our ability to develop, market and deliver innovative and stylish products that are consistent with and build on our brand and image at a pace and intensity competitive with our competition. The novelty and the design of our apparel is critical to our success and competitive position. The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. If we are unable to continue to develop and offer unique products to our customers, our sales and margins will decline and we may be faced with a significant amount of unsold finished goods inventory. We cannot be certain that high-fashion denim and related apparel will continue to be fashionable. Should the trend steer away from high-fashion denim and related apparel, our sales could decrease and our business could be adversely affected. In addition, our future designs and plans to expand our product offerings may not be successful, and any unsuccessful designs or product offerings could adversely affect our business.
Our business and the success of our products could be harmed if we are unable to maintain our brand image.
Our success to date has been due in large part to the growth of our brand image. If we are unable to timely and appropriately respond to changing consumer demand, our brand name and brand image may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles that are no longer popular. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.
We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
We face intense competition in the apparel industry from other established companies. A number of our competitors may have significantly greater financial, technological, manufacturing, sales, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic
downturns in the apparel industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, there are low barriers of entry into this industry and new companies may enter the markets in which we compete, further increasing competition in the industry. Our branded retail stores compete with many other retailers, including department stores, some of whom are our major wholesale customers. We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the strength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the trading price of our common stock.
Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.
The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials—primarily cotton—used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, work stoppages, government regulation, economic climates and other unpredictable factors. Increases in raw material costs, together with other factors, will make it difficult for us to sustain the wholesale gross margin level we have achieved in recent years and result in a decrease of our profitability unless we are able to pass higher prices on to our wholesale and retail customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.
We may be unable to sustain our past growth or manage our future growth, which may have a material adverse effect on our future operating results.
We anticipate that our future growth rate will depend upon various factors, including the strength of our brand image, the market success of our current and future products, the success or our growth strategies, competitive conditions and our ability to manage our future growth. Future growth may place a significant strain on our management and operations. As we continue to grow in our operations, our operational, administrative, financial and legal procedures and controls will need to be expanded. As a result, we may need to train and manage an increasing number of employees, which could distract our management team from our business. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If we are unable to anticipate or manage our growth effectively, our future operating results could be adversely affected.
Our business could be harmed if we fail to maintain proper inventory levels.
We place orders with our manufacturers for some of our products prior to the time we receive all of our customers' orders. We do this to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of certain products that we anticipate will be in greater demand. However, we may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty.
Increasing the number of branded company-operated stores will require us to develop new capabilities and increase our expenditures.
Our growth strategy is dependent in part on our ability to open and operate new stores and the availability of suitable store locations on acceptable terms. We currently operate 1 branded retail store and we historically have been primarily a wholesaler. We plan to open 2 company-operated branded retail and outlet stores in 2010. The success of this strategy is dependent upon, among other factors, the identification of suitable markets and sites for
store locations, the negotiation of acceptable lease terms, the hiring, training an