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| PARL > SEC Filings for PARL > Form 10-Q on 10-Feb-2009 | All Recent SEC Filings |
10-Feb-2009
Quarterly Report
Parlux Fragrances, Inc. is a manufacturer and international distributor of prestige products. It holds licenses for Paris Hilton fragrances, watches, cosmetics, sunglasses, handbags, and other small leather accessories in addition to licenses to manufacture and distribute the designer fragrance brands of Marc Ecko, GUESS?, Jessica Simpson, Nicole Miller, Josie Natori, Queen Latifah, XOXO, Ocean Pacific (OP), Andy Roddick, babyGund, and Fred Hayman Beverly Hills.
Certain statements within this Quarterly Report on Form 10-Q, which are not historical in nature, including those that contain the words, "anticipate"; "believe"; "plan"; "estimate"; "expect"; "should"; "intend"; and other similar expressions, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are based on current expectations. Investors are cautioned that forward-looking statements involve many risks and uncertainties, which may affect our business and prospects, including economic, competitive, governmental and other factors included in our filings with the Securities and Exchange Commission ("SEC"), including the Risk Factors included in our Annual Report on Form 10-K for the year ended March 31, 2008. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. We do not undertake any obligation to update the forward-looking information herein, which speaks only as of this date. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Recent Developments
Paris Hilton Sunglass License
On April 5, 2006, we entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute sunglasses under the Paris Hilton name. The initial term of the agreement expires on January 15, 2012, and is renewable for an additional five-year period. In January 2009, we entered into an agreement with Gripping Eyewear, Inc. ("GEI"), assigning the worldwide exclusive licensing rights with Paris Hilton Entertainment, Inc. ("PHEI"), for the production and distribution of Paris Hilton Sunglasses. We remain contingently liable for the minimum guaranteed royalty under the license. However, we anticipate offsetting approximately 60% of such from our assignment to GEI through the agreement expiration date of January 15, 2012.
Marc Ecko Fragrance License
Effective November 5, 2008, we entered into an exclusive license agreement with Ecko Complex LLC, to develop, manufacture and distribute fragrances under the Marc Ecko marks. The initial term of the agreement expires on December 31, 2014, and is renewable for an additional three-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009. Our license agreement calls for minimum royalties in the first year after the launch of an initial product, based upon a minimum sales target. Based upon preliminary discussions with our retail partners, and assuming no material adverse change in the current economic environment, we anticipate sales for this brand should exceed the minimum target.
Josie Natori Fragrance License
Effective May 1, 2008, we entered into an exclusive license agreement with J.N. Concepts, Inc., to develop, manufacture and distribute prestige fragrances and related products under the Josie Natori name. The initial term of the agreement expires on September 30, 2012, or December 31, 2012, depending on the first product launch date, and is renewable for an additional three-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010. Since this brand is a higher end luxury brand that we expect to launch in an exclusive arrangement with an upper tier retailer, we expect that our first year sales will not be material.
Effective May 22, 2008, we entered into an exclusive license agreement with Queen Latifah Inc., to develop, manufacture and distribute prestige fragrances and related products under the Queen Latifah name. The initial term of the agreement expires on March 31, 2014, and is renewable for an additional five-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010. Our license agreement calls for minimum royalties in the first year after the launch of an initial product, based upon a minimum sales target. Based upon preliminary discussions with our retail partners, and assuming no material adverse change in the current economic environment, we anticipate sales for this brand should exceed the minimum target.
Critical Accounting Policies and Estimates
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We have included in our Annual Report on Form 10-K for the year ended March 31, 2008, a discussion of our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We have not made any changes in these critical accounting policies, nor have we made any material change in any of the critical accounting estimates underlying these accounting policies, since the filing of our Annual Report on Form 10-K filing, discussed above.
Recent Accounting Pronouncements
Effective April 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and expands disclosure requirements about fair value measurements. In accordance with the Financial Accounting Standards Board ("FASB") Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"), we will defer the adoption of SFAS 157 for our non-financial assets and non-financial liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis, until April 1, 2009. In October 2008, the FASB issued Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active. It is effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of SFAS 157 did not have a material impact on our fair value measurements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB No. 115 ("SFAS 159"). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for our fiscal year ending March 31, 2009. We implemented the provisions of SFAS 159 effective April 1, 2008. The adoption of SFAS 159 did not have a material impact on our condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"). SFAS 141(R) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The provisions of
SFAS 141(R) are effective for financial statements issued for fiscal years
beginning after December 15, 2008. We are currently assessing the financial
impact, if any, of SFAS 141(R) on our condensed consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 ("SFAS 160"). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements ("ARB 51"), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement also amends
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants ("AICPA") Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We are currently reviewing the provisions of SFAS 162 to determine the impact, if any, on our condensed consolidated financial statements.
During April 2008, the FASB issued FASB Staff Position ("FSP") FAS No. 142-3, Determination of the Useful Life of Intangible Assets ("FAS 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other pronouncements under GAAP. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are currently assessing the financial impact, if any, of this statement on our condensed consolidated financial statements.
Significant Trends
Over the last few years, a significant number of new prestige fragrance products have been introduced on a worldwide basis. The beauty industry, in general, is highly competitive and consumer preferences often change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, has fueled the growth of our industry. Department stores continue to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies are required to introduce new products more quickly, which requires additional spending for development and advertising and promotional expenses. In addition, a number of the new launches are with celebrities (either entertainers or athletes) which require substantial royalty commitments and whose careers and/or appeal could change drastically, both positively and negatively, based on a single event. We believe these trends will continue. If one or more of our new product introductions would be unsuccessful, or the appeal of the celebrity would diminish, it could result in a substantial reduction in profitability and operating cash flows.
In the past, certain U.S. department store retailers consolidated operations resulting in the closing of retail stores as well as implementing various inventory control initiatives. We expect that these store closings, the inventory control initiatives, and the current global economic conditions will continue to affect our sales in the short-term. In response, we have implemented a number of cost reduction initiatives including a targeted reduction in staff, along with a reduction in committed advertising and promotional spending, and expect to reduce our production levels in response to the current economic environment.
During the recent holiday season, U.S. department store retailers experienced a major reduction in consumer traffic, resulting in decreased sales. In response, the retailers offered consumers deep discounts on most of their products. As is customary in the fragrance industry, these discounts were not offered on fragrances and cosmetics. This resulted in an overall reduction in sales of these products, although sales of our products increased during this period, as a result of investments we made with our promotional activities and in our domestic sales force.
Historically, as is the case for most fragrance companies, our sales have been influenced by seasonal trends generally related to holiday or gift giving periods. Substantial sales often occur during the final month of each
In light of the recent downturn in the global economy the Company performed a review of its intangible, long-lived assets at December 31, 2008. This review was based upon the estimated future net cash flows for the remaining period of each license. Based upon management's review, no impairment charges were deemed necessary.
Results of Operations
As more fully discussed in Note N to the accompanying condensed consolidated financial statements, on December 6, 2006, the Company sold the Perry Ellis fragrance brand license back to Perry Ellis International (PEI) at a price of approximately $63 million, including approximately $21 million for inventory and promotional products relating to the brand. Subsequently, the Perry Ellis brand activity has been presented as discontinued operations and prior period statements of operations have been retrospectively adjusted. The discussions on results of operations that follow are based upon the results from continuing operations and exclude any discussion of discontinued operations, unless specifically noted.
We did business with fragrance distributors owned/operated by individuals related to our former Chairman and CEO. Through June 30, 2007, these sales were included as related party sales in the accompanying condensed consolidated statements of operations. As of June 30, 2007, the former Chairman and CEO's beneficial ownership interest in the Company was approximately 7.6%. During the quarter ended September 30, 2007, his beneficial ownership declined to less than 5%. Accordingly, the Company's management determined that, effective as of July 1, 2007, transactions with such parties will no longer be reported as related party transactions. As of June 30, 2008, the former Chairman and CEO had no further beneficial ownership interest in the Company.
Our gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold, since we allocate a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses. Selling and distribution expenses for the nine-months ended December 31, 2008 and 2007, include approximately $4,073,000 and $3,279,000 respectively, ($1,474,000 and $1,511,000 for the three-months ended December 31, 2008 and 2007) relating to the cost of warehouse operations not allocated to inventories and other related distribution expenses (excluding shipping expenses which are recorded as cost of goods sold). A portion of these costs is allocated to inventory in accordance with GAAP.
Comparison of the three-month period ended December 31, 2008, with the three-month period ended December 31, 2007.
Net Sales
During the three-months ended December 31, 2008, net sales from continuing operations increased 6% to $47,292,522, as compared to $44,543,788 for the same prior year period. The increase was primarily due to the launch, in August 2008, of our new Jessica Simpson fragrance, Fancy, resulting in an increase in gross sales of $8,391,708 and the launch, in late September 2008, of our new Paris Hilton fragrance, Fairy Dust, resulting in an increase in gross sales of $6,000,269. Both fragrances were launched in our domestic market. However, the increase in sales was negatively impacted by the current global economic environment, resulting in a significant drop in consumer retail business and retail re-orders, particularly in our international market.
Net sales to unrelated customers, which represented 82% of our total net sales for the three-months ended December 31, 2008, increased 10% to $38,546,367, as compared to $35,055,318 for the same prior year period. This was primarily due to an increase in sales to the U.S. department store sector. Net sales to the U.S. department store sector increased 82% to $24,140,143 for the three-months ended December 31, 2008, as compared to $13,288,524 for the same prior year period, while net sales to international distributors decreased 34% to $14,406,223, as compared to $21,766,868 for the same prior year period. The increase in domestic sales was primarily due to the launch of our new Jessica Simpson fragrance, Fancy, and the launch of our new Paris Hilton fragrance, Fairy Dust, noted above. Additionally, in the domestic market we benefited from our investments in promotional activities and our domestic sales force, coupled with high levels of sell-through in difficult economic conditions. The decrease in international net sales was primarily due to global recessionary economic conditions and the volatility of the U.S. dollar. Sales to related parties, primarily from Perfumania, (See Note F to the accompanying condensed consolidated financial statements for further discussion of related parties) decreased 8% to $8,746,156 for the three-months ended December 31, 2008, as compared to $9,488,396 for the same prior year period. The decrease in sales reflects the
Cost of Goods Sold
Our overall cost of goods sold remained constant at 50% of net sales for the three-months ended December 31, 2008, as compared to the same prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 47% and 60%, respectively, for the three-months ended December 31, 2008, as compared to 49% and 53%, respectively, for the same prior year period. The three-months ended December 31, 2008, included a higher percentage of sales to U.S. department store customers, which sales generally have a higher margin than sales of these products to international distributors, which generally reflect a lower margin. As is common in the industry, we offer international customers higher discounts, which are generally offset by reduced advertising expenditures for those sales, as the international distributors are responsible for advertising in their own territories. International distributors have no rights to return merchandise. As noted above, the current year period also includes the sale of overstock merchandise to related parties, which sales resulted in lower margins.
Total Operating Expenses
Total operating expenses increased by 42% for the three-months ended December 31, 2008, as compared to the same prior year period, to $31,085,949 from $21,896,502, increasing as a percentage of net sales to 66% from 49%. However, certain individual components of our operating expenses discussed below experienced more significant changes.
Advertising and Promotional Expenses
Advertising and promotional expenses increased 48% to $18,370,026 for the three-months ended December 31, 2008, as compared to $12,454,247 for the same prior year period, increasing as a percentage of net sales to 39% from 28%, primarily due to the launches and advertising campaigns for our new Jessica Simpson and Paris Hilton fragrances in the fall of 2008 and due to the investments we made with our promotional activities in our domestic markets. During the prior year period, we incurred advertising and promotional costs in connection with the launch of our Paris Hilton Can Can fragrance. During the quarter ended December 31, 2008, we anticipated significantly higher sales and we committed our spending accordingly. However, during the last five weeks of the quarter, retailers experienced a significant drop in consumer business and re-orders were negatively affected. We anticipate promotional spending for all brands to decrease during the fourth quarter ending March 31, 2009, and into our next fiscal year as we reduce our promotional spending in response to the current economic climate.
Selling and Distribution Costs
Selling and distribution costs increased 47% to $4,936,975 for the three-months ended December 31, 2008, as compared to $3,358,058 for the same prior year period, increasing as a percentage of sales to 10% from 8%. The increase in costs was mainly attributable to increases in personnel for the Domestic Sales and Marketing departments required to support new product development and in-store activities of our launches and the holiday season. Additionally, selling expenses were incurred with the launch of our new Jessica Simpson brand. During the prior year period, our selling and distribution cost decreased primarily due to the centralization of all distribution activities in our New Jersey facility.
Royalties
Royalties increased by 13% to $3,734,456 for the three-months ended December 31, 2008, as compared to $3,301,514 for the same prior year period, increasing as a percentage of net sales to 8% from 7%. The increase is due to the increase in sales for the three-months ended December 31, 2008, and reflects contractual royalty rates on actual sales coupled with minimum royalty requirements, most notably for Paris Hilton cosmetics, sunglasses, and handbags, for which minimum sales levels were not achieved. We anticipate that this percentage will remain relatively constant for the remainder of the fiscal year ending March 31, 2009, as increases in fragrance sales partially offset minimum royalty payments for Paris Hilton non-fragrance licenses. In January 2009, we entered into an agreement with GEI, assigning the worldwide exclusive licensing rights with PHEI, for the production and distribution of Paris Hilton sunglasses.
General and administrative expenses increased 73% to $3,416,942 for the three-months ended December 31, 2008, as compared to $1,975,670 for the same prior year period, increasing as a percentage of sales to 7% from 4%. The increase in expenses was mainly attributable to an increase in the reserves for uncollectible accounts receivable of approximately $637,000, as compared to the same prior year period, resulting from the aging of past due receivables and to an increase in personnel, and related benefit and insurance expenses, partially offset by a decrease in accounting fees.
Depreciation and Amortization
Depreciation and amortization decreased 22% to $627,550 for the three-months ended December 31, 2008, as compared to $807,013 for the same prior year period, decreasing as a percentage of sales to 1% from 2%. The decrease was attributable to lower amortization expense. In addition, an impairment charge of $200,000 was recorded in the comparable prior year period in connection with the XOXO fragrance license (See Note D to the accompanying condensed consolidated financial statements for further discussion).
Operating (Loss) Income
As a result of the above factors, we incurred an operating loss from continuing operations of $(7,357,012) for the three-months ended December 31, 2008, as compared to an operating income from continuing operations of $493,840 for the same prior year period.
Net Interest/Income Expense
Net interest income was $40,632 in the three-months ended December 31, 2008, as compared to net interest expense of $217,067 for the same prior year period, as we earned interest on our cash balances and did not need to utilize our line of credit during the three-months ended December 31, 2008.
(Loss) Income Before Income Taxes, Taxes, Discontinued Operations and Net (Loss) Income
Our loss from continuing operations before income taxes for the three-months ended December 31, 2008, was $(7,316,400), as compared to income from continuing operations before income taxes of $288,648 for the same prior year period. Our tax benefit in the current year period and our tax provision in the prior year period reflect an estimated effective rate of 38%. As a result, we incurred a loss from continuing operations of $(4,536,168) for the three-months ended December 31, 2008, as compared to income from continuing operations of $178,962 for the same prior year period.
Income from discontinued operations (See Note N to the accompanying condensed consolidated financial statements for further discussion), net of the tax effect, was $0 for the three-months ended December 31, 2008, and $3,719 for the same prior year period. There was no discontinued operation activity during the three-months ended December 31, 2008.
As a result, we incurred a net loss of $(4,536,168) for the three-months ended December 31, 2008, as compared to net income of $182,681 for the same prior year period.
Comparison of the nine-month period ended December 31, 2008, with the nine-month . . .
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