EX-99.2 4 a15-24595_1ex99d2.htm EX-99.2

Exhibit 99.2

 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC

BALANCE SHEET

JUNE 30, 2015 AND DECEMBER 31, 2014

(RESTATED)

 

 

 

June 30, 2015

 

December 31, 2014

 

ASSETS

 

 

 

 

 

Cash - Operating and Money Market Accounts

 

$

270,344

 

$

290,830

 

Cash - Restricted

 

49,763

 

11,431

 

Total Cash

 

320,107

 

302,261

 

 

 

 

 

 

 

Accounts Receivable

 

44,277

 

63,930

 

Affiliate Loan Receivable

 

86,081

 

78,798

 

Other Receivables

 

29,052

 

29,052

 

 

 

 

 

 

 

Total Current Assets

 

479,517

 

474,041

 

 

 

 

 

 

 

Computers and Equipment, net of accumulated depreciation of $31,078 and $29,233

 

6,712

 

5,865

 

 

 

 

 

 

 

Total Assets

 

$

486,229

 

$

479,906

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S CAPITAL

 

 

 

 

 

Accounts Payable

 

$

137,781

 

$

156,336

 

Brand Building Fund Obligations

 

49,763

 

11,431

 

Affiliate Notes Payable

 

—

 

—

 

Deferred Revenue - short term

 

290,000

 

342,000

 

 

 

 

 

 

 

Total Current Liabilities

 

477,544

 

509,767

 

 

 

 

 

 

 

Deferred Revenue - long term

 

2,339,000

 

2,128,000

 

 

 

 

 

 

 

Total Long-Term Liabilities

 

2,339,000

 

2,128,000

 

 

 

 

 

 

 

Total Liabilities

 

2,816,544

 

2,637,767

 

 

 

 

 

 

 

Member’s Capital

 

(2,330,315

)

(2,157,861

)

 

 

 

 

 

 

Total Liabilities and Member’s Capital

 

$

486,229

 

$

479,906

 

 

See Accompanying Notes and Independent Auditor’s Report

 

2


 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
STATEMENT OF INCOME AND MEMBER’S CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(RESTATED)

 

 

 

June 30, 2015

 

June 30, 2014

 

Revenue

 

 

 

 

 

Franchise Fees

 

$

261,000

 

$

609,960

 

Royalty Fees

 

640,463

 

639,947

 

Total Revenue

 

901,463

 

1,249,907

 

Expenses

 

 

 

 

 

Selling and Marketing

 

240,807

 

342,557

 

General and Administrative

 

745,052

 

897,719

 

Depreciation

 

1,845

 

2,528

 

Legal and Professional Fees

 

102,865

 

36,243

 

Operating Expenses

 

1,090,569

 

1,279,047

 

Net Income (Loss) from Operations

 

(189,106

)

(29,140

)

Other Income (Expense)

 

 

 

 

 

Other Income

 

16,652

 

26,000

 

Gain/Loss on Sale of Fixed Assets

 

—

 

—

 

Total Other Income (Expense)

 

16,652

 

26,000

 

Net Income (Loss)

 

(172,454

)

(3,140

)

Member’s Capital, Beginning of Year

 

312,139

 

25,464

 

Cumulative Effect of Change in Accounting Principle

 

(2,470,000

)

(1,996,000

)

Member’s Contributions

 

—

 

—

 

Member’s Distributions

 

—

 

(50,000

)

Member’s Capital, End of Year

 

$

(2,330,315

)

$

(2,023,676

)

 


 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(RESTATED)

 

 

 

June 30, 2015

 

June 30, 2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

Adjustments:

 

$

(172,454

)

$

(3,140

)

Depreciation

 

1,845

 

2,528

 

(Increase) decrease in accounts receivable

 

19,653

 

27,539

 

(Increase) decrease in other receivables

 

—

 

712

 

Increase (decrease) in accounts payable

 

(18,555

)

(54,096

)

Increase (decrease) in deferred revenue

 

159,000

 

525,000

 

Net cash provided (used) by operating activities

 

(10,511

)

498,543

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchase of computers and equipment

 

(2,692

)

(2,041

)

Sale of computers and equipment

 

—

 

—

 

Net cash used by investing activities

 

(2,692

)

(2,041

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Loan Receivables

 

(7,283

)

—

 

Proceeds from (repayments of) notes payable

 

—

 

(65,065

)

Contributions from Member

 

—

 

—

 

Distributions to Member

 

—

 

(50,000

)

Net cash provided (used) by financing activities

 

(7,283

)

(115,065

)

NET INCREASE (DECREASE) IN CASH

 

(20,486

)

381,437

 

CASH, BEGINNING

 

290,830

 

48,826

 

CASH, ENDING

 

$

270,344

 

$

430,263

 

RESTRICTED CASH, BEGINNING

 

$

11,431

 

$

43,344

 

Proceeds from Restricted Brand Building Fees

 

62,084

 

73,505

 

Use of Restricted Brand Building Fees

 

(23,752

)

(104,597

)

RESTRICTED CASH, ENDING

 

$

49,763

 

$

12,252

 

Cash paid for Interest Expense

 

$

—

 

$

—

 

Cash paid for Income Taxes

 

$

—

 

$

—

 

 


 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES

 

Organization

 

Flip Flop Shops Franchise Company, LLC (the “Company”) was established on August 24, 2007 in Delaware. The Company is a single member LLC engaged in offering and selling franchises throughout the United States and internationally for the operation of franchised stores focused on high-end flip flops and sandals with seasonal variety, including but not limited to, slippers and related accessories. The Company is owned by FFS Holdings, LLC which is owned by active and passive members.

 

The Company completed a uniform franchise offering circular and commenced selling franchises during 2007. There are four master franchise agreements: one master franchise agreement covers Canada, one covers South Africa, Zimbabwe, and Mauritius; one covers various jurisdictions in the Middle East, and one covers the Caribbean.

 

Basis of Presentation

 

The Company prepares its financial statements in accordance with generally accepted accounting principles. This basis of accounting involves the application of accrual accounting; consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.

 

These financial statements arc prepared in conformity with accounting principles generally accepted in the United States.

 

Cash

 

Cash consists of a business checking account maintained at one financial institution. The account is insured by the Federal Deposit Insurance Corpora tion (FDIC) up to $250,000.

 

The Company considers all cash in bank and investments in highly liquid debt instruments with maturities of three months or less to be cash equivalents.

 


 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1— ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)

 

Restricted Cash

 

The Company collects one half of one percent (0.5%) of the franchisees’ monthly gross revenue for brand building expenses. This money is maintained in a separate bank account from the Company’s general operating account and is disbursed only for brand building expenditures approved by the franchisor to maximize general public recognition and acceptance of the Licensed Marks for the benefit of the Flip Flop Shops system.

 

Accounts Receivable

 

Accounts receivable consist of amounts management expects to collect from franchisees for royalties and franchise fees, net of any allowance for uncollectible accounts. On a periodic basis, the Company evaluates its accounts receivable and when deemed necessary, establishes an allowance for doubtful accounts. The allowance is based on its perceived collectability of customer balances, history of collections and current credit conditions. For amounts that become uncollectible, the Company uses the allowance method to recognize bad debts. Accounts receivable as of June 30, 2015 was $44,277. The Company considers accounts receivable to be fully collectible. Accordingly, no allowance for doubtful accounts was required to be recorded at June 30, 2015.

 

Property and Equipment

 

Property and equipment arc carried at cost. For financial reporting purposes, property and equipment are depreciated using the straight-line method at rates based upon the following estimated useful lives:

 

Computers and Equipment

 

3 Years

Furniture and Fixtures

 

7 Years

 

Revenue Recognition

 

The Company derives its income from franchise fees and royalty agreements with the franchisees’ stores bearing the name Flip Flop Shops. Revenue from franchise fees is recognized as deferred revenue when the franchise agreement is executed. Franchise fee revenue is recognized in income when earned which is deemed to be when the franchise operations commence for individual franchises and over the life of the franchise agreement for master franchises

 

Royalties from individual franchisees are based upon a percentage of each franchisee’s sales and are recognized as franchise revenues as the fees are earned and become receivable from the franchisee.

 


 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1-ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)

 

Organizational Expense

 

The Company incurred various expenses during the formation of the Company. These expenses relate to the legal assistance in organizing franchise documents and the initial Uniform Franchise Offering Circular, currently referred to as the Franchise Disclosure Document.

 

Income Tax

 

The Company itself is not a taxpaying entity for purposes of federal and state income taxes. Federal and state income taxes of the Company are computed on the owner’s total income from all sources; accordingly; no provision for income taxes is made in these statements.

 

Advertising Costs

 

Advertising costs are expensed in the period in which they are incurred.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 


 

FLIP FLOP SHOPS FRANCHISE COMPANY, LLC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - MEMBER’S CAPITAL

 

The member initially contributed $1,000 cash for 100% equity and profit sharing interests. The member contributed additional cash equal to $100,000 in 2010. There were no contributions in 2014.

 

NOTE 3 - SUBSEQUENT EVENTS

 

On October 13, 2015, all of the issued and outstanding equity interests of the sole member of the Company, FFS Holdings, LLC, were acquired by Cherokee Inc. Upon consummation of the merger agreement, FFS Holdings, LLC became a wholly owned subsidiary of Cherokee Inc., a publicly-traded company. No other subsequent events outside of the normal scope of operations were noted through that date.

 

NOTE 4 — RELATED PARTIES

 

The Company is a single member LLC owned by FFS Holdings, LLC. FFS Holdings, LLC is owned by active and passive members, including FFS, Inc. One of the active members provides office space for himself along with storage space for company files and documents at no charge for rent or reimbursements for overhead. The other active members work from virtual offices also provided at no charge for rent or reimbursements for overhead.

 

The Company had a related party receivable as of June 30, 2015 of $86,081, respectively, due from active members of FFS Holdings, LLC, the majority of which represents federal income taxes paid by the Company on behalf of a member.

 

NOTE 5 - CONTINGENCIES

 

The Company is engaged in ongoing litigation which is common in the franchise industry.  The results of the ongoing litigation are not known at this time and according to Generally Accepted Auditing Standards no contingent liability is included in the financial statements.