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COMMITMENTS AND CONTINGENCIES
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6 Months Ended |
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Dec. 31, 2012
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| Commitments and Contingencies Disclosure [Abstract] | |
| COMMITMENTS AND CONTINGENCIES | NOTE 7. COMMITMENTS AND CONTINGENCIES
License agreements
In May 2012, the Company entered into a licensing agreement with three individuals (collectively the “Licensors”) acquiring the exclusive right to use the Licensors’ image in connection with the development, production, distribution, advertisement, promotion and sale of products and obtain certain ancillary services of the Licensors. The licensing agreement remains in effect through November 30, 2016. The Company has the option to extend the term of this agreement for an additional period of eighteen months.
During the term of the licensing agreement and as consideration for the grant of rights and license the Licensors’ image, the Company agreed to pay the Licensors depending on the product sold, a single digit royalty on all net wholesale sales of all products within the contract term. In addition the Company has agreed to pay a guaranteed minimum royalty payment of $4,686,125 or $5,206,900 depending on launch date of various products in accordance with the following schedule, but subject to adjustments:
• Contract period one: $1,000,000 • Contract period two: $925,000 or $962,000 • Contract period three: $1,188,625 or $1,394,900 • Contract period four: $1,572,500 or $1,850,000
In addition to the royalty payment, guaranteed minimum royalty payment, and the Licensor Warrants (described in Note 6) the Company has granted the Licensors the right and option to exchange the exit fee for 10,000,000 shares of restricted common stock or warrants, which shall provide for cashless exercise, to purchase 10,000,000 shares of the common stock of the Company. On May 30, 2012, the Licensors exercised their option and agreed to exchange their exit fee for a warrant to purchase 10,000,000 shares of common stock. The warrant is exercisable for a period of ten years from the grant date.
As of December 31, 2012, the Company has paid the Licensors $1,000,000 as a non-refundable advance payment for contract period one. These fees are amortized ratably using the straight-line method over contract period one (see Note 3).
In July 2012, the Company entered into a second license agreement with an individual (“Second Licensor”) acquiring the exclusive right to use the Licensor’s image in connection with the development, production, distribution, advertisement, promotion and sale of products and obtain certain ancillary services of the Licensor. The licensing agreement remains in effect through February 29, 2016.
During the term of the licensing agreement and as consideration for the grant of rights and license the Licensor’s image, the Company agreed to pay the Licensor depending on the product sold, a royalty rate on all net sales of all products within the contract term.
In addition the Company agreed to pay a guaranteed minimum royalty payment of $600,000 depending on launch date of various products in accordance with the following schedule, but subject to adjustments:
· Contract period one: $100,000 · Contract period two: $225,000 · Contract period three: $275,000
As of December 31, 2012, the Company has paid the Second Licensor $50,000 as a non-refundable advance payment for contract period one. These fees are amortized ratably using the straight-line method over contract period one (see Note 3).
Operating Lease
On May 8, 2012, the Company executed a one-year operating lease for its corporate office commencing on May 15, 2012 at a monthly rent payment of $1,785 per month. Total rent expense related to this operating lease was $5,355 and $10,710 for the quarter and six months ended December 31, 2012, respectively, and is included in general and administrative expenses in accompanying statement of operations.
Litigation
In the normal course of business, the Company may become involved in various legal proceedings. Except as described below, management knows of no pending or threatened legal proceeding to which they are or will be a party and which, if successful, might result in a material adverse change in our business, properties or financial condition.
On November 19, 2012, an action entitled Chroma Makeup Studio, LLC. v. BOLDFACE Group, Inc. and BOLDFACE Licensing + Branding was filed in the United States District Court for the Central District of California, Western Division. Chroma Makeup Studio, LLC (“Chroma”) asserted that (a) BGI’s and BLB’s “Khroma Beauty by Kourtney, Kim and Khloé” mark (the “Mark”) and related commercial conduct infringes Lanham Act and as a result Chroma has suffered damages and (b) the Company and BLB’s commercial conduct with respect to its Mark constitutes unfair business practice and constitutes unfair competition under applicable California law due to Chroma’s alleged ownership of the Chroma and Chroma Makeup Studio trademarks. Accordingly, among other things, Chroma requested for the court to (a) enter judgment in favor of Chroma in an amount to be proven at trial, (ii) enjoin the Company and BLB and their officers, agents, directors, employees and affiliates from using the Mark and/or any other brand, symbol, trademark, product design or packaging which is confusingly similar to Chroma’s Chroma marks, and (iii) award Chroma its costs and attorneys’ fees incurred in this action. Chroma also filed a motion for preliminary injunction on December 5, 2012 to enjoin our use of the Mark, including the promotion and sale of products offered under such mark during the pendency of the litigation. After the filing of the Company’s opposition to the motion, Chroma’s filing of a reply in support of the motion and the court’s hearing on the motion on January 14, 2013, the court issued an order on January 23, 2013 denying Chroma’s motion for a preliminary injunction. Prior to the hearing on the motion, the court set a mandatory prehearing conference for March 18, 2013 where the court is expected to review and set the proposed discovery and pretrial plan for the case, as well as address any issues related to the parties’ pretrial preparation or possible resolution. The Company intends to defend itself against all of the allegations in the complaint.
On November 30, 2012, the Company filed a complaint for a declaratory judgment in the United States District Court for the Central District of California, Western Division entitled BOLDFACE Licensing + Branding v. By Lee Tillett, Inc. (“Tillett”). BLB’s complaint requests a declaration from the court that (1) BLB’s use of the KHROMA term, including the Khroma Beauty marks does not infringe on Tillett’s rights in its Kroma trademark, and (2) BLB’s two pending trademark applications for Khroma Beauty marks should be allowed to register with the USPTO. On January 9, 2013, Tillett filed an answer and counterclaim against BLB and the Company alleging that the Kroma mark and Khroma Beauty marks are confusingly similar and consumers will mistakenly believe that Tillett’s products are associated with or sponsored by the Company, BLB and their licensors. Among other things, Tillett requested for the court to deny BLB’s request for declaratory judgment, for permanent injunctive relief preventing us using the Khroma mark or any derivation thereof utilizing the Kroma mark in connection with cosmetics goods and services and for an award of unspecified damages (including punitive damages). In addition the Company and BLB, Tillett's counterclaims were also made against Kimsaprincess Inc., 2Die4Kourt Inc., Khlomoney Inc., and individuals Kim Kardashian, Kourtney Kardashian, and Khloe Kardashian (collectively, the “Kardashian Parties”). On January 23, 2013, the parties filed a stipulated agreement extending the Company’s and the Kardashian Parties’ deadline to respond to the counterclaims, now currently set for February 11, 2013, which the Company filed. The court also set a mandatory prehearing conference for March 25, 2013, where the court is expected to review and set the proposed discovery and pretrial plan for the case, as well as to address any issues related to the parties’ pretrial preparation or possible resolution. The Company intends to proceed with its complaint against Tillett and defend itself against all of the allegations in the counterclaim.
Registration Agreement
As of December 31, 2012, the Company had 300,000,000 shares of common stock authorized. As of December 31, 2012, the Company had 88,444,036 shares issued and outstanding.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Common stockholders are not entitled to receive dividends unless declared by the Company's Board of Directors.
PPO Offering Registration Rights In connection with the Merger and Offering (as defined in Notes 1 and 6), the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with each of the investors participating in the Offering. Under the Registration Rights Agreement, as amended, the Company committed to file a registration statement on Form S-1, or other applicable form (the “Registration Statement”), covering the resale of (i) the Company’s common stock underlying the Bridge Warrants (as defined in Note 6), (ii) common stock underlying the PPO Units (as defined in Note 6) sold or to be sold in the Offering, and (iii) common stock underlying the Investor Warrants (as defined in Note 6) (including securities issued in the Offering as a result of the conversion of the Bridge Notes (as defined in Note 6), but not common stock that is issuable upon exercise of the broker warrants issued to the placement agent for the Offering) (collectively, the “Registrable Securities”) no later than October 29, 2012 (the “Filing Date”), and to use commercially reasonable efforts to cause the Registration Statement to become effective no later than 150 days after it is filed (the “Effectiveness Date”). As of the date of this Quarterly Report the Company has not filed the Registration Statement with the SEC and anticipates filing the Registration Statement during the quarter ended March 31, 2013. The Company agreed to use its commercially reasonable efforts to maintain the effectiveness of the Registration Statement for at least one year from the date the Registration Statement is declared effective by the SEC or for such shorter period ending on the earlier to occur of (i) until Rule 144 of the Securities Act is available to investors with respect to all of their Registrable Securities or (ii) the date when all of the Registrable Securities registered thereunder shall have been sold.
The Company will be liable for liquidated damages at the rate of 1% of the purchase price per PPO Unit paid by each investor for the Registrable Securities then held by such investor for each full period of 30 days for which the Company fails to file the registration statement by the Filing Date or if the Company fails to have the Registration Statement declared effective by the Effectiveness Date (each, a “Registration Event”), until such failure is cured. The payment amount shall be prorated for partial 30-day periods. The aggregate penalty accrued with respect to each investor may not exceed 10% of the original purchase price paid by such investor. However, if a Registration Event occurs (or is continuing) on a date more than one year after July 12, 2012 or the final closing of the Offering, liquidated damages shall be paid only with respect to that portion of the Registrable Securities that cannot then be immediately resold in reliance on Rule 144. If the Company fails to pay any partial liquidated damages or refund pursuant in full within seven days after the date payable, the Company will pay interest thereon at a rate of 8% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the holder of the PPO Unit.
In December 2006, the FASB issued guidance on accounting for registration payment arrangements, which addresses an issuer's accounting for registration payment arrangements. This guidance specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB guidance on accounting for contingencies. This guidance further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with US GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. The Company applied the recognition and measurement provisions of the FASB guidance to the registration rights associated with the Registration Rights Agreement. As of December 31, 2012, the Company has recorded $100,000 in General and administrative expenses on the accompanying statement of operations associated with these registration rights.
Convertible Note Offering Registration Rights In connection with the Convertible Note offering (as defined in Note 5), the Company also entered into a registration rights agreement with the Investors (the “Convertible Note Registration Rights Agreement”). Under the terms of the Convertible Note Registration Rights Agreement, the Company committed to file a registration statement on Form S-1, or other applicable form, covering the resale of (i) the Common Stock underlying the Warrants and (ii) the Common Stock underlying the Notes (collectively, the “Convertible Note Registrable Securities”) within 45 days from the final closing of the Offering (the “Filing Date”), and to use its commercially reasonable efforts to cause the registration statement to become effective no later than 90 days after it is filed (the “Effectiveness Date”). The registration statement will also cover the shares of Common Stock underlying the Broker Warrants.
The Company agreed to use its commercially reasonable efforts to maintain the effectiveness of the registration statement for at least one year from the date the registration statement is declared effective by the SEC or for such shorter period ending on the earlier to occur of (i) until Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), is available to Investors with respect to all of their Convertible Note Registrable Securities or (ii) the date when all of the Convertible Note Registrable Securities registered thereunder shall have been sold. The Company will be liable for monetary penalties equal to 0.5% of the purchase price per Unit paid by such Investor for the Convertible Note Registrable Securities then held by each investor for each full period of period of 30 days if the Company fails to file the registration statement by the Filing Date or if the Company fails to use its reasonable efforts to have the registration statement declared effective by the Effectiveness Date until such failure is cured. The payment amount shall be prorated for partial 30 day periods. The maximum aggregate amount of payments to be made by the Company as the result of such failures, whether by reason of a filing deadline failure, effectiveness deadline failure or any combination thereof, shall be an amount equal to 6% of the purchase price per Unit paid by such Investor for the Convertible Note Registrable Securities held by such Investor at the time of the first occurrence of such failure to file with, or to have the registration statement be declared effective by, the United States Securities and Exchange Commission (the “SEC”).
Moreover, no such payments shall be due and payable with respect to any Convertible Note Registrable Securities that the Company is unable to register due to limits imposed by the SEC’s interpretation of Rule 415 under the Securities Act. The holders of any Convertible Note Registrable Securities removed from the registration statement as the result of a Rule 415 comment or other comment from the SEC shall have “piggyback” registration rights for the shares of Common Stock underlying the Convertible Note Registrable Securities, until such shares can be sold without limitation under Rule 144, with respect to any registration statement filed by the Company following the effectiveness of the registration statement which would permit the inclusion of these shares. As of the date of this Quarterly Report the Company has not filed the Registration Statement with the SEC and anticipates filing the Registration Statement during the quarter ended March 31, 2013. As of December 31, 2012, the Company has not recorded any liability associated with these registration rights. |