UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549




FORM
10-K










[X]           Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
fiscal year ended December 31, 2009




[   ]           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period from __________________ to
______________________.




Commission
file number 0-16075




PEOPLE’S
LIBERATION, INC.


(Exact
name of registrant as specified in its charter)






Delaware
              (State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            86-0449546
              (I.R.S.
      Employer
              Identification
      No.)








1212
S. Flower Street, 5th
Floor


Los
Angeles, CA 90015


(Address
of Principal Executive Offices)(Zip Code)




(213)
745-2123


(Registrant’s
Telephone Number, Including Area Code)




Securities
registered pursuant to Section 12(b) of the Act:


None




Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, par value $.001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes oNo x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes oNo x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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
o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).      Yes o     
No x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) 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.




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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer o
              (Do not check if smaller reporting company)
            Smaller
      reporting company x













Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)      Yes o     
No x





The
aggregate market value of the registrant's common stock held by non-affiliates
of the registrant on June 30, 2009, the last business day of the registrant's
most recently completed second fiscal quarter was $2,870,570 (based on the
closing sales price of the registrant's common stock on that date).





At March
29, 2010, the registrant had 36,002,563 shares of Common Stock, $0.001 par
value, issued and outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE


None








PEOPLE’S
LIBERATION, INC.




INDEX
TO FORM 10-K




PART
      I
            
            
            PageItem 1.
            Business
            
            3Item 1A.
            Risk Factors
            
            9Item 1B.
            Unresolved Staff Comments
            
            16Item 2.
            Properties
            
            16Item 3.
            Legal Proceedings
            
            16Item 4.
            (Removed and Reserved)
            
            18PART
      IIItem 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            
            19Item 7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            19Item 7A.
            Quantitative and Qualitative Disclosures about Market
      Risk
            
            31Item 8.
            Financial Statements and Supplementary
      Data
            
            32Item 9.
            Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            
            71Item 9A(T).
            Controls and Procedures
            
            71Item 9B.
            Other Information
            
            72PART
      IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            
            72Item 11.
            Executive Compensation
            
            75Item 12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            
            83Item 13.
            Certain Relationships and Related
      Transactions, and Director Independence
            
            86Item 14.
            Principal Accounting Fees and
      Services
            
            87PART
      IVItem 15.
            Exhibits, Financial Statement
    Schedules
            
            89







1







PART
I




This 2009
Annual Report on Form 10-K, including the sections entitled “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business,” contains “forward-looking statements” that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of
resources.  These forward-looking statements include, without
limitation, statements regarding: proposed new services; our expectations
concerning litigation, regulatory developments or other matters; statements
concerning projections, predictions, expectations, estimates or forecasts for
our business, financial and operating results and future economic performance;
statements of management’s goals and objectives; and other similar expressions
concerning matters that are not historical facts.  Words such as
“may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,”
“expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and
“estimates,” and similar expressions, as well as statements in future tense,
identify forward-looking statements.




Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved.  Forward-looking
statements are based on information available at the time they are made and/or
management’s good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the
forward-looking statements.  Important factors that could cause these
differences include, but are not limited to:




·
            our
      failure to implement our business plan within the time period we
      originally planned to accomplish;




·
            the
      risks of expanding the number of products we offer, as well as the number
      of brands we market and distribute;




·
            our
      ability to locate manufacturers who can timely manufacture our
      products;




·
            our
      ability to enter into distribution agreements both in the United States
      and internationally;




·
            the
      demand for high-end jeans and other casual apparel in the United States
      and internationally;




·
            the
      outcome of legal proceedings and related costs of legal
      counsel;




·
            a
      decline in the retail sales
environment;




·
            a
      decrease in the availability of financial resources at favorable
      terms;




·
            industry
      competition;




·
            general
      economic conditions; and




·
            other
      factors discussed under the headings “Risk Factors,” “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
      and “Description of Business.”




Forward-looking
statements speak only as of the date they are made.  You should not
put undue reliance on any forward-looking statements.  We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities
laws.  If we do update one or more forward-looking statements, no
inference should be drawn that we will make additional updates with respect to
those or other forward-looking statements.






2




Item 1. Business





Corporate
Overview




We
design, market and sell high-end casual apparel under the brand names “People’s
Liberation,” “William Rast” and, in the United States, “J.
Lindeberg.”  The majority of the merchandise we offer consists of
premium denim, knits, wovens, leather goods, golf wear and outerwear for men and
women.  In the United States, we distribute our merchandise to better
specialty stores, boutiques and department stores, such as Nordstrom,
Bloomingdales, Saks Fifth Avenue and Neiman Marcus, and online at various
websites including williamrast.com, jlindebergusa.com and
Zappos.com.  We also market and sell our J. Lindeberg branded
collection and golf apparel through our retail stores in New York City and Los
Angeles, and J. Lindeberg golf wear to green grass golf stores and boutiques in
the United States.  William Rast products are also sold in our three
retail stores located in Los Angeles, San Jose and Cabazon,
California.  Internationally, in select countries, we sell our William
Rast branded apparel products directly and through distributors to better
department stores and boutiques throughout the world.




We
commenced our William Rast clothing line in May 2005.  Our William
Rast clothing line is a collaboration with Justin Timberlake and his childhood
friend, Trace Ayala.




We began
distributing J. Lindeberg branded apparel products in the United States on an
exclusive basis beginning July 2008 in collaboration with J. Lindeberg AB of
Sweden.  In addition to being sold in the United States through our
subsidiary, J. Lindeberg USA, LLC, J. Lindeberg branded high-end men’s fashion
and premium golf apparel is marketed and sold by J. Lindeberg AB
worldwide.




We
commenced our People’s Liberation business in July 2004.  On December
16, 2008, we entered into an agreement with Charlotte Russe Holding, Inc. and
its wholly-owned subsidiary, Charlotte Russe Merchandising, Inc. (collectively,
“Charlotte Russe”) pursuant to which we agreed to exclusively sell to Charlotte
Russe, in North America and Central America, People’s Liberation® branded
apparel, apparel accessories, eyewear, jewelry, watches, cosmetics and
fragrances, and to provide Charlotte Russe with marketing and branding support
for People’s Liberation branded apparel and apparel accessories.  We
ceased to sell People’s Liberation branded merchandise in North America and
Central America to parties other than Charlotte Russe effective April 30,
2009.  Product sales to Charlotte Russe under the terms of this
agreement began shipping in June 2009.  We are in litigation with
Charlotte Russe in relation to our distribution agreement.  See the
discussion under Note 11 to the financial statements as well as the
discussion below under Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations under the heading “Recent Developments” for
further information relating to our distribution agreement with Charlotte Russe
and the pending litigation.




We are
headquartered in Los Angeles, California, maintain showrooms in New York, Los
Angeles and Atlanta, and have sales representatives in Dallas and
Chicago.




Structure
of Operations




Our
wholly-owned subsidiary Versatile Entertainment, Inc. conducts our People’s
Liberation brand business.  Our William Rast brand business is
conducted through our wholly-owned subsidiary Bella Rose,
LLC.  William Rast Sourcing, LLC and William Rast Licensing, LLC are
consolidated under Bella Rose and are each owned 50% by Bella Rose and 50% by
William Rast Enterprises, LLC, an entity owned in part by Justin
Timberlake.  William Rast Retail, LLC, a California limited liability
company, was formed on August 26, 2009 and is a wholly-owned subsidiary of
William Rast Sourcing.  William Rast Retail was formed to operate our
William Rast retail stores.  Our J. Lindeberg brand business is
conducted through Bella Rose.  J. Lindeberg USA, LLC is consolidated
under Bella Rose and is owned 50% by Bella Rose and 50% by J. Lindeberg USA,
Corp. an entity owned by J. Lindeberg AB, a Swedish
corporation.   J. Lindeberg USA Retail, LLC, a California limited
liability company, was formed on August 21, 2009 and is a wholly-owned
subsidiary of J. Lindeberg USA.     J. Lindeberg USA
Retail was formed to operate our J. Lindeberg retail stores.






3




Apparel Industry
Background





We
operate exclusively in the premium contemporary segment of the apparel industry,
which is characterized by lower volume sales of higher margin
products.  Our future success depends in part on the continued demand
by consumers for high-end casual apparel, which in recent years has contributed
to a proliferation of brands such as True Religion, Seven For All Mankind,
Diesel, Guess, J Brand and Joe’s Jeans.  We anticipate that the
premium contemporary segment of the apparel industry will become increasingly
competitive because of the consumer demand for apparel in this segment, as well
as the high retail prices consumers are willing to spend for such
goods.  An increase in the number of brands competing in the premium
contemporary segment of the apparel industry could result in reduced shelf space
for our brands at better department stores and boutiques, our primary
customers.




Customers




We market
our products to better department stores and boutiques that cater to fashion
forward clientele.  Our products are sold to a limited number of
better department stores and boutiques to maintain our premium brand
status.  In the United States, our products are sold in a number of
Nordstrom and Bloomingdales store locations.  We plan to continue to
develop our existing relationships with our customers, and expand our domestic
sales and distribution to better department stores as the visibility of our
brands increase in the marketplace.  Currently, in addition to
Nordstrom and Bloomingdales, we sell to Saks Fifth Avenue and Neiman Marcus, as
well as hundreds of other boutiques and specialty retailers.  We also
sell our William Rast and J. Lindeberg brands online at various websites
including williamrast.com, jlindebergusa.com and Zappos.com.  We
market and sell our J. Lindeberg branded collection and golf apparel through our
retail stores in New York City and Los Angeles,and we sell J. Lindeberg
golf wear to green grass golf stores and boutiques in the United States.William Rast products
are sold in three William Rast branded retail stores located in Los Angeles, San
Jose and Cabazon, California.Internationally, in
select countries, we sell our William Rast products directly and through
distributors to better department stores and boutiques throughout the
world.We intend to
expand our international distribution of our William Rast brand into additional
territories and increase our brand penetration in the countries in which our
apparel is currently being sold.




In
November 2009, we launched our retail expansion plan for our William Rast and J.
Lindeberg brands with the opening of two new full-price William Rast retail
stores at the Westfield Century City Shopping Mall in Los Angeles, California,
and the Westfield Valley Fair Shopping Mall in San Jose,
California.  Additionally, we opened our first William Rast outlet
store at the Desert Hills Premium Outlets in Cabazon, California.  In
the third quarter of 2010, we plan to open a William Rast full price retail
store and a J. Lindeberg full price retail store in Miami,
Florida.  These store openings are part of our retail expansion plan
which contemplates the roll-out of approximately forty retail stores in major
metropolitan locations over the next several years.  We anticipate
opening between three and five retail stores in 2010, including the two retail
stores in Miami.  In 2011, we anticipate opening between six and
twelve retail stores.  We believe that the retail stores will enhance
our net sales and gross profit and the outlet store will allow us to sell our
overstock or slow moving items at higher profit margins.




In
December 2009, we signed a binding term sheet for a new multi-year licensing
agreement with Viva International Group to design, produce and globally
distribute William Rast Eyewear and William Rast Racing Eyewear focusing on
styles for both the premium and sportswear categories for men and women. Viva is
a worldwide leading eyewear company, representing premium and luxury brands
including, GUESS, SKECHERS®, Tommy Hilfiger, Escada and Ermenegildo Zegna. The
William Rast branded eyewear collections, which will include sunglasses and
prescription eyewear, will debut in 2011 and will be available in William Rast’s
branded stores and in upscale department stores and specialty retailers
worldwide.




Beginning
in June 2009, we exclusively sold our People’s Liberation branded apparel and
apparel accessories to Charlotte Russe in North America and Central America and
provided Charlotte Russe with marketing and branding support for People’s
Liberation branded apparel.  We are in litigation with Charlotte
Russe in relation to our distribution agreement.  See the discussion
under Note 11 to the financial statements as well as the discussion below
under Item 7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations under the heading “Recent Developments” for further
information relating to our distribution agreement with Charlotte Russe and the
pending litigation.






4





Our
Products




Our
principal products consist of high-end casual apparel under the brand names
“William Rast,”  “People’s Liberation” and, in the United States, “J.
Lindeberg.”  The majority of the merchandise we offer consists of
premium denim, knits, wovens, leather goods, golf wear and outerwear for men and
women.  Our principal products are designed, manufactured, marketed,
and distributed under our “William Rast” and “People’s Liberation” labels and we
market and distribute under the J. Lindeberg label in the United States,
products that are designed and manufactured by J. Lindeberg AB of
Sweden.  Our William Rast brand is a collection of denim, knits,
wovens, leather goods and outerwear for both men and women and our J. Lindeberg
brand primarily consists of golf wear and collection apparel for
men.  Our People’s Liberation brand, under our exclusive distribution
agreement with Charlotte Russe, primarily includes denim and knits for
women.  As a result of the fit, quality, styles and the marketing and
branding of our products, we believe that our products will continue to command
premium prices in the marketplace.




Our denim
is made from high quality fabrics milled primarily in the United States, Japan,
Italy, Turkey and Mexico, and processed with various treatments, washes and
finishes, including light, medium, dark, and destroyed washes, some of which
include studs, stones, and embroidered pockets as embellishments.  We
introduce new versions of our major styles each season in different colors,
washes and finishes.




Our knits
and woven products consist of men’s and women’s tops and bottoms.  We
sell knit and woven products which consist primarily of cotton and silk
fabrications.  Similar to our denim products, we introduce new
versions, bodies, styles, colors and graphics of our knit and woven products
each season.  We anticipate expanding our products and fabrications to
include other fashion forward materials.




Our
leather goods consist primarily of men’s and women’s jackets and
outerwear.  These goods are manufactured using high-quality leather
and occasionally include studs, stones and other embellishments.




An
in-house team of designers is responsible for the design and development of our
People’s Liberation and William Rast denim product lines.  We do not
currently have a formal research and development effort.  Our design
team and consultants, together with our in-house sales team and our J. Lindeberg
outside sales contractors, shop stores, travel and speak to market and trend
setters to help generate new product ideas.




Sales
and Distribution




US
Sales and Distribution




We sell
our products through our own sales force based in Los Angeles, New York,
Atlanta, Chicago and Dallas.  Additionally, we operate showrooms in
Los Angeles, New York and Atlanta with dedicated salaried and commissioned sales
staff.  We also employ customer service representatives who are
assigned to key customers and provide in-house customer service
support.  We ship products to and invoice our United States customers
directly from warehouse facilities located in or around Los Angeles,
California.  Under agreements with third-party warehouses, we
outsource all of our finished good shipping, receiving and warehouse
functions.






5




Currently,
our products are sold in the United States to department stores and
boutiques.  While we do not depend on any individual department store
to sell our products, for the year ended December 31, 2009, approximately 36.6%
of our sales were to two customers.  For the year ended December 31,
2008, approximately 28.9% of our sales were to one customer.




In June
2009, we began to exclusively sell our People’s Liberation branded apparel and
apparel accessories to Charlotte Russe in North America and Central America and
provide Charlotte Russe with marketing and branding support for People’s
Liberation branded apparel.  We are in litigation with Charlotte Russe
in relation to our exclusive distribution agreement and, as a result, there have
been no sales of People’s Liberation branded apparel to Charlotte Russe
subsequent to October 2009.




International
Sales and Distribution




Our
William Rast branded apparel products are also sold internationally in select
countries directly and through agents and distributors to better department
stores and boutiques.  Our distributors purchase products at a
discount for resale in their respective territories and market, sell, warehouse
and ship William Rast branded apparel products at their expense.  Our
agents are paid a commission on net sales of our William Rast
products.  We anticipate growing our international distribution
channels across new territories.




Brand
Development




Our
William Rast and J. Lindeberg brands have acquired consumer recognition in the
high-end fashion denim, knits, golf wear and casual wear markets.  We
plan to continue building and expanding this recognition by target marketing our
lines to fashion conscious consumers who want to wear and be seen in the latest,
trendiest jeans and other apparel.  To facilitate this objective, we
plan to continue to limit distribution to exclusive boutiques, major retailers
and our own retail stores.  We also plan to use celebrities as a
marketing catalyst to continue to bring attention and credibility to our
brands.  Currently, we leverage the popular public images of Justin
Timberlake in the promotion of our William Rast apparel line and Camilo Villegas
to promote our J. Lindeberg apparel line.




In
December 2009, we signed a binding term sheet for a new multi-year licensing
agreement with Viva International Group to design, produce and globally
distribute William Rast Eyewear and William Rast Racing Eyewear focusing on
styles for both the premium and sportswear categories for men and women. Viva is
a worldwide leading eyewear company, representing premium and luxury brands
including, GUESS, SKECHERS®, Tommy Hilfiger, Escada and Ermenegildo Zegna. The
William Rast branded eyewear collections, which will include sunglasses and
prescription eyewear, will debut in 2011 and will be available in William Rast’s
branded stores and in upscale department stores and specialty retailers
worldwide.  We anticipate entering into additional licensing
agreements for the sale of William Rast branded products within the next several
years.




We
anticipate that our internal growth will be driven by (1) expansion of our
product lines by introducing new styles and categories of apparel products, (2)
entering into license agreements for the manufacture and distribution of new
apparel categories, accessories, fragrances and other products, (3) expansion of
our wholesale distribution, both domestically and internationally through
high-end retailers, and (4) expansion of our retail store
penetration.  Our goal is to employ a multi-brand strategy which
diversifies the fashion and other risks associated with reliance on any single
brand.




Manufacturing
and Supply




We use
third party contract manufacturers and full package suppliers to produce our
William Rast denim finished goods from facilities located primarily in Mexico
and Los Angeles, California.  For the majority of our William Rast
knits and other non-denim products, we source these goods from international
suppliers primarily in Asia.  We sourced our People’s Liberation denim
products sold to Charlotte Russe under our exclusive distribution agreement from
international suppliers of full package goods
primarily located in Mexico.  We sourced our People’s Liberation knit
products sold to Charlotte Russe from international suppliers of full package
goods located primarily in Asia and India.  We currently purchase all
of our J. Lindeberg branded apparel products from J. Lindeberg AB of Sweden, the
beneficial owner of 50% of our subsidiary, J. Lindeberg USA, LLC.  We
intend to continue our transition to international suppliers of full package
denim finished goods which will enable us to remain competitive and improve
margins.






6




We may be
able to realize additional cost savings in product manufacturing due to our
strong relationships with a diverse group of U.S. and international
manufacturers established by our management team.  We do not rely on
any one manufacturer and manufacturing capacity is readily available to meet our
current and planned needs.  We do not currently have any long-term
agreements in place for the supply of fabric, thread or other raw
materials.  Fabric, thread and other raw materials are available from
a large number of suppliers worldwide.  Although we do not depend on
any one supplier, for the year ended December 31, 2009, three suppliers provided
for 59.4% of our total combined purchases for the year.  For the year
ended December 31, 2008, three suppliers provided for 34.5% of our total
combined purchases for the year.




Competition




The
premium denim, knits and golf wear industries are intensely competitive and
fragmented, and will continue to become more competitive and fragmented as a
result of the high margins that are achievable in the industries.  Our
competitors include other small companies like ours, as well as companies that
are much larger, with superior economic, marketing, distribution, and
manufacturing capabilities.  Our competitors in the denim and knit
markets include brands such as True Religion, Seven For All Mankind, Diesel,
Guess, J Brand and Joe’s Jeans, as well as other premium denim
brands.




We
compete in our ability to create innovative concepts and designs, develop
products with extraordinary fit, and produce high quality fabrics and finishes,
treatments and embellishments.  At a retail price point of $150 to
$280 for denim jeans, $20 to $125 for knits and other apparel items, and $60 to
$1,000 for collection products, we believe that we offer competitively priced
products in our target markets.






7





Trademarks
and other Intellectual Property




We have
filed trademark applications for the following marks in the following
territories:




Name of Mark
            TerritoryPeople’s
      Liberation
            USA,
      European Community, Japan, Mexico, Hong Kong, Israel, Russia, Taiwan,
      Singapore, Turkey, Australia and Canada.William
      Rast
            USA,
      European Community, Japan, Mexico, People’s Republic of China, Hong Kong,
      Israel, Russia, Taiwan, Singapore, Turkey, Canada, Australia, Republic of
      Korea, Croatia and United Arab Emirates, Brazil, India, South
      Africa.William
      Rast & Design
            USA,
      European Community and Japan.Rising
      Star
            USA,
      European Community, Japan, Mexico, Republic of Korea, Hong Kong,
      Israel,  Russia, Taiwan, Singapore, Turkey, Australia and
      Canada.Star
      Pocket
            USA,
      Japan, Mexico, Republic of Korea, Israel, Russia, Singapore, Turkey,
      Australia and Canada.The
      Dub
            USA,
      European Community, Japan, Mexico, People’s Republic of China, Republic of
      Korea, Russia, Canada, Croatia and United Arab Emirates, Australia,
      Brazil, Hong Kong, Singapore, Taiwan.Mummy
      Star
            USA,
      Mexico, Canada.People’s
      Liberation & Design (Mummy Star)
            USA,
      Mexico, Canada, Japan.


We plan
to continue to expand our brand names and our proprietary trademarks and designs
worldwide.




Government
Regulation and Supervision




Our
operations are subject to the effects of international treaties and regulations
such as the North American Free Trade Agreement (NAFTA).  We are also
subject to the effects of international trade agreements and embargoes by
entities such as the World Trade Organization.  Generally, these
international trade agreements benefit our business rather than burden it
because they tend to reduce trade quotas, duties, taxes and similar
impositions.  However, these trade agreements may also impose
restrictions that could have an adverse impact on our business, by limiting the
countries from whom we can purchase our fabric or other component materials, or
limiting the countries where we might market and sell our products.




Labeling
and advertising of our products is subject to regulation by the Federal Trade
Commission.  We believe that we are in compliance with these
regulations.






8


Employees




As of
December 31, 2009, we had a total of 71 full time employees.  Our full
time employees consist of four officers, Colin Dyne, our Chief Executive
Officer, Thomas Nields, our Chief Operating Officer, Darryn Barber, our
President and Chief Financial Officer and Andrea Sobel, Executive Vice President
of Branding and Licensing.  Our production and design teams include 18
employees consisting of production managers as well as pattern makers, technical
designers and product designers.  Our production and design teams are
responsible for the design, development, and preparation of sample
products.  Additionally, we have 49 employees who handle retail and
wholesale sales, marketing, customer service, accounting and administration
functions.




Item
1A.         Risk
Factors




Several
of the matters discussed in this document contain forward-looking statements
that involve risks and uncertainties.  Factors associated with the
forward-looking statements that could cause actual results to differ materially
from those projected or forecast are included in the statements
below.  In addition to other information contained in this report,
readers should carefully consider the following cautionary statements.




Risks
Related To Our Business




Our
growth and operating results could be materially, adversely affected if we are
unsuccessful in resolving a dispute that now exists regarding our rights under
our agreement with Charlotte Russe.




We are in
litigation with Charlotte Russe and its affiliates in relation to our exclusive
distribution agreement, which Charlotte Russe purported to terminate on October
26, 2009.  We have filed an action against Charlotte Russe in the
Superior Court of the State of California, County of Los Angeles, Central
District (Versatile
Entertainment, Inc. v. Charlotte Russe Merchandising, Inc., BC424674)
seeking a declaratory judgment that the termination was invalid and alleging
other causes of action, including breach of contract by Charlotte
Russe.  We also filed an action against Advent International
Corporation and certain of its subsidiaries, and David Mussafer and Jenny J.
Ming in the Superior Court of the State of California, County of Los Angeles,
Central District (Versatile
Entertainment, Inc. v. Advent International Corporation, BC424675)
asserting one cause of action for intentional interference with a
contract.  Advent International Corporation, through its subsidiaries,
acquired Charlotte Russe in October 2009.  Charlotte Russe has served
a complaint against us in the Superior Court of the State of California, County
of Los Angeles, Central District (Charlotte Russe Holding, Inc. vs.
Versatile Entertainment, Inc., BC424734) asserting claims for rescission
of the distribution agreement, fraud, negligent misrepresentation, restitution
after rescission and breach of contract.




We
derived a significant portion of our revenues and operating cash flow from the
sale of People’s Liberation branded merchandise pursuant to the distribution
agreement.  In the first year of the contract, we received
approximately $5.5 million through December 31, 2009 as required by the
distribution agreement and we are owed $59.5 million in guaranteed minimum
payments over the remainder of the term of the agreement, which amount may
be reduced if Charlotte Russe elects to terminate the agreement early, beginning
July 2011 with an early termination fee.  As a result of Charlotte
Russe’s purported termination of the distribution agreement, Charlotte Russe
ceased to make their contractually obligated payments to us, which significantly
decreased our net sales and cash flows from operations of our People’s
Liberation business.  We also believe our results of operations and
financial condition could be negatively impacted if we are unable to collect
factored accounts receivable in the amount of approximately $575,000 related to
goods shipped to Charlotte Russe prior to the dispute and if we are unable to
reach a settlement in a manner acceptable to us or the ensuing litigation, which
is currently in its early stage, is not resolved in a manner favorable to
us.  Additionally, we may continue to incur significant legal fees in
our litigation with Charlotte Russe, and unless the cases are settled, we will
continue to incur additional expenses in increasing amounts as the cases move
toward trial.






9


We may require additional capital in
the future.




We may
not be able to fund our future growth or react to competitive pressures if we
lack sufficient funds. We are currently evaluating various financing strategies
to be used to expand our business and fund future growth, including the opening
of new retail stores.  We believe that our existing cash and cash
equivalents and anticipated cash flows from our operating activities and
pursuant to our factoring arrangements, including availability under our
inventory facilities, should be sufficient to fund our minimum working capital
and capital expenditure needs for the next twelve months.  The extent
of our future capital requirements will depend on many factors, including our
results of operations and our ability to mitigate the impact of Charlotte
Russe’s purported termination of our exclusive distribution agreement through
cost cutting and other measures.  We may also need to raise additional
capital if our working capital requirements or capital expenditures are greater
than we expect, or if we expand our business by acquiring or investing in
additional brands.  There can be no assurance that additional debt or
equity financing will be available on acceptable terms or at all. In addition,
any additional funding may result in significant dilution to existing
shareholders.




Our
J. Lindeberg clothing line is a collaboration with J. Lindeberg USA Corp, a
wholly-owned subsidiary of J. Lindeberg AB.  Should our relationship
with our partner deteriorate, our profitability may be negatively
impacted.




J.
Lindeberg USA, LLC, which is 50% owned by our wholly-owned subsidiary, Bella
Rose, and 50% owned by J. Lindeberg USA Corp, a wholly-owned subsidiary of J.
Lindeberg AB, has the exclusive rights to source, market, and distribute J.
LindebergTM branded apparel in the United States on an exclusive
basis.  We manage J. Lindeberg USA and will be required to contribute
up to a maximum of $1.5 million in working capital or related guaranties through
December 2010.  J. Lindeberg AB is required to make available to J.
Lindeberg USA for purchase all new collections of J. LindebergTM branded apparel,
and provide for the factory-direct purchase by J. Lindeberg USA of J. LindebergTM
branded apparel on terms no less favorable to J. Lindeberg USA then terms
received by J. Lindeberg AB or its affiliates for the same or substantially the
same merchandise.  In addition, the agreements establishing the
relationship between the parties provide for a license from J. Lindeberg AB to
J. Lindeberg USA of the J. LindebergTM mark and other related marks for use in
the United States on an exclusive basis for a period of 25 years.  In
the event that our relationship with J. Lindeberg AB deteriorates or if the
business operations of J. Lindeberg AB deteriorate, J. Lindeberg AB may be
unable to fulfill its contractual obligation to us, including providing us with
design, sourcing and timely product delivery.  If J. Lindeberg AB
fails to fulfill its contractual obligations to us, our sales and profitability
could be negatively impacted.




Our
William Rast business is a collaboration with William Rast Enterprises, LLC, an
entity owned in part by Justin Timberlake.  Should our relationship
with our partner deteriorate, our sales and profitability may be negatively
impacted.





Certain
of our consolidated subsidiaries that we manage have the exclusive rights to
manufacture clothing and accessories under the William Rast
tradename.  We share ownership of these subsidiaries with William Rast
Enterprises, LLC, an entity controlled by Justin Timberlake.  In the
event that our relationships with William Rast Enterprises and Justin Timberlake
deteriorate, our sales and profitability may be negatively
impacted.





Failure
to manage our growth and expansion could impair our business.




We
believe that we are poised for growth in 2010 for our William Rast and J.
Lindeberg brands.  No assurance can be given that we will be
successful in maintaining or increasing our sales in the future.  Any
future growth in sales of these brands will require additional working capital
and may place a significant strain on our management, management information
systems, inventory management, sourcing capability, distribution facilities and
receivables credit management.  Any disruption in our order
processing, sourcing or distribution systems could cause orders to be shipped
late, and under industry practices,
retailers generally can cancel orders or refuse to accept goods due to late
shipment.  Such cancellations and returns would result in a reduction
in revenue, increased administrative and shipping costs, further burden on our
distribution facilities and also adversely impact our relations with
retailers.






10





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
William Rast and J. Lindeberg branded retail stores and the availability of
suitable store locations on acceptable terms. Although we operated 5 branded
retail stores as of December 31, 2009, we historically have been primarily a
wholesaler. In the third quarter of 2010, we plan to open a William Rast full
price retail store and a J. Lindeberg full price retail store in Miami,
Florida.  These store openings are part of our retail expansion plan
which contemplates the roll-out of approximately forty retail stores in major
metropolitan locations over the next several years.  We anticipate
opening between three and five retail stores in 2010, including the two retail
stores in Miami.  In 2011, we anticipate opening between six and
twelve retail stores.  The success of this strategy is dependent upon,
among other factors, the identification of suitable markets and sites for new
store locations, the negotiation of acceptable lease terms, the hiring, training
and retention of competent sales personnel, and extent of capital expenditures,
if any, for these stores. We must also appropriately manage retail inventory
levels, install and operate effective retail systems, execute effective pricing
strategies and integrate our stores into our overall business mix. An increase
in the number of branded company-operated stores will place increased demands on
our operational, managerial and administrative resources and require us to
further develop our retailing skills and capabilities. These increased demands
could cause us to operate our business less effectively, which in turn could
cause deterioration in the financial performance of our existing stores and in
our more established wholesale businesses. The commitments associated with our
expansion will increase our operating expenses and may be costly to
terminate.  In addition, these investments may be difficult to
recapture if we decide to close a store or change our strategy.




We
operate in a seasonal business, and our failure to timely deliver products to
market will negatively impact our profitability.




The
apparel industry is a seasonal business in which our financial success is
largely determined by seasonal events such as the commencement of the school
year and holiday seasons.  In the event that we are unable to supply
our products to the marketplace in a timely manner as a consequence of
manufacturing delays, shipping delays, or other operational delays, our sales
and profitability will be negatively impacted.




Our
operating results may fluctuate significantly.




Management
expects that we will experience substantial variations in our net sales and
operating results from quarter to quarter.  We believe that the
factors which influence this variability of quarterly results
include:




-
            the
      timing of our introduction of new product
lines;


-
            the
      level of consumer acceptance of each new product
  line;


-
            general
      economic and industry conditions that affect consumer spending and
      retailer purchasing;


-
            the
      availability of manufacturing
capacity;


-
            the
      timing of trade shows;


-
            the
      product mix of customer orders;


-
            the
      return of defective merchandise;


-
            the
      timing of the placement or cancellation of customer
  orders;


-
            transportation
      delays;


-
            quotas
      and other regulatory matters;


-
            the
      lack of credit approval of our customers from our
  factor;


-
            the
      occurrence of charge backs in excess of reserves;
  and


-
            the
      timing of expenditures in anticipation of increased sales and actions of
      competitors.





11





As a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance.  It is
possible that in some future quarter or quarters, our operating results will be
below the expectations of securities analysts or investors.  In that
case, our stock price could fluctuate significantly or decline.




The
financial condition of our customers could affect our results of
operations.




Certain
retailers, including some of our customers, have experienced in the past, and
may experience in the future, financial difficulties, which increase the risk of
extending credit to such retailers and the risk that financial failure will
eliminate a customer entirely.  These retailers have attempted to
improve their own operating efficiencies by concentrating their purchasing power
among a narrowing group of vendors.  There can be no assurance that we
will remain a preferred vendor for our existing customers.  A decrease in
business from or loss of a major customer, such as the two customers that
accounted for approximately 36.6% of our net sales for the year ended December
31, 2009, one of which was Charlotte Russe, and the one customer that accounted
for 28.9% of our net sales for the year ended December 31, 2008, respectively,
could have a material adverse effect on the results of our
operations.  There can be no assurance that our factor will approve
the extension of credit to certain retail customers in the future.  If
a customer’s credit is not approved by the factor or sales to a customer exceed
the factor’s imposed limits, we could assume the collection risk on sales to the
customer.




Our
business is subject to risks associated with importing products.




A portion
of our import operations are subject to tariffs imposed on imported products and
quotas imposed by trade agreements.  In addition, the countries into
which our products are imported may from time to time impose additional new
duties, tariffs or other restrictions on their imports or adversely modify
existing restrictions.  Adverse changes in these import costs and
restrictions, or our suppliers’ failure to comply with customs or similar laws,
could harm our business.  We cannot assure that future trade
agreements will not provide our competitors with an advantage over us, or
increase our costs, either of which could have an adverse effect on our business
and financial condition.




Our
operations are also subject to the effects of international trade agreements and
regulations such as the North American Free Trade Agreement, and the activities
and regulations of the World Trade Organization.  Generally, these
trade agreements benefit our business by reducing or eliminating the duties
assessed on products or other materials manufactured in a particular
country.  However, trade agreements can also impose requirements that
adversely affect our business, such as limiting the countries from which we can
purchase raw materials and setting duties or restrictions on products that may
be imported into the United States from a particular country.




Our
ability to import raw materials in a timely and cost-effective manner may also
be affected by problems at ports or issues that otherwise affect transportation
and warehousing providers, such as labor disputes.  These problems
could require us to locate alternative ports or warehousing providers to avoid
disruption to our customers.  These alternatives may not be available
on short notice or could result in higher transit costs, which could have an
adverse impact on our business and financial condition.




Our
dependence on independent manufacturers and suppliers of raw materials reduces
our ability to control the manufacturing process, which could harm our sales,
reputation and overall profitability.




We depend
on full package suppliers, independent contract manufacturers and suppliers of
raw materials to secure a sufficient supply of raw materials and maintain
sufficient manufacturing and shipping
capacity in an environment characterized by declining prices, labor shortage,
continuing cost pressures and increased demands for product innovation and
speed-to-market.  This dependence could subject us to difficulty in
obtaining timely delivery of products of acceptable quality.  In
addition, a contractor’s failure to ship products to us in a timely manner or
failure to meet the required quality standards could cause us to miss the
delivery date requirements of our customers.  The failure to make
timely deliveries may cause our customers to cancel orders, refuse to accept
deliveries, impose non-compliance charges through invoice deductions or other
charge-backs, demand reduced prices or reduce future orders, any of which could
harm our sales, reputation and overall profitability.






12


For the
year ended December 31, 2009, three suppliers accounted for approximately 59
% of our consolidated purchases.  For the year ended December 31,
2008, three suppliers accounted for approximately 35% of our
purchases.  We do not have long-term contracts with any of our
suppliers, and any of these suppliers may unilaterally terminate their
relationship with us at any time.  While management believes that
there exists an adequate amount of suppliers to provide products and services to
us, to the extent that we are not able to secure or maintain relationships with
suppliers that are able to fulfill our requirements, our business would be
harmed.




We do not
control our suppliers or their labor practices.  The violation of
federal, state or foreign labor laws by one of our suppliers could subject us to
fines and result in our goods that are manufactured in violation of such laws
being seized or their sale in interstate commerce being
prohibited.  To date, we have not been subject to any sanctions that,
individually or in the aggregate, have had a material adverse effect on our
business, and we are not aware of any facts on which any such sanctions could be
based.  There can be no assurance, however, that in the future we will
not be subject to sanctions as a result of violations of applicable labor laws
by our suppliers, or that such sanctions will not have a material adverse effect
on our business and results of operations.




We
may not be able to adequately protect our intellectual property
rights.




The loss
of or inability to enforce the trademarks “William Rast” and “People’s
Liberation” and our other proprietary designs, know-how and trade secrets could
adversely affect our business.  If any third party independently
develops similar products to ours or manufactures knock-offs of our products, it
may be costly to enforce our rights and we would not be able to compete as
effectively.  Additionally, the laws of foreign countries may provide
inadequate protection of intellectual property rights, making it difficult to
enforce such rights in those countries.




We may
need to bring legal claims to enforce or protect our intellectual property
rights.  Any litigation, whether successful or unsuccessful, could
result in substantial costs and diversions of resources.  In addition,
notwithstanding the rights we have secured in our intellectual property, third
parties may bring claims against us alleging that we have infringed on their
intellectual property rights or that our intellectual property rights are not
valid.  Any claims against us, with or without merit, could be time
consuming and costly to defend or litigate and therefore could have an adverse
affect on our business.




The
loss of Chief Executive Officer, Colin Dyne, could have an adverse effect on our
future development and could significantly impair our ability to achieve our
business objectives.




Our
success is largely dependent upon the expertise and knowledge of our Chief
Executive Officer, Colin Dyne, whom we rely upon to formulate our business
strategy.  As a result of the unique skill set and responsibilities of
Mr. Dyne, the loss of Mr. Dyne could have a material adverse effect on our
business, development, financial condition, and operating results.  We
do not maintain “key person” life insurance on any of our management, including
Mr. Dyne.






13




The
requirements of the Sarbanes-Oxley Act, including section 404, are burdensome,
and our failure to comply with them could have a material adverse affect on our
business and stock price.




Effective
internal control over financial reporting is necessary for us to provide
reliable financial reports and effectively prevent
fraud.  Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate and report on our internal control over financial reporting and,
beginning with our annual report for the fiscal year ending December 31, 2010,
our independent registered public accounting firm will be required to annually
attest to our evaluation and issue their own opinion on our internal control
over financial reporting.  We have prepared for compliance with
Section 404 by strengthening, assessing and testing our system of internal
control over financial reporting to provide the basis for our
report.  The process of strengthening our internal control over
financial reporting and complying with Section 404 was expensive and time
consuming, and required significant management attention.  We cannot
be certain that the measures we have undertaken will ensure that we will
maintain adequate controls over our financial processes and reporting in the
future.  Furthermore, if we are able to rapidly grow our business, the
internal control over financial reporting that we will need will become more
complex, and significantly more resources will be required to ensure our
internal control over financial reporting remains effective.  Failure
to implement required controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our
reporting obligations.  If we or our auditors discover a material
weakness in our internal control over financial reporting, the disclosure of
that fact, even if the weakness is quickly remedied, could diminish investors’
confidence in our financial statements and harm our stock price.  In
addition, non-compliance with Section 404 could subject us to a variety of
administrative sanctions, including the suspension of trading, ineligibility for
listing on one of the Nasdaq Stock Markets or national securities exchanges, and
the inability of registered broker-dealers to make a market in our common stock,
which would further reduce our stock price.


Risks
Related to Our Industry




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 and distributors, 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-end 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,
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 or operate new retail
stores or maintain sales levels at existing stores, or maintain or increase our
international operations on a profitable basis. As a result, our operating
results may be adversely and materially affected by downward trends in the
United States or global economy, including the current downturn in the
United States.




We
operate in a highly competitive industry and the success of our business depends
on our ability to overcome a variety of competitive challenges.




We
operate our business in the premium contemporary segment of the apparel
industry.  Currently, our competitors include companies and brands
such as True Religion, Seven For All Mankind, Diesel, Guess, J Brand and Joe’s
Jeans.  We face a variety of competitive challenges
including:




-
            anticipating
      and quickly responding to changing consumer demands that are dictated in
      part by fashion and season;


-
            developing
      innovative, high-quality products in sizes and styles that appeal to
      consumers;


-
            competitively
      pricing our products and achieving customer perception of value;
      and


-
            the
      need to provide strong and effective marketing support to maintain our
      brand image.








14





Our
ability to anticipate and effectively respond to these competitive challenges
depends in part on our ability to attract and retain key personnel in our
design, merchandising and marketing staff.  Competition for these
personnel is intense, and we cannot be sure that we will be able to attract and
retain a sufficient number of qualified personnel in future
periods.  In addition, our competitors may have greater financial
resources than we do which could limit our ability to respond quickly to market
demands.  In the event that we are not successful in addressing the
competitive challenges we face, we could lose market share to our competitors
and consequently our stock price could be negatively impacted.




Risks
Related to Our Common Stock




Since
trading on the OTC Bulletin Board may be sporadic, you may have difficulty
reselling your shares of our common stock.




In the
past, our trading price has fluctuated as the result of many factors that may
have little to do with our operations or business prospects.  In
addition, because the trading of securities on the OTC Bulletin Board is often
more sporadic than the trading of securities listed on an exchange, you may have
difficulty reselling any of our common shares.




We
have a limited trading volume and shares eligible for future sale by our current
stockholders may adversely affect our stock price.




To date,
we have had a very limited trading volume in our common stock.  For
instance, for the year ended December 31, 2009, approximately 4.9 million shares
of our common stock were traded and for the year ended December 31, 2008,
approximately 2.5 million shares of our common stock were traded.  As
long as this condition continues, the sale of a significant number of shares of
common stock at any particular time could be difficult to achieve at the market
prices prevailing immediately before such shares are offered.




Our
common stock price is highly volatile.




The
market price of our common stock is likely to be highly volatile as the stock
market in general has been highly volatile.




Factors
that could cause such volatility in our common stock may include, among other
things:





-
            actual
      or anticipated fluctuations in our quarterly operating
      results;


-
            changes
      in financial estimates by securities
analysts;


-
            conditions
      or trends in our industry or in the economy in general;
  and


-
            changes
      in the market valuations of other comparable
  companies.





We
do not foresee paying dividends in the near future.




We have
not paid dividends on our common stock and do not anticipate paying such
dividends in the foreseeable future.




Our
officers and directors own a significant portion of our common stock, which
could limit our stockholders’ ability to influence the outcome of key
transactions.




Our
officers and directors and their affiliates beneficially own
approximately 26.9% of our outstanding voting shares as of March 8,
2010.  In addition, Gerard Guez, a relative of our founder and former
chief executive officer and director, Daniel Guez, owns
approximately 28.0% of our outstanding voting
shares.  As a result, our officers and directors, and Mr. Guez, are
able to exert influence over the outcome of any matters submitted to a vote of
the holders of our common stock, including the election of our Board of
Directors.  The voting power of these stockholders could also
discourage others from seeking to acquire control of us through the purchase of
our common stock, which might depress the price of our common
stock.






15


Item
1B.         Unresolved Staff
Comments




Not applicable.




Item
2.            Properties




We lease
our principal executive office space under a lease agreement that expires in
March 2012.  The facility is approximately 13,000 square feet, and is
located in Los Angeles, California.  It is from this facility that we
conduct all of our design, executive and administrative
functions.  Our finished goods are shipped from third-party warehouses
in Ontario and Los Angeles, California.  Our internet products are
shipped from a third-party warehouse in Long Beach, California.  We
have showrooms located in Los Angeles, New York City and Atlanta.  Our
New York City showroom lease expires in April 2011, our Los Angeles showroom
lease expires in May 2013 and our Atlanta showroom lease expires in June
2011.  We have William Rast retail stores located in Los Angeles, San
Jose and Cabazon, California, and expect to open a new William Rast retail store
in Miami, Florida, in the third quarter of 2010.  Our William Rast
retail store leases expire on various dates beginning April 2011 through January
2020.   We have J. Lindeberg retail stores located in New York
City and Los Angeles and expect to open a new J. Lindeberg retail store in
Miami, Florida, in the third quarter of 2010.  Our J. Lindeberg retail
store leases expire on various dates beginning June 2014 through March
2017.   We believe that the facilities we utilize are well
maintained, in good operating condition, and adequate to meet our current and
foreseeable needs.




Item
3.            Legal
Proceedings




On
October 27, 2009, People’s Liberation, Inc. and our wholly-owned subsidiary,
Versatile Entertainment, Inc., filed a complaint for damages and equitable
relief against Charlotte Russe Holding, Inc. and its wholly-owned subsidiary,
Charlotte Russe Merchandising, Inc. (collectively, “Charlotte Russe”) in the
Superior Court of the State of California, County of Los Angeles, Central
District (Versatile
Entertainment, Inc. v. Charlotte Russe Merchandising, Inc., BC424674)
(the “Charlotte Russe
Action”).  On that same day, we also filed suit against Advent
International Corporation and certain of its subsidiaries, and David Mussafer
and Jenny J. Ming (collectively, the “Advent Defendants”) in the
Superior Court of the State of California, County of Los Angeles, Central
District (Versatile
Entertainment, Inc. v. Advent International Corporation, BC424675) (the
“Advent
Action”).  Advent International Corporation, through its
subsidiaries, acquired Charlotte Russe in October 2009.




The
complaints relate to our December 2008 distribution agreement with Charlotte
Russe (the “Agreement”), pursuant to
which we agreed to exclusively sell to Charlotte Russe in North America and
Central America, People’s Liberation® branded apparel, apparel accessories,
eyewear, jewelry, watches, cosmetics and fragrances, and to provide Charlotte
Russe with marketing and branding support for People’s Liberation branded
apparel and apparel accessories.  In consideration for the exclusive
rights granted to Charlotte Russe under the Agreement, Charlotte Russe agreed to
purchase from us a minimum of $65 million of People’s Liberation branded
merchandise during the initial term of the Agreement.  The amount of
the minimum purchase obligation varies by contract year, and may be less than or
greater than $65 million if the Agreement is terminated prior to expiration of
the initial term or is renewed for one or more additional renewal periods. The
Agreement provides that Charlotte Russe can elect to terminate the Agreement
early by delivering written notice to us at any time between January 1, 2011 and
June 30, 2011, in which event the Agreement shall terminate, at Charlotte
Russe’s election, on either (i) July 1, 2011 with the payment of an early
termination fee, or (ii) December 31, 2011.






16





On
October 26, 2009, we received a letter from Charlotte Russe purportedly
terminating the Agreement as a result of our alleged fraudulent inducement of
Charlotte Russe to enter into the Agreement as well as our alleged subsequent
material breaches of the Agreement.  We believe the allegations in the
letter are demonstrably false and that the termination of the Agreement by
Charlotte Russe was improper, constituting a material breach of the Agreement by
Charlotte Russe for which we are entitled to damages.  Additionally,
we assert that before acquiring Charlotte Russe, Advent International
Corporation and certain of its subsidiaries and management, including David
Mussafer and Jenny J. Ming, evaluated Charlotte Russe’s ongoing business and
contractual relations, and decided that they would wrongfully attempt to avoid
the contractual obligations under the Agreement by asserting fabricated breaches
of contract against us, thus intentionally interfering with our contract with
Charlotte Russe.




Our
complaint in the Charlotte Russe Action includes four causes of action,
including one for declaratory relief in which we seek declarations that (i) by
Charlotte Russe’s efforts to wrongfully terminate the Agreement and their sale
of People’s Liberation brand goods at “close-out” prices, they have breached the
express terms of the Agreement; (ii) the Agreement is in full force and effect
notwithstanding Charlotte Russe’s purported termination thereof; (iii) Charlotte
Russe is required to perform its obligations under the Agreement and that no
performance obligation has been excused; (iv) our actions, including those
alleged acts complained of in Charlotte Russe’s October 26 letter, do not
constitute material breaches of the Agreement; and (v) the express terms of the
Agreement require Charlotte Russe to indemnify, hold harmless and defend us from
any future or additional damages or costs incurred by us as a result of
Charlotte Russe’s breach of the Agreement and as a result of our
lawsuit.




In the
Charlotte Russe Action, we have also asserted claims for:




·
            breach
      of contract by Charlotte Russe for, among other things, wrongfully
      terminating the Agreement and for selling People’s Liberation branded
      apparel at “close-out” prices;




·
            fraudulent
      misrepresentation relating to the misrepresentation and concealment of
      certain material facts from us, including making false representations
      about their ability and intent to promote People’s Liberation branded
      products for sale in their stores, their ability to perform their
      obligations under the Agreement, their discounting of People’s Liberation
      branded apparel in violation of the Agreement and the facts underlying
      their purported termination of the Agreement;
  and




·
            negligent
      misrepresentation relating to the misrepresentation and concealment of
      certain material facts from us, including making false representations
      about their ability and intent to promote People’s Liberation branded
      products for sale in their stores, their ability to perform their
      obligations under the Agreement, their discounting of People’s Liberation
      branded apparel in violation of the Agreement and the facts underlying
      their purported termination of the
Agreement.




We are
seeking compensatory damages of no less than $59,000,000, punitive damages,
preliminary and permanent injunctions enjoining Charlotte Russe and the other
defendants from engaging in acts which diminish the value of the People’s
Liberation brand, and an award of attorneys’ fees and costs incurred in relation
to each cause of action.




In the
Advent Action, we assert one cause of action for intentional interference with
contract, for which we are seeking compensatory damages of no less than
$59,000,000, punitive damages, as well as an award of attorney’s fees and costs
incurred in relation to the action.




On
October 28, 2009, Charlotte Russe Holding, Inc. and Charlotte Russe
Merchandising, Inc. served a complaint against People’s Liberation, Inc. and
Versatile Entertainment, Inc., which complaint was filed
in the Superior Court of the State of California, County of Los Angeles, Central
District (Charlotte Russe
Holding, Inc. vs. Versatile Entertainment, Inc.,
BC424734).  Charlotte Russe subsequently filed a First Amended
Complaint asserting claims for:




17




·
            rescission
      of the Agreement based on fraudulent misrepresentations made by us to
      induce Charlotte Russe to enter into the
  Agreement;




·
            restitution after rescission based upon our breach of
      the Agreement as described below;




·
            breach
      of contract by us for, among other things, (i) failing to provide the
      promised services of Marcella Lindeberg; (ii) permitting other retailers
      to sell People’s Liberation branded products in Charlotte Russe’s
      exclusive territory; (iii) failing to provide the products in
      compliance with the Agreement; (iv) failing to maintain the promised
      quality of the products; (v) failing to provide the promised services of
      Colin Dyne; (vi) failing to provide the promised services of a dedicated
      work team; (vii) failing to provide the promised management services under
      the Agreement; and (viii) failing to deliver all products in the time
      required under the Agreement;




·
            fraud; and





·
            negligent
misrepresentation.




Charlotte
Russe is seeking restitution of all consideration paid to us under the
Agreement, compensatory and punitive damages, and an award of attorneys’ fees
and costs incurred in relation to each cause of action.




We intend to vigorously pursue the
Charlotte Russe Action and the Advent Action and to vigorously defend any
actions brought forth by Charlotte Russe.




We are
subject to certain other legal proceedings and claims arising in connection with
our business.  In the opinion of management, there are currently no
claims, other than the Charlotte Russe action discussed above, that will have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.




Item
4.            Removed
and Reserved






18





PART
II




Item
5.            Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities






Common
Stock




Our
common stock is quoted on the Over-The-Counter Bulletin Board under the symbol
“PPLB.OB”  The following table sets forth, for the periods indicated,
the high and low bid information for the common stock, as determined from
quotations on the Over-the-Counter Bulletin Board, as well as the total number
of shares of common stock traded during the periods indicated.  The
following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.




High
            
            Low
            
            VolumeYear
      Ended December 31, 2009First
      Quarter
            
            $0.33
            
            $0.10
            
            1,325,515Second
      Quarter
            
            $0.35
            
            $0.08
            
            2,323,127Third
      Quarter
            
            $0.48
            
            $0.15
            
            627,420Fourth
      Quarter
            
            $0.41
            
            $0.16
            
            669,010Year
      Ended December 31, 2008First
      Quarter
            
            $0.55
            
            $0.35
            
            643,400Second
      Quarter
            
            $0.45
            
            $0.30
            
            526,200Third
      Quarter
            
            $0.54
            
            $0.26
            
            898,800Fourth
      Quarter
            
            $0.42
            
            $0.16
            
            476,400






On March
29, 2010, the closing sales price of our common stock as reported on the
Over-The-Counter Bulletin Board was $0.27 per share.  As of March 8,
2010, there were approximately 459 record holders of our common
stock.  Our transfer agent is Stalt, Inc., Menlo Park,
CA.




Dividends




Since
January 1, 2006, we have not paid or declared cash distributions or dividends on
our common stock.  We do not intend to pay cash dividends on our
common stock in the near future.  We currently intend to retain all
earnings, if and when generated, to finance our operations.  The
declaration of cash dividends in the future will be determined by the board of
directors based upon our earnings, financial condition, capital requirements and
other relevant factors.




Item
6.            Selected
Financial Data




Not applicable.




Item
7.            Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




The
following discussion and analysis should be read together with the Consolidated
Financial Statements of People’s Liberation, Inc. and the “Notes to Consolidated
Financial Statements” included elsewhere in this report.  This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of People’s
Liberation, Inc. for the fiscal years ended December 31, 2009 and
2008.  Except for historical information, the matters discussed in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control.






19


Overview




We
design, market and sell high-end casual apparel under the brand names “People’s
Liberation,” “William Rast” and, in the United States, “J.
Lindeberg.”  The majority of the merchandise we offer consists of
premium denim, knits, wovens, leather goods, golf wear and outerwear for men and
women.  In the United States, we distribute our merchandise to better
specialty stores, boutiques and department stores, such as Nordstrom,
Bloomingdales, Saks Fifth Avenue and Neiman Marcus, and online at various
websites including williamrast.com, jlindebergusa.com and
Zappos.com.  We also market and sell our J. Lindeberg branded
collection and golf apparel through our retail stores in New York City and Los
Angeles, and J. Lindeberg golf wear to green grass golf stores and boutiques in
the United States.  William Rast products are also sold in our three
retail stores located in Los Angeles, San Jose and Cabazon,
California.  Internationally, in select countries, we sell our William
Rast branded apparel products directly and through distributors to better
department stores and boutiques throughout the world.




We
commenced our William Rast clothing line in May 2005.  Our William
Rast clothing line is a collaboration with Justin Timberlake and his childhood
friend, Trace Ayala.




We began
distributing J. Lindeberg branded apparel products in the United States on an
exclusive basis beginning July 2008 in collaboration with J. Lindeberg AB of
Sweden.  In addition to being sold in the United States through our
subsidiary, J. Lindeberg USA, LLC, J. Lindeberg branded high-end men’s fashion
and premium golf apparel is marketed and sold by J. Lindeberg AB
worldwide.




We
commenced our People’s Liberation business in July 2004.  On December
16, 2008, we entered into an agreement with Charlotte Russe pursuant to which we
agreed to exclusively sell to Charlotte Russe, in North America and Central
America, People’s Liberation® branded apparel, apparel accessories, eyewear,
jewelry, watches, cosmetics and fragrances, and to provide Charlotte Russe with
marketing and branding support for People’s Liberation branded apparel and
apparel accessories.  We ceased to sell People’s Liberation branded
merchandise in North America and Central America to parties other than Charlotte
Russe effective April 30, 2009.  We will continue to market and sell
People’s Liberation branded merchandise internationally, with the exception of
Central America.  Product sales to Charlotte Russe under the terms of
this agreement began shipping in June 2009.  We are in litigation with
Charlotte Russe in relation to our distribution agreement.  See the
discussion under Note 11 to our consolidated financial statements as well
as the discussion below under the heading “Recent Developments” for further
information relating to our distribution agreement with Charlotte Russe and the
pending litigation.




We are
headquartered in Los Angeles, California, maintain showrooms in New York, Los
Angeles and Atlanta, and have sales representatives in Dallas, Texas, and
Chicago, Illinois.




International
Distribution




Our
William Rast branded apparel products are also sold internationally in select
countries directly and through agents and distributors to better department
stores and boutiques.  Our distributors purchase products at a
discount for resale in their respective territories and market, sell, warehouse
and ship William Rast branded apparel products at their expense.  Our
agents are paid a commission on net sales of our William Rast
products.  We anticipate growing our international distribution
channels across new territories.




Manufacturing
and Supply




We use
third party contract manufacturers and full package suppliers to produce our
William Rast denim finished goods from facilities located primarily in Mexico
and Los Angeles, California.  Our denim is made from high quality
fabrics milled primarily in the United States, Japan, Italy, Turkey and
Mexico.  For the majority of our William Rast knits and other
non-denim products, we source these goods from international suppliers primarily
in Asia.  We sourced our People’s Liberation denim products sold to Charlotte
Russe under our exclusive distribution agreement from international suppliers of
full package goods primarily located in Mexico.  We sourced our
People’s Liberation knit products sold to Charlotte Russe from international
suppliers of full package goods located primarily in Asia and
India.  We currently purchase all of our J. Lindeberg branded apparel
products from J. Lindeberg AB in Sweden, the beneficial owner of 50% of our
subsidiary, J. Lindeberg USA, LLC.  We intend to continue our
transition to international suppliers of full package denim finished goods which
will enable us to remain competitive and improve margins.






20


Structure
of Operations




Our
wholly-owned subsidiary Versatile Entertainment, Inc. conducts our People’s
Liberation brand business.  Our William Rast brand business is
conducted through our wholly-owned subsidiary Bella Rose,
LLC.  William Rast Sourcing, LLC and William Rast Licensing, LLC are
consolidated under Bella Rose and are each owned 50% by Bella Rose and 50% by
William Rast Enterprises, LLC, an entity owned in part by Justin
Timberlake.  William Rast Retail, LLC, a California limited liability
company, was formed on August 26, 2009 and is a wholly-owned subsidiary of
William Rast Sourcing.  William Rast Retail was formed to operate our
William Rast retail stores.  Our J. Lindeberg brand business is
conducted through Bella Rose.  J. Lindeberg USA, LLC is consolidated
under Bella Rose and is owned 50% by Bella Rose and 50% by J. Lindeberg USA,
Corp. an entity owned by J. Lindeberg AB, a Swedish
corporation.   J. Lindeberg USA Retail, LLC, a California limited
liability company, was formed on August 21, 2009 and is a wholly-owned
subsidiary of J. Lindeberg USA.     J. Lindeberg Retail
was formed to operate our J. Lindeberg retail stores.




Recent
Developments




Charlotte Russe Litigation




As
discussed under Note 11 to the Consolidated Financial Statements, we are in
litigation with Charlotte Russe and its affiliates in relation to our exclusive
distribution agreement, which Charlotte Russe purported to terminate on October
26, 2009.  We derived a significant portion of our revenues and
operating cash flow from the sale of People’s Liberation branded merchandise
pursuant to this distribution agreement.  In the first year of the
contract, we received approximately $5.5 million through September 30, 2009 as
required by the distribution agreement and we are owed $59.5 million in
guaranteed minimum payments over the remainder of the term of the distribution
agreement, which amount may be reduced if Charlotte Russe elects to terminate
the distribution agreement early, beginning July 2011 with an early termination
fee. As a result of Charlotte Russe’s purported termination of the
distribution agreement, Charlotte Russe ceased to make their contractually
obligated payments to us, which significantly decreased our net sales and cash
flows from operations of our People’s Liberation business.  We also
believe our results of operations and financial condition could be negatively
impacted if we are unable to collect factored accounts receivable in the amount
of approximately $575,000 related to goods shipped to Charlotte Russe prior to
the dispute, and if we are unable to reach a settlement in a manner acceptable
to us or the ensuing litigation, which is currently in its early stage, is not
resolved in a manner favorable to us.  Additionally, we may continue
to incur significant legal fees in our litigation with Charlotte Russe, and
unless the cases are settled, we will continue to incur additional expenses in
increasing amounts as the cases move toward trial.




As of
December 31, 2009, we had approximately $575,000 of factored accounts receivable
due from Charlotte Russe and approximately $463,000 of inventory on hand related
to purchase orders received from Charlotte Russe.  In January 2010, we
received approximately $120,000 of additional inventory from our vendor related
to purchase orders received from Charlotte Russe prior to the
dispute.  This inventory is not included in the consolidated balance
sheet at December 31, 2009.  Approximately 20% of the inventory on
hand was subsequently sold to third parties at an overall price above the cost
of production.  We have not recorded a reserve for bad debts related
to factored accounts receivable due from Charlotte Russe or a reserve for
inventory purchased on behalf of Charlotte Russe as of December 31, 2009, as we
believe we will prevail in our actions against Charlotte Russe.  We do
not believe that it is probable
that we will incur a loss related to these assets and we believe that we will be
able to sell our remaining inventory at or above the cost of
production.






21


Although
the purported termination of our exclusive distribution agreement by Charlotte
Russe will have a significant impact on our subsidiary that holds the People’s
Liberation brand business, Versatile Entertainment, we believe it does not
affect our ability as a whole to continue as a going concern because of the
continued operations and expected sales, cash flows and results of operations
from our other subsidiaries, William Rast Sourcing and J. Lindeberg
USA.




Other
Developments




During
Fashion Week in February 2010, Justin Timberlake and Trace Ayala presented their
Fall/Winter 2010 William Rast collection at a fashion show held at Cedar Lake in
NYC.  The show launched a collection of William Rast footwear with
boots which were designed to complement our William Rast denim
line.  This season’s show was presented by Sony.  Other sponsors
included Maybelline New York, Sebastian Professional, CRYSTALLIZEDTM -
Swarovski Elements, 901
Silver Tequila, Neuro, La Caravelle Champagne and Coors Light.





On
January 29, 2010, we entered into a sponsorship agreement with Sony Electronics
Inc.  The sponsorship agreement provided Sony Electronics with the
title sponsorship at our William Rast fashion show held during Fashion Week in
New York City in February 2010.  The sponsorship agreement also grants
Sony Electronics with title sponsorship in our “My Name is William Rast 2010
Campaign” and the placement of Sony products in our William Rast retail and
pop-up stores.  The sponsorship agreement expires in December
2010.





In
December 2009, we signed a binding term sheet for a new multi-year licensing
agreement with Viva International Group to design, produce and globally
distribute William Rast Eyewear and William Rast Racing Eyewear focusing on
styles for both the premium and sportswear categories for men and women. Viva is
a worldwide leading eyewear company, representing premium and luxury brands
including, GUESS, SKECHERS®, Tommy Hilfiger, Escada and Ermenegildo Zegna. The
William Rast branded eyewear collections, which will include sunglasses and
prescription eyewear, will debut in 2011 and will be available in William Rast’s
branded stores and in upscale department stores and specialty retailers
worldwide.





In
November 2009, we launched our retail expansion plan for our William Rast brand
with the opening of two new full-price retail stores at the Westfield Century
City Shopping Mall in Los Angeles, California, and the Westfield Valley Fair
Shopping Mall in San Jose, California.  Additionally, we opened our
first outlet store at the Desert Hills Premium Outlets in Cabazon,
California.  These store openings are part of our retail expansion
plan which includes the roll-out of approximately forty retail stores in major
metropolitan locations over the next several years.  We believe that
the retail stores will enhance our net sales and gross profit and the outlet
store will allow us to sell our overstock or slow moving items at higher profit
margins.





To
further our retail expansion plan, in November 2009 we entered into two new
leases for a William Rast retail store and a J. Lindeberg retail store, both to
be located in Miami, Florida.  The leases have seven-year terms
expiring in March and May 2017.  The stores are expected to open in
the third quarter of 2010.




Critical
Accounting Policies, Judgments and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On an on-going basis, we evaluate our estimates, including
those related to our valuation of inventories and our allowance for
uncollectible house accounts receivable, recourse factored accounts receivable
and chargebacks, and contingent assets and liabilities.  We base our
estimates on historical experience and on various other 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.  Actual results may
differ from these estimates under different assumptions or
conditions.  We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:






22


Inventories.  Inventories
are evaluated on a continual basis and reserve adjustments, if any, are made
based on management’s estimate of future sales value of specific inventory
items.  Reserve adjustments are made for the difference between the
cost of the inventory and the estimated market value, if lower, and charged to
operations in the period in which the facts that give rise to the adjustments
become known.  Inventories, consisting of piece goods and trim,
work-in-process and finished goods, are stated at the lower of cost (first-in,
first-out method) or market.




Accounts
Receivable.Factored accounts receivable balances with
recourse, chargeback and other receivables are evaluated on a continual basis
and allowances are provided for potentially uncollectible accounts based on
management’s estimate of the collectability of customer
accounts.  Factored accounts receivable without recourse are also
evaluated on a continual basis and allowances are provided for anticipated
returns, discounts and chargebacks based on management’s estimate of the
collectability of customer accounts and historical return, discount and other
chargeback rates.  If the financial condition of a customer were to
deteriorate, resulting in an impairment of its ability to make payments, an
additional allowance may be required.  Allowance adjustments are
charged to operations in the period in which the facts that give rise to the
adjustments become known.




Intangible
Assets.Intangible assets are evaluated on a continual basis
and impairment adjustments are made based on management’s reassessment of the
useful lives related to intangible assets with definite useful
lives.  Intangible assets with indefinite lives are evaluated on a
continual basis and impairment adjustments are made based on management’s
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset.  Impairment adjustments
are made for the difference between the carrying value of the intangible asset
and the estimated valuation and charged to operations in the period in which the
facts that give rise to the adjustments become known.




Revenue
Recognition.  Wholesale revenue is recognized when merchandise
is shipped to a customer, at which point title transfers to the customer, and
when collection is reasonably assured.  Customers are not given
extended terms or dating or return rights without proper prior
authorization.  Revenue is recorded net of estimated returns, charge
backs and markdowns based upon management’s estimates and historical
experience.  Website revenue is recognized when merchandise is shipped
to a customer and when collection is reasonably assured.  Retail
revenue is recognized on the date of purchase from our retail
stores.




Deferred Tax
Assets.  We may record a valuation allowance to reduce our
deferred tax assets to an amount that we believe is more likely than not to be
realized.  We consider estimated future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a
valuation allowance.  If we determine that we may not realize all or
part of our deferred tax assets in the future, we will make an adjustment to the
carrying value of the deferred tax asset, which would be reflected as an income
tax expense.  Conversely, if we determine that we will realize a
deferred tax asset, which currently has a valuation allowance, we would be
required to reverse the valuation allowance, which would be reflected as an
income tax benefit.  Valuation allowance adjustments are made in the
period in which the facts that give rise to the adjustments become
known.




Income Taxes.  We
file U.S. Federal tax returns, multiple U.S. state and state franchise tax
returns.  For U.S. Federal tax purposes, all periods subsequent to
December 31, 2005 are subject to examination by the U.S. Internal Revenue
Service (“IRS”).  We believe that our income tax filing positions and deductions
will be sustained on audit and we do not anticipate any adjustments that will
result in a material change.  Therefore, no reserves for uncertain
income tax positions have been recorded.  In addition, we do not
anticipate that the total amount of unrecognized tax benefit related to any
particular tax position will change significantly within the next twelve
months.  Our policy for recording interest and penalties, if any,
associated with IRS audits is to record such items as a component of income
taxes.






23


Stock Based
Compensation.  Stock-based compensation expense is recognized
based on awards ultimately expected to vest on a straight-line prorated
basis.  The fair value of options is estimated on the date of grant
using the Black-Scholes option pricing model.  The valuation
determined by the Black-Scholes pricing model is affected by our stock price as
well as assumptions regarding a number of highly complex and subjective
variables.  These variables include, but are not limited to our
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors.  Stock price
volatility was estimated based on a peer group of public companies and the
expected term was estimated using the “safe harbor” provisions provided by
generally accepted accounting principles.





Litigation
Contingencies.  We are subject to on-going litigation which
requires management to make certain assumptions and estimates regarding gain or
loss contingencies, if any, related to the outcome of pending
litigation.  In consultation with legal counsel, we consider the facts
and circumstances surrounding the pending litigation and the probability of the
outcome of pending litigation, whether favorable or unfavorable, in our
estimates of gain or loss contingencies.




Recent
Accounting Pronouncements




See Note
2 to Notes to Consolidated Financial Statements for a full description of recent
accounting pronouncements including the respective expected dates of adoption
and effects on results of operations and financial condition.




Results
of Operations




The
following table presents consolidated statement of operations data for each of
the years indicated as a percentage of net sales.




Year
      Ended
              December
      31,
              2009
            
            Year
      Ended
              December
      31,
              2008Net
      sales
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of goods
      sold
            
            
            51.6
            
            
            
            51.7Gross
      profit
            
            
            48.4
            
            
            
            48.3Selling,
      design and production
      expense
            
            
            26.4
            
            
            
            36.6General
      and administrative
      expense
            
            
            23.2
            
            
            
            21.1Operating
      loss
            
            
            (1.2
            )%
            
            
            (9.4
            )%







24


Net
Sales




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Net
      sales
            
            $35,634,806
            
            $32,190,093
            
            10.7%





The
increase in net sales for the year ended December 31, 2009 was due primarily to
increased sales of People’s Liberation branded apparel due to our exclusive
distributor relationship with Charlotte Russe, as discussed above, and increased
wholesale and retail sales of our J. Lindeberg apparel line, including through
our newly acquired retail store in Los Angeles, California.  We began
distributing J. Lindeberg brand products in the United States on an exclusive
basis beginning July 2008.  We began shipping goods to Charlotte Russe
under the terms of our distribution agreement in June 2009.  As a
result of Charlotte Russe’s purported termination of the agreement, Charlotte
Russe has ceased to purchase People’s Liberation branded merchandise from us,
which resulted in a significant decrease in net sales of the brand for the
fourth quarter of 2009.  Due to current macro economic conditions, we
experienced a decline in wholesale sales of our William Rast apparel line in the
United States during the year ended December 31, 2009.  The decrease
in William Rast wholesale sales was offset, in part, by retail sales of the
brand from our three new William Rast retail stores that opened in November 2009
in Los Angeles, San Jose and Cabazon, California.




Gross
Profit




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Gross
      profit
            
            $17,244,747
            
            $15,547,678
            
            10.9%





Gross
profit consists of net sales less cost of goods sold.  Cost of goods
sold includes expenses primarily related to inventory purchases and contract
labor, customs, freight, duty and overhead expenses.  Overhead expenses
primarily consist of third party warehouse and shipping costs.  Our
gross margin increased slightly to 48.4% for the year ended December 31, 2009
from 48.3% for the year ended December 31, 2008.  The increase in
gross profit as a percentage of net sales was primarily due to increased retail
sales of our J. Lindeberg and William Rast product lines at higher gross
margins.




Selling,
Design and Production Expenses




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Selling,
      design and production expense
            
            $9,396,134
            
            $11,784,062
            
            (20.3)%





Selling,
design and production expense for the years ended December 31, 2009 and 2008
primarily related to tradeshow, salaries, design fees, advertising, marketing
and promotion, samples, travel and showroom expenses.  As a percentage
of net sales, selling, design and production expense decreased to 26.4% for the
year ended December 31, 2009 compared to 36.6% for the year ended December 31,
2008.  The decrease in selling, design and production expenses for the
year ended December 31, 2009 is attributable to decreased design and sample
costs related to our restructured design services agreement with Paris68 and
decreased promotion and marketing costs.  Effective December 1, 2008,
our design services agreement with Paris68 was restructured and the new design
consulting arrangement
provides for a reduction in the fees paid for services, a reduction in sample
costs and the elimination of royalty payments due under the prior
agreement.  In the third quarter of 2008, we launched a viral
marketing campaign to promote our William Rast brand.  This cost was
not incurred during the year ended December 31, 2009, which further accounts for
the decrease in selling, design and production expense during the
year.  The decrease in selling, design and production expenses for the
year ended December 31, 2009 was offset by increased sales and retail salaries
and commissions related to our J. Lindeberg acquisition which took place during
the second quarter of 2008.  As discussed above, we are currently
subject to litigation in relation to our agreement with Charlotte
Russe.  As a result of the litigation, we anticipate a reduction of
our selling, design and production expenses directly related to our People’s
Liberation brand as we are currently not manufacturing or promoting this
brand.






25





General
and Administrative Expenses




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008General
      and administrative expenses
            
            $8,290,842
            
            $6,796,234
            
            22.0%





General
and administrative expenses for the years ended December 31, 2009 and 2008
primarily related to salaries, professional fees, facility costs, travel and
entertainment, depreciation and amortization expense, and other general
corporate expenses.  As a percentage of net sales, general and
administrative expenses increased to 23.2% for the year ended December 31, 2009
compared to 21.1% for the year ended December 31, 2008.  The increase
in general and administrative expenses during the year ended December 31, 2009
was due primarily to a net increase in administrative salaries and rent related
to our J. Lindeberg retail stores and showroom in New York City, increased rent
for our new administrative office and warehouse facilities, rent for our three
new William Rast retail stores and impairment charges related to trademarks we
are no longer using.  The net increase in administrative salaries was
due to the hiring of our Executive Vice President of Branding and Licensing
during the second quarter of 2008, the hiring of additional employees related to
our J. Lindeberg acquisition in the third quarter of 2008 and our J. Lindeberg
retail store acquisition in May 2009, and additional employees related to our
three new William Rast retail stores.  As discussed above, we are
currently subject to litigation in relation to our agreement with Charlotte
Russe.  As a result of this litigation, we anticipate a reduction of
our general and administrative expenses related to direct expenses of our
People’s Liberation brand.  The decrease in direct expenses of our
People’s Liberation brand will be offset by increased legal fees as a result of
the on-going litigation.




Interest
Expense, Net




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Interest
      expense, net
            
            $207,716
            
            $141,844
            
            46.4%





Under our
factoring arrangements, we may borrow up to 85% on our factored accounts
receivable and 50% on our eligible inventories.  Maximum borrowings
under our People’s Liberation and William Rast inventory facility are not to
exceed $1.3 million of eligible inventory.  Maximum borrowings,
including borrowings related to factored accounts receivable and inventory,
related to our J. Lindeberg facility are not to exceed $1.5
million.  Outstanding borrowings, net of matured funds, under our
factoring arrangements amounted to approximately $3.7 million and $3.5 million
at December 31, 2009 and 2008, respectively.  The increase in interest
expense is due to an average increase in borrowings under our factoring
arrangements during the year ended December 31, 2009.






26





Provision
(Benefit) for Income Taxes




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Provision
      (benefit) for income taxes
            
            $53,992
            
            $(35,250)
            
            **
      not meaningful





The
current provision for income taxes for the years ended December 31, 2009 and
2008 represents the minimum tax payments due for state and local purposes,
including gross receipts tax on sales generated by our limited liability
companies.  A provision for Federal income taxes has not been recorded
for the years ended December 31, 2009 and 2008, as we had net losses during the
years.  As of December 31, 2009 and 2008, a valuation allowance has
been provided for our deferred income tax assets related to net operating loss
carryforwards, factored accounts receivable and bad debt reserves and other
reserves.  As of December 31, 2009, total net operating losses
available to carry forward to future periods amounted to approximately $5.3
million.  At this time, we cannot determine that it is more likely
than not that we will realize the future income tax benefits related to our net
operating losses and other deferred tax assets.




Net
Loss




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Net
      loss
            
            $
      (703,937)
            
            $
      (3,122,940)
            
            (77.5)%





The
decrease in net loss during the year ended December 31, 2009 compared to the
year ended December 31, 2008 is due primarily to increased net sales and gross
profit, and decreased operating expenses incurred during the year, as discussed
above.




Noncontrolling
Interest in Subsidiaries’ Earnings




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Noncontrolling
      interest in subsidiaries’ earnings
            
            $989,966
            
            $1,337,317
            
            (26.0)%





Noncontrolling
interest recorded for the year ended December 31, 2009 and 2008 represents
minimum distributions accrued for the calendar quarters ended December 31, 2009
and 2008 due to William Rast Enterprises, a member of William Rast Sourcing, and
profit or loss allocations due to J. Lindeberg USA Corp., a member of J.
Lindeberg USA, LLC.  In accordance with the related operating
agreements, as amended, William Rast Sourcing and William Rast Licensing are to
pay its member, William Rast Enterprises, a minimum quarterly minority interest
distribution of 6% and 3%, respectively, of applicable net sales generated by
William Rast Sourcing and William Rast Licensing during the quarterly
periods.  Beginning July 1, 2008, the operations of J. Lindeberg USA,
LLC are included in our consolidated financial statements.  Profit and
loss allocations to its member, J. Lindeberg USA Corp., are recorded as
noncontrolling interest in our consolidated financial statements.  The
decrease in noncontrolling interest recorded for the year ended December 31,
2009 compared to the year ended December 31, 2008 was due primarily to loss
allocations from our J. Lindeberg subsidiary during the year ended December 31,
2009, compared to income allocations during the year ended December 31,
2008.






27




The
decrease in noncontrolling interest was also due to decreased sales of William
Rast wholesale products during the year ended December 31, 2009




Net
Loss Attributable to Common Stockholders




Years
      Ended
              December
      31,
            
            Percent
      Change2009
            
            2008Net
      loss attributable to common stockholders
            
            $(1,693,903)
            
            $(4,460,257)
            
            (62.0)%





The
decrease in net loss attributable to common stockholders during the year ended
December 31, 2009 compared to the year ended December 31, 2008 is due primarily
to increased net sales and gross profit and decreased noncontrolling interest
and operating expenses incurred during the year, as discussed
above.




Related
Party Transactions




See
“Certain Relationships and Related Transactions, and Director Independence”
included under Item 13 of this report.




Liquidity
and Capital Resources




As of
December 31, 2009, we had cash and cash equivalents of approximately $2.6
million, a working capital balance of approximately $1.7 million, and
approximately $776,000 of availability from our factor.  As of
December 31, 2009, advances from our factor totaled approximately $3.7
million.  As of December 31, 2008, we had cash and cash equivalents of
approximately $1.9 million, a working capital balance of approximately $3.0
million, and approximately $895,000 of availability from our
factor.  As of December 31, 2008, advances from our factor, net of
matured funds, totaled approximately $3.5 million.




We are in
litigation with Charlotte Russe and its affiliates in relation to our exclusive
distribution agreement, which Charlotte Russe purported to terminate on October
26, 2009.  We derived a significant portion of our revenues and
operating cash flow from the sale of People’s Liberation branded merchandise
pursuant to the distribution agreement.  In the first year of the
contract, we received approximately $5.5 million through September 30, 2009 as
required by the distribution agreement and we are owed $59.5 million in
guaranteed minimum payments over the remainder of the term of the distribution
agreement, which amount may be reduced if Charlotte Russe elects to terminate
the agreement early, beginning July 2011 with an early termination
fee.  As a result of Charlotte Russe’s purported termination of the
distribution agreement, Charlotte Russe ceased to make their contractually
obligated payments to us, which significantly decreased our net sales and cash
flows from operations of our People’s Liberation business.  We also
believe our results of operations and financial condition could be negatively
impacted if we are unable to collect factored accounts receivable in the amount
of approximately $575,000 related to goods shipped to Charlotte Russe prior to
the dispute, and if we are unable to reach a settlement in a manner acceptable
to us or the ensuing litigation, which is currently in its early stage, is not
resolved in a manner favorable to us.  Additionally, we may continue
to incur significant legal fees in our litigation with Charlotte Russe, and
unless the cases are settled, we will continue to incur additional legal fees in
increasing amounts as the cases move toward trial.




In
November 2009, we launched our retail expansion plan for our William Rast and J.
Lindeberg brands with the opening of two new full-price William Rast retail
stores at the Westfield Century City Shopping Mall in Los Angeles, California,
and the Westfield Valley Fair Shopping Mall in San Jose,
California.  Additionally, we opened our first William Rast outlet
store at the Desert Hills Premium Outlets in Cabazon, California, and we
anticipate opening one William Rast and one J. Lindeberg full price retail store
in Miami Florida in the third quarter of 2010.  These store openings
are part of our retail expansion
plan which includes the roll-out of approximately forty retail stores in major
metropolitan locations over the next several years.  We anticipate
opening between three and five retail stores in 2010, including the two retail
stores in Miami.  In 2011, we anticipate opening between six and
twelve retail stores.  The costs associated with our store openings
have been immaterial to date and have been financed primarily through cash flow
from operations, as well as through tenant improvements received from landlords
at some of our locations.  In an effort to reduce the capital required
to open future locations, we will attempt to continue to negotiate landlord
concessions.






28


We are
subject to a contractual agreement that may require us to contribute cash to our
subsidiary, J. Lindeberg USA, LLC. Pursuant to the operating agreement we
entered into with J. Lindeberg USA Corp and J. Lindeberg AB, we contributed
$20,000 in cash to our 50% owned subsidiary, J. Lindeberg USA, LLC, and will be
required to contribute up to a maximum of $1.5 million in working capital or
related guaranties through December 2010. Our J. Lindeberg USA, LLC, factoring
agreements currently provide for corporate guaranties from our related entities,
People's Liberation, Inc., Bella Rose, LLC, and Versatile Entertainment, Inc. At
this point in time, the cash amount in excess of $20,000 that we may be required
to contribute to J. Lindeberg USA, LLC, if any, is uncertain and our future cash
position may be adversely impacted.




We are
currently evaluating various financing strategies to be used to expand our
business and fund future growth, including the opening of our new retail
stores.  We believe that our existing cash and cash equivalents and
anticipated cash flows from our operating activities and pursuant to our
factoring arrangements, including availability under our inventory facilities,
should be sufficient to fund our minimum working capital and capital expenditure
needs for the next twelve months.  The extent of our future capital
requirements will depend on many factors, including our results of operations,
the availability of landlord concessions for future retail store locations, and
our ability to mitigate the impact of Charlotte Russe’s purported termination of
our exclusive distribution agreement through cost cutting
measures.  We may also need to raise additional capital if our working
capital requirements or capital expenditures are greater than we expect, or if
we expand our business by acquiring or investing in additional
brands.  There can be no assurance that additional debt or equity
financing will be available on acceptable terms or at all.




Cash
Flows




We
currently satisfy our working capital requirements primarily through borrowings
from our factor and cash flows generated from operations.  Cash flows
from operating, financing and investing activities for the years ended December
31, 2009 and 2008 are summarized in the following table:




Years
      Ended
              December
      31,2009
            
            
            2008Operating
      activities
            
            $
            1,782,280
            
            
            $
            2,366,047Investing
      activities
            
            
            (1,103,993
            )
            
            
            (846,781
            )Financing
      activities
            
            
            -
            
            
            
            6,947Net
      increase in cash
            
            $
            678,287
            
            
            $
            1,526,213





Cash
Provided By Operating Activities




Net cash
provided by operating activities was approximately $1,782,000 and $2,366,000 for
the years ended December 31, 2009 and 2008, respectively.  Although we
experienced a net loss of approximately $704,000 during the year ended December
31, 2009, we had positive cash flows from operating activities primarily as a
result of decreased inventories and receivables, and increased amounts due to
member , offset by a reduction in customer deposits.  Cash provided
from operating activities for the year ended December 31, 2008 was primarily a
result of decreased receivables and inventories, the receipt
of a $1 million deposit from Charlotte Russe in December 2008 upon execution of
the distribution agreement, and increased accounts payable and accrued expenses,
offset by a net loss of approximately $3.1 million.






29


Cash Used in Investing Activities




Net cash
used in investing activities was approximately $1,104,000 and $847,000 for the
years ended December 31, 2009 and 2008, respectively.  Net cash used
in investing activities for the year ended December 31, 2009 consisted of an
increase in restricted cash held under lease lines as collateral to secure two
lease agreements, an increase in capital expenditures primarily for leasehold
improvements and furniture and fixtures for our new William Rast retail stores
and the relocation of our corporate offices, trademark costs and cash paid in
the acquisition of a J. Lindeberg retail store.  Effective May 13,
2009, we purchased certain assets related to the operation of a J. Lindeberg
retail store in Los Angeles, California, from an unrelated party.  The
asset purchase agreement provided for the payment of $100,000 in cash upon
closing and cancellation of approximately $250,000 of trade accounts receivable
due from the seller.  The asset purchase agreement also provided that
we acquire certain leasehold improvements, furniture and fixtures, and computer
and store equipment.  Net cash used in investing activities for the
year ended December 31, 2008 consisted of capital expenditures primarily for
property and equipment and trademark costs.




Cash
Provided By Financing Activities




There
were no financing activities during the year ended December 31,
2009.  Net cash provided by financing activities for the year ended
December 31, 2008 amounted to approximately $7,000.  Cash provided by
financing activities for the year ended December 31, 2008 reflects the capital
investment of $20,000 received from J. Lindeberg AB, offset by approximately
$13,000 in legal and accounting fees incurred in 2008 related to the
registration of the 2007 private placement shares.  Effective July 1,
2008, approximately $2.2 million of net assets were received into our newly
formed subsidiary, J. Lindeberg USA, LLC in addition to $40,000 cash received
from its members.  This is presented as a non-cash financing activity
in our statement of cash flows for the year ended December 31,
2008.




Factoring Agreements




Pursuant
to the terms of our factoring agreements, the factor purchases our eligible
accounts receivable and assumes the credit risk with respect to those accounts
for which the factor has given its prior approval.  If the factor does
not assume the credit risk for a receivable, the collection risk associated with
the receivable remains with us.  We pay a fixed commission rate and
may borrow up to 85% of eligible accounts receivable and 50% of our eligible
inventory.  Maximum borrowings under our People’s Liberation and
William Rast inventory facility are not to exceed $1.3 million of eligible
inventory.  Maximum borrowings, including borrowings related to
factored accounts receivable and inventory, related to our J. Lindeberg facility
are not to exceed $1.5 million.  Interest is charged at prime plus
1%.  Effective January 1, 2010, our William Rast factoring agreement
was amended to increase the interest rate to prime plus 2%.  As of
December 31, 2009 and 2008, total factored accounts receivable included in due
to factor amounted to approximately $4,099,000 and $4,116,000,
respectively.  Outstanding advances amounted to approximately
$3,686,000 and $3,520,000 as of December 31, 2009 and 2008, respectively, and
are included in the due to factor balance.






30


Contractual
Obligations and Off-Balance Sheet Arrangements




The
following summarizes our contractual obligations at December 31, 2009 and the
effects such obligations are expected to have on liquidity and cash flows in
future periods:




Payments
      Due by PeriodLess
      than
            
            
            1-3
            
            
            4-5
            
            
            AfterContractual
      Obligations
            
            Total
            
            
            1
      Year
            
            
            Years
            
            
            Years
            
            
            5
      YearsOperating
      leases
            
            $
            14,920,132
            
            
            $
            2,385,762
            
            
            $
            6,175,729
            
            
            $
            2,733,318
            
            
            $
            3,625,323Consulting
      agreements
            
            
            150,000
            
            
            
            150,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            15,070,132
            
            
            $
            2,535,762
            
            
            $
            6,175,729
            
            
            $
            2,733,318
            
            
            $
            3,625,323





At
December 31, 2009, approximately $167,000 of the Company’s cash is held under
lease lines as collateral to secure two of the Company’s lease
agreements.




At
December 31, 2009 and 2008, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes.  As such, we are
not exposed to any financing, liquidity, market or credit risk that could arise
if we had engaged in such relationships.




Factored
accounts receivable may subject us to off-balance sheet risk.  We sell
the majority of our trade accounts receivable to a factor and are contingently
liable to the factor for merchandise disputes, other customer claims and
invoices that are not credit approved by the factor.  From time to
time, our factor also issues letters of credit and vendor guarantees on our
behalf.  There were no outstanding letters of credit or vendor
guarantees as of December 31, 2009.  Outstanding letters of credit and
vendor guarantees totaled approximately $91,000 as of December 31,
2008.  Ledger debt (payables to suppliers that use the same factor as
the Company) amounted to approximately $1.1 million and $12,000 at December 31,
2009 and 2008, respectively.





Item
7A.         Quantitative and
Qualitative Disclosures about Market Risk




Not
applicable.






31


Item
8.            Financial
Statements and Supplementary Data




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageAudited
      Financial Statements:Report of Independent Registered Public
      Accounting
      Firm
            
            33Consolidated Balance Sheets at December 31, 2009 and
      2008
            
            34Consolidated Statements of Operations for the Years
      Ended December 31, 2009 and 2008
            
            35Consolidated Statements of Cash Flows for the Years
      Ended December 31, 2009 and 2008
            
            36Consolidated Statement of Changes in Stockholders’ Equity
      from January 1, 2008 to December 31, 2009
            
            37Notes to the Consolidated Financial
      Statements
            
            38







32





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM













To the
Board of Directors and Stockholders:


People’s
Liberation, Inc. and Subsidiaries







We have audited the accompanying
consolidated balance sheets of People’s Liberation, Inc. and Subsidiaries (the
“Company”) as of December 31, 2009 and 2008 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.




We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement.  The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinions.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of People’s
Liberation, Inc. and Subsidiaries, as of December 31, 2009 and 2008 and the
results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.




As discussed in Note 2 to the
consolidated financial statements, effective January 1, 2009 the Company changed
its method of accounting for noncontrolling interests in
subsidiaries.  This change was made to comply with new accounting
requirements.








/s/ Crowe
Horwath LLP




Sherman
Oaks, California


March   29,
2010






33





PEOPLE’S
LIBERATION, INC.


CONSOLIDATED BALANCE SHEETS


December
      31,
              2009
            
            
            December
      31,
              2008AssetsCurrent
      Assets:Cash
      and cash equivalents
            
            $
            2,567,005
            
            
            $
            1,888,718Restricted
      cash
            
            
            167,000
            
            
            
            -Accounts
      receivable, net of allowance for doubtful accounts
            
            
            94,306
            
            
            
            1,307,922Inventories
            
            
            2,731,754
            
            
            
            4,925,438Prepaid
      expenses and other current assets
            
            
            405,615
            
            
            
            247,672Total
      current assets
            
            
            5,965,680
            
            
            
            8,369,750Property
      and equipment, net of accumulated depreciation and
      amortization
            
            
            1,528,033
            
            
            
            837,351Trademarks,
      net of accumulated amortization
            
            
            598,948
            
            
            
            600,609Intangible
      asset
            
            
            428,572
            
            
            
            428,572Other
      assets
            
            
            469,106
            
            
            
            444,266Total
      assets
            
            $
            8,990,339
            
            
            $
            10,680,548Liabilities
      and Stockholders’ EquityCurrent
      Liabilities:Accounts
      payable and accrued expenses
            
            $
            3,455,512
            
            
            $
            3,801,080Due
      to factor
            
            
            2,529
            
            
            
            170,369Customer
      deposits
            
            
            -
            
            
            
            1,000,000Due
      to member
            
            
            812,090
            
            
            
            427,623Income
      taxes payable
            
            
            9,400
            
            
            
            17,789Total
      current liabilities
            
            
            4,279,531
            
            
            
            5,416,861Stockholders’
      equity:Common
      stock, $0.001 par value, 150,000,000 shares authorized; 36,002,563 shares
      issued and outstanding at December 31, 2009 and 2008
            
            
            36,002
            
            
            
            36,002Additional
      paid-in capital
            
            
            8,103,018
            
            
            
            7,951,960Accumulated
      deficit
            
            
            (8,043,054
            )
            
            
            (6,349,151
            )Total
      stockholders’ equity
            
            
            95,966
            
            
            
            1,638,811Noncontrolling
      interest
            
            
            4,614,842
            
            
            
            3,624,876Total
      equity
            
            
            4,710,808
            
            
            
            5,263,687Total
      liabilities and stockholders’ equity
            
            $
            8,990,339
            
            
            $
            10,680,548







See Notes
to Consolidated Financial Statements.






34




PEOPLE’S
LIBERATION, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


Year
      Ended
                December
      31,
                2009
              
              
              Year
      Ended December 31,
                2008Net
      sales
              
              $
              35,634,806
              
              
              $
              32,190,093Cost
      of goods
      sold
              
              
              18,390,059
              
              
              
              16,642,415Gross
      profit
              
              
              17,244,747
              
              
              
              15,547,678Selling,
      design and production expenses
              
              
              9,396,134
              
              
              
              11,784,062General
      and
      administrative
              
              
              8,290,842
              
              
              
              6,796,234Total operating
      expenses
              
              
              17,686,976
              
              
              
              18,580,296Loss
      from
      operations
              
              
              (442,229
              )
              
              
              (3,032,618
              )Interest
      expense,
      net
              
              
              207,716
              
              
              
              141,844Other
      income
              
              
              -
              
              
              
              (16,272
              )Total other
      expense
              
              
              207,716
              
              
              
              125,572Loss
      before income taxes and noncontrolling interest in subsidiaries’
      earnings
              
              
              (649,945
              )
              
              
              (3,158,190
              )Provision
      (benefit) for income
      taxes
              
              
              53,992
              
              
              
              (35,250
              )Net
      loss
              
              
              (703,937
              )
              
              
              (3,122,940
              )Noncontrolling
      interest in subsidiaries’ earnings
              
              
              989,966
              
              
              
              1,337,317Net
      loss attributable to common stockholders
              
              $
              (1,693,903
              )
              
              $
              (4,460,257
              )Basic
      and diluted weighted average loss per common share
              
              $
              (0.05
              )
              
              $
              (0.12
              )Basic
      and diluted weighted average common shares outstanding
              
              
              36,002,563
              
              
              
              36,002,563







See Notes
to Consolidated Financial Statements.






35




PEOPLE’S
LIBERATION, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS




Year
      Ended
              December
      31, 2009
            
            
            Year
      Ended
              December
      31, 2008Cash
      flows from operating activities:Net
      loss
            
            $
            (703,937
            )
            
            $
            (3,122,940
            )Adjustments to reconcile net
      loss to net cash provided by operating activities:Depreciation and
      amortization
            
            
            371,145
            
            
            
            291,297Allowance for doubtful
      accounts
            
            
            (46,000
            )
            
            
            150,000Deferred income
      taxes
            
            
            -
            
            
            
            (55,000
            )Impairment of long-lived
      asset
            
            
            123,036
            
            
            
            -Stock based
      compensation
            
            
            151,058
            
            
            
            183,058Warrants issued for
      services
            
            
            -
            
            
            
            6,700Loss on disposal of fixed
      assets
            
            
            4,141
            
            
            
            143,148Changes in operating assets and
      liabilities:Receivables
            
            
            841,426
            
            
            
            1,985,177Inventories
            
            
            2,193,684
            
            
            
            399,101Refundable income
      taxes
            
            
            -
            
            
            
            11,500Prepaid expenses and other
      current assets
            
            
            (157,943
            )
            
            
            (50,942
            )Other
      assets
            
            
            (24,840
            )
            
            
            205,894Accounts payable and accrued
      expenses
            
            
            (345,568
            )
            
            
            1,172,172Customer
      deposit
            
            
            (1,000,000
            )
            
            
            1,000,000Due to
      member
            
            
            384,467
            
            
            
            42,483Income taxes
      payable
            
            
            (8,389
            )
            
            
            4,399Net cash flows provided by
      operating activities
            
            
            1,782,280
            
            
            
            2,366,047Cash
      flows from investing activities:Increase in restricted
      cash
            
            
            (167,000
            )
            
            
            -Acquisition of retail
      store
            
            
            (100,000
            )
            
            
            -Acquisition of
      trademarks
            
            
            (165,360
            )
            
            
            (270,999
            )Acquisition of property and
      equipment
            
            
            (671,633
            )
            
            
            (575,782
            )Net cash flows used in
      investing activities
            
            
            (1,103,993
            )
            
            
            (846,781
            )Cash
      flows from financing activities:Capital
      investment received from minority interest member
            
            
            -
            
            
            
            20,000Professional fees related to
      private placement of common stock
            
            
            -
            
            
            
            (13,053
            )Net cash flows provided by
      financing activities
            
            
            -
            
            
            
            6,947Net
      increase in cash and cash
      equivalents
            
            
            678,287
            
            
            
            1,526,213Cash
      and cash equivalents, beginning of year
            
            
            1,888,718
            
            
            
            362,505Cash
      and cash equivalents, end of
      year
            
            $
            2,567,005
            
            
            $
            1,888,718Supplemental
      disclosures of cash flow information:Cash
      paid (received) during the year for:Interest
            
            $
            208,642
            
            
            $
            144,064Income
      taxes
      paid
            
            
            69,150
            
            
            
            18,222Income
      taxes
      received
            
            
            (6,390
            )
            
            
            (14,578
            )Non-cash financing
      transactions:Acquisition of retail
      store:Cancellation of trade
      receivables
            
            
            (250,350
            )
            
            
            -Fair value of property and
      equipment acquired
            
            
            350,350
            
            
            
            -Net assets and liabilities
      received in acquisition of subsidiary:Receivables
            
            
            -
            
            
            
            726,191Inventory
            
            
            -
            
            
            
            1,491,369Property and
      equipment
            
            
            -
            
            
            
            50,000Deposits
            
            
            -
            
            
            
            385,140Due to
      member
            
            
            -
            
            
            
            (385,140
            )Minority interest, net of cash
      received from member
            
            
            -
            
            
            
            (2,267,560
            )




See Notes
to Consolidated Financial Statements.








36





PEOPLE’S
LIBERATION, INC.




CONSOLIDATED
STATEMENT OF CHANGES INSTOCKHOLDERS’
EQUITY









Additional
            
            
            
            
            
            TotalCommon
      Stock
            
            
            Paid-in
            
            
            Accumulated
            
            
            Stockholders’
            
            
            Noncontrolling
            
            
            TotalShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Equity
            
            
            Interest
            
            
            EquityBalance
      at January 1, 2008
            
            
            36,002,563
            
            
            $
            36,002
            
            
            $
            7,775,255
            
            
            $
            (1,888,894
            )
            
            $
            5,922,363
            
            
            $
            --
            
            
            $
            5,922,363Professional
      fees related to the  registration of the shares issued in the
      2007 private placement of common stock
            
            
            --
            
            
            
            --
            
            
            
            (13,053
            )
            
            
            --
            
            
            
            (13,053
            )
            
            
            --
            
            
            
            (13,053
            )Warrants
      issued for services
            
            
            --
            
            
            
            --
            
            
            
            6,700
            
            
            
            --
            
            
            
            6,700
            
            
            
            --
            
            
            
            6,700Noncontrolling
      interest
            
            
            --
            
            
            
            --
            
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            3,624,876
            
            
            
            3,624,876Stock
      based compensation
            
            
            --
            
            
            
            --
            
            
            
            183,058
            
            
            
            --
            
            
            
            183,058
            
            
            
            --
            
            
            
            183,058Net
      loss attributable to common stockholders
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (4,460,257
            )
            
            
            (4,460,257
            )
            
            
            --
            
            
            
            (4,460,257
            )Balance
      at December 31, 2008
            
            
            36,002,563
            
            
            
            36,002
            
            
            
            7,951,960
            
            
            
            (6,349,151
            )
            
            
            1,638,811
            
            
            
            3,624,876
            
            
            
            5,263,687Noncontrolling
      interest
            
            
            --
            
            
            
            --
            
            
            
            -
            
            
            
            --
            
            
            
            --
            
            
            
            989,966
            
            
            
            989,966Stock
      based compensation
            
            
            --
            
            
            
            --
            
            
            
            151,058
            
            
            
            --
            
            
            
            151,058
            
            
            
            --
            
            
            
            151,058Net
      loss attributable to common stockholders
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,693,903
            )
            
            
            (1,693,903
            )
            
            
            --
            
            
            
            (1,693,903
            )Balance
      at December 31, 2009
            
            
            36,002,563
            
            
            $
            36,002
            
            
            $
            8,103,018
            
            
            $
            (8,043,054
            )
            
            $
            95,966
            
            
            $
            4,614,842
            
            
            $
            4,710,808










See Notes
to Consolidated Financial Statements.






37


NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS





Organization





People’s
Liberation, Inc. is the parent holding company of Versatile Entertainment, Inc.
(“Versatile”), a California corporation established in April of 2001, and Bella
Rose, LLC (“Bella Rose”), a California limited liability company established in
May 2005, both of which were consolidated on November 22, 2005 and became
wholly-owned subsidiaries of the Company on the effective date of the Company’s
exchange transaction.  William Rast Sourcing, LLC (“William Rast
Sourcing”) and William Rast Licensing, LLC (“William Rast Licensing”), both
California limited liability companies, were formed effective October 1, 2006
and are owned 50% by Bella Rose and 50% by William Rast Enterprises, LLC
(“WRE”), an entity owned in part by Justin Timberlake.  William Rast
Europe Holdings, LLC, a Delaware limited liability company, was formed on March
11, 2009 and is a wholly-owned subsidiary of William Rast
Sourcing.  William Rast Europe B.V. was formed on June 30, 2009 and is
a wholly-owned subsidiary of William Rast Europe Holdings,
LLC.  William Rast Europe Holdings, LLC and William Rast Europe B.V.
(collectively “William Rast Europe”) were formed to market and sell William Rast
apparel and accessories in Europe.  William Rast Retail, LLC (“William
Rast Retail”), a California limited liability company, was formed on August 26,
2009 and is a wholly-owned subsidiary of William Rast
Sourcing.  William Rast Retail was formed to operate the Company’s
William Rast retail stores.  J. Lindeberg USA, LLC (“J. Lindeberg
USA”), a California limited liability company, was formed effective July 1, 2008
and is owned 50% by Bella Rose and 50% by J. Lindeberg USA Corp., a New York
corporation and an entity owned by J. Lindeberg AB, a Swedish corporation
(collectively “Lindeberg Sweden”).    J. Lindeberg USA
Retail, LLC (“J. Lindeberg Retail”), a California limited liability company, was
formed on August 21, 2009 and is a wholly-owned subsidiary of J. Lindeberg
USA.     J. Lindeberg Retail was formed to operate the
Company’s J. Lindeberg retail stores.




People’s
Liberation, Inc. was incorporated in the State of Delaware on December 29, 1982
under the name Philco Financial Management Corp.  The Company had
three wholly owned subsidiaries, Global Medical Technologies, Inc., an Arizona
corporation, which was operating (“Global Medical”), and Century Pacific
Fidelity Corporation and Century Pacific Investment Management Corporation, both
of which were inactive and without assets or debts.




On
January 31, 2005, the Company contributed all of the shares of common stock of
its wholly-owned, inactive subsidiaries, Century Pacific Fidelity Corp. and
Century Pacific Investment Management Corporation, to Global
Medical.  In February 2005, the Company distributed all of the
outstanding shares of common stock of Global Medical on a pro rata basis to its
stockholders.  After this distribution, the Company existed as a
“shell company” under the name of Century Pacific Financial Corporation with
nominal assets whose sole business was to identify, evaluate and investigate
various companies to acquire or with which to merge.




On
November 22, 2005, the Company acquired all of the outstanding voting securities
of Bella Rose and Versatile, each of which became its wholly-owned
subsidiaries.  The Company issued to the Bella Rose members and the
Versatile stockholders an aggregate of 2,460,106.34 shares of its series A
convertible preferred stock, which subsequently converted into 26,595,751 shares
of common stock on January 5, 2006 on a post reverse stock split
basis.  The exchange transaction was accounted for as a reverse merger
(recapitalization) with Versatile and Bella Rose deemed to be the accounting
acquirer, and the Company the legal acquirer.




Effective
on January 5, 2006, the Company changed its corporate name from Century Pacific
Financial Corporation to People’s Liberation, Inc., completed a 1-for-9.25
reverse split of its common stock, adopted its 2005 Stock Incentive Plan, and
its series A convertible preferred stock converted into common
stock.  Following the conversion of the Series A convertible preferred
stock, the reverse stock split on January 5, 2006, and the subsequent issuance
of shares to preserve round lot holders, 34,371,134 shares of common stock were
outstanding.  All share and per share information included in the
accompanying consolidated financial statements reflects the effects of the
reverse stock split.






38







Bella
Rose commenced operations of its William Rast clothing line in May
2005.  Bella Rose began shipping products under the William Rast brand
name in the fourth quarter of 2005.  Under an apparel brand agreement
with WRE, Bella Rose had the exclusive rights to manufacture clothing and
accessories under the William Rast trade name.  Under long-form
definitive agreements entered into effective October 1, 2006, which superseded
the apparel brand agreement, two new entities were formed, William Rast Sourcing
and William Rast Licensing.  All assets and liabilities of the Bella
Rose business were transferred to William Rast Sourcing effective October 1,
2006.  William Rast Sourcing has the exclusive rights to manufacture
clothing with the William Rast brand name.  The William Rast
trademarks were transferred to William Rast Licensing effective October 1, 2006
and William Rast Licensing has the exclusive rights to promote and license the
William Rast brand.




Beginning October 1, 2006, William Rast
Sourcing and William Rast Licensing are consolidated under Bella
Rose.  Until WRE has a basis in the capital of William Rast Sourcing
and William Rast Licensing, losses will not be allocated to
WRE.  Instead, all losses will be recognized by Bella Rose in
consolidation.  Subsequently, if profits are generated by William Rast
Sourcing and William Rast Licensing, then profits will not be allocated to WRE
until previously unrecognized noncontrolling interest losses are fully recouped
by Bella Rose.  Minimum profit allocations to WRE will be accounted
for as a noncontrolling interest in the consolidated financial statements of the
Company.




Effective July 1, 2008, Bella Rose and
Lindeberg Sweden entered into an operating agreement and other related
agreements for J. Lindeberg USA.  Pursuant to the agreements, J.
Lindeberg USA has the rights to source, market, and distribute J. Lindeberg®
branded apparel in the United States on an exclusive basis.  The
agreements provide that Bella Rose and Lindeberg Sweden each hold a 50% interest
in J. Lindeberg USA with the business of J. Lindeberg USA being operated by
Bella Rose.  Bella Rose has management control over J. Lindeberg USA
and therefore, beginning July 1, 2008, the operations of J. Lindeberg USA are
included in the consolidated financial statements of the
Company.  Profit and loss allocations to Lindeberg Sweden are recorded
as a noncontrolling interest in the consolidated financial statements of the
Company.




Nature
of Operations




The
Company markets and sells high-end casual apparel under the brand names
“People’s Liberation,” “William Rast” and, in the United States, “J.
Lindeberg.”  The majority of the merchandise the Company offers
consists of premium denim, knits, wovens, leather goods, golf wear and outerwear
for men and women.  In the United States, William Rast Sourcing and J.
Lindeberg USA distribute their merchandise to boutiques, specialty stores and
better department stores, such as Nordstrom, Bloomingdales, Saks Fifth Avenue
and Neiman Marcus, and online at various websites including williamrast.com,
jlindebergusa.com and Zappos.com.  The Company also markets and sells
its J. Lindeberg branded collection and golf apparel through its retail stores
in New York City and Los Angeles, and sells J. Lindeberg golf wear to green
grass golf stores and boutiques in the United States.  William Rast
products are also sold in its three retail stores located in Los Angeles, San
Jose and Cabazon, California.  Internationally, in select countries,
William Rast Sourcing sells its products to better department stores and
boutiques throughout the world.




The
Company commenced its William Rast clothing line in May 2005.  The
Company’s William Rast clothing line is a collaboration with Justin Timberlake
and his childhood friend, Trace Ayala.






39




The
Company began distributing J. Lindeberg branded apparel products in the United
States on an exclusive basis beginning July 2008 in collaboration with Lindeberg
Sweden.  In addition to being sold in the United States through J.
Lindeberg USA, J. Lindeberg branded high-end men’s fashion and premium golf
apparel is marketed and sold by Lindeberg Sweden worldwide.




The
Company commenced its People’s Liberation business in July 2004.  On
December 16, 2008, the Company entered into an agreement with Charlotte Russe
Holding, Inc. and its wholly-owned subsidiary, Charlotte Russe Merchandising,
Inc. (collectively, “Charlotte Russe”), pursuant to which the Company’s
wholly-owned subsidiary, Versatile, agreed to exclusively sell to Charlotte
Russe, in North America and Central America, People’s Liberation®
branded apparel, apparel accessories, eyewear, jewelry, watches, cosmetics and
fragrances, and to provide Charlotte Russe with marketing and branding support
for People’s Liberation branded apparel and apparel accessories.  The
Company ceased to sell People’s Liberation branded merchandise in North America
and Central America to parties other than Charlotte Russe effective April 30,
2009.  The Company will continue to market and sell People’s
Liberation branded merchandise internationally, with the exception of Central
America.  Product sales to Charlotte Russe under the terms of this
agreement began shipping in June 2009.  The Company is in litigation
with Charlotte Russe in relation to the agreement.  See Note 11 below
for further information relating to the Company’s agreement with Charlotte Russe
and the pending litigation.




The
Company is headquartered in Los Angeles, California, maintains showrooms in New
York, Los Angeles and Atlanta, and has sales representatives in Dallas, Texas,
and Chicago, Illinois.




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Principles
of Consolidation




The
accounts of Versatile, Bella Rose, William Rast Sourcing, William Rast
Licensing, William Rast Retail, William Rast Europe, J. Lindeberg USA and J.
Lindeberg Retail have been consolidated for financial statement
presentation.  All significant inter-company accounts and transactions
have been eliminated in the consolidation.




Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from these estimates.  The significant assets and
liabilities that require management to make estimates and assumptions that
affect the reported amounts in the consolidated financial statements included
inventories, accounts receivable and due to factor, intangible assets, deferred
taxes, stock based compensation and accrued expenses.  Management is
required to make significant estimates and assumptions related to its disclosure
of litigation and the recording of related contingent assets or liabilities, if
any.




Revenue
Recognition




The
Company recognizes revenues in accordance with generally accepted accounting
principles.  Wholesale revenue is recognized when merchandise is
shipped to a customer, at which point title transfers to the customer, and when
collection is reasonably assured.  Customers are not given extended
terms or dating or return rights without proper prior
authorization.  Revenue is recorded net of estimated returns, charge
backs and markdowns based upon management’s estimates and historical
experience.  Website revenue is recognized when merchandise is shipped
to a customer and when collection is reasonably assured.  Retail
revenue is recognized on the date of purchase from the Company’s retail
stores.






40




Comprehensive Income




The Company discloses comprehensive
income in accordance with generally accepted principles which establish
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial
statements.  There were no material other comprehensive income items
for the years ended December 31, 2009 and 2008.




Segment
Reporting




In accordance with generally accepted
accounting principles, the Company is required to report certain information
about operating segments, products, services and geographical areas in which it
operates.  The Company believes that it operates within one segment as
there is not enough difference between the types of products developed and
distributed by the Company to justify segmented reporting by product
type.  Management decisions regarding the allocation of resources and
the assessment of performance are made on a company-wide basis and are not
specific to the type of product.  The Company’s operations include
wholesale sales and retail sales of similar product categories.  At
this time, the Company’s retail operations are not significant enough to require
separate disclosure in the consolidated financial statements.  See
Note 22 for disclosure regarding geographic regions.




Advertising




Advertising
costs are charged to expense as of the first date the advertisements take
place.  Advertising expenses included in selling expenses approximated
$1,373,000 and $1,813,000 for the years ended December 31, 2009 and 2008,
respectively.




Inventories




Inventories,
consisting of piece goods and trim, work-in-process and finished goods, are
stated at the lower of cost (first-in, first-out method) or market
value.  Inventories are evaluated for obsolescence and slow-moving
items based on management’s analysis of sales levels, sales projections and
inventory levels.




Stock-Based
Compensation




The
Company recognizes compensation costs relating to share-based payment
transactions in accordance with generally accepted accounting
principles.  See Note 16 for disclosures regarding stock-based
compensation.




Property
and Equipment




Property
and equipment are stated at cost.  Maintenance and repairs are charged
to expense as incurred.  Upon retirement or other disposition of
property and equipment, applicable cost and accumulated depreciation and
amortization are removed from the accounts and any gains or losses are included
in results of operations.






41







Depreciation
of property and equipment is computed using the straight-line method based on
estimated useful lives of the assets as follows:




Furniture
      and fixtures
            5
      yearsOffice
      equipment
            5
      to 7 yearsMachinery
      and equipment
            5
      to 7 yearsLeasehold
      improvements
            Term
      of the lease or the estimated life of the related improvements, whichever
      is shorter.Computer
      Software
            5
      years





Intangible
Assets




Intangible
assets consist of trademarks and operational control rights related to William
Rast Sourcing and William Rast Licensing (Note 8).




Costs
incurred related to the Company’s trademarks are amortized on a straight-line
basis over an estimated useful life of fifteen years.




Impairment
of Long-Lived Assets and Intangibles




Long-lived
assets, including trademarks and operational control rights related to William
Rast Sourcing and William Rast Licensing, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset.  If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.  Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to
sell.  For the year ended December 31, 2009, the Company recorded an
impairment loss of $123,036 related to trade names the Company was no longer
using.  The impairment loss was charged to general and administrative
expense.  There were no impairment losses related to intangible assets
recorded for the year ended December 31, 2008.




Income
Taxes




Bella
Rose, William Rast Sourcing, William Rast Licensing, William Rast Europe,
William Rast Retail, J. Lindeberg USA and J. Lindeberg USA Retail are limited
liability companies and are subject to California minimum tax of $800 and a fee
based on total annual revenue.  The earnings of a limited liability
company are reported individually by its members.




On
November 22, 2005, People’s Liberation, Inc. (formerly Century Pacific Financial
Corporation) acquired all of the outstanding voting securities of Bella Rose and
Versatile, each of which became a wholly-owned subsidiary of the
Company.  As a result, Versatile and Bella Rose (including its 50%
owned subsidiaries, William Rast Sourcing, William Rast Licensing and J.
Lindeberg USA) are consolidated and income taxes are reported by the parent,
People’s Liberation, Inc.  Taxes are calculated on a consolidated
basis at C-Corporation income tax rates.




Deferred
income taxes are recognized using the asset and liability method by applying
income tax rates to cumulative temporary differences based on when and how they
are expected to affect the tax return.  Deferred tax assets and
liabilities, if any, are adjusted for income tax rate changes.






42





Generally
accepted accounting principles require the Company to account for uncertainty in
income taxes recognized in its financial statements, which includes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  The Company uses a two-step approach to recognizing and
measuring uncertain tax positions.  The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if
any.  The second step is to measure the tax benefit as the largest
amount that is more than 50% likely of being realized upon ultimate
settlement.




The
Company files U.S. Federal tax returns, California, New York, Georgia, Florida,
New Jersey and Texas franchise tax returns.  For the U.S. Federal return,
all periods are subject to tax examination by the U.S. Internal Revenue Service
(“IRS”).  The Company does not currently have any ongoing tax examinations
with the IRS.  The Company believes that its income tax
filing positions and deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material change to its
financial position.  Therefore, no reserves for uncertain income tax
positions have been recorded for the years ended December 31, 2009 and
2008.  In addition, the Company does not anticipate that the total
amount of unrecognized tax benefit related to any particular tax position will
change significantly within the next 12 months.





Income
taxes are further described in Note 17.




Concentration
of Credit Risk




Financial
instruments, which potentially expose the Company to concentration of credit
risk, consist primarily of cash and cash equivalents, trade accounts receivable,
and amounts due from factor.  Concentration of credit risk with
respect to trade accounts receivable is significantly mitigated by the use of a
factor, which effectively transfers a substantial amount of credit risk to the
factor.  The Company and its factor perform on-going credit
evaluations of its customers and the Company maintains an allowance for doubtful
accounts and chargebacks.  The Company may extend unsecured credit to
its customers in the normal course of business.




The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000.  The Company may be
exposed to risk for the amounts of funds held in one bank in excess of the
insurance limit.  In assessing the risk, the Company’s policy is to
maintain cash balances with high quality financial institutions.




The
Company’s products are primarily sold to department stores, specialty retail
stores and international distributors.  These customers can be
significantly affected by changes in economic, competitive or other
factors.  The Company makes substantial sales to a relatively few,
large customers.  In order to minimize the risk of loss, the Company
assigns the majority of domestic accounts receivable to a factor without
recourse.  For non-factored and recourse receivables,
account-monitoring procedures are utilized to minimize the risk of
loss.  Collateral is generally not required.






43




Accounts
Receivable - Allowance for Returns, Discounts and Bad Debts




TheCompany evaluates the
collectability of accounts receivable and charge backs (disputes from customers)
based upon a combination of factors.  In circumstances where the
Company is aware of a specific customer’s inability to meet its financial
obligations (such as in the case of bankruptcy filings or substantialdowngrading by credit
sources),a
specific allowance for bad debts is taken against amounts due to reduce the net
recognized receivable to the amount reasonably expected to be
collected.  For all other customers, the Company recognizes an
allowance for bad debts and uncollectible charge backs based on its historical
collection experience.  If collection experience deteriorates (for
example, due to an unexpected material adverse change in a major customer’s
ability to meet its financial obligations to the Company), the estimates of the
recoverability of amounts due could be reduced by a material
amount.




Shipping
and Handling Costs




The Company records shipping and
handling costs billed to customers as a component of revenue, and shipping and
handling costs incurred by the Company for inbound and outbound freight are
recorded as a component of cost of sales.  Total shipping and handling
costs included as a component of revenue for the years ended December 31, 2009
and 2008 amounted to approximately $217,000 and $334,000,
respectively.  Total shipping and handling costs included as a
component of cost of sales amounted to approximately $920,000 and $957,000 for
the years ended December 31, 2009 and 2008, respectively.




Classification
of Expenses




Cost of Goods Sold - Cost of
goods sold includes expenses primarily related to inventory purchases and
contract labor, customs, freight, duty and overhead
expenses.  Overhead expenses primarily consist of third party
warehouse and shipping costs.




Selling, Design and Production
Expense – Selling, design and production expense primarily includes
tradeshows, salaries, advertising, marketing and promotion, design fees,
samples, travel and showroom expenses.




General and Administrative
Expenses - General and administrative expenses primarily include
salaries, professional fees, facility costs, travel and entertainment,
depreciation and amortization expense, and other general corporate
expenses.




Recently
Issued Accounting Standards




In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-01, “Equity (Topic 505), Accounting
for Distributions to Shareholders with Components of Stock and
Cash.”  ASU No. 2010-01 clarifies that the stock portion of a
distribution to shareholders that allows for the receipt of cash or stock with
the potential limitation on the total amount of cash that all shareholders can
elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock
dividend.  This update is effective for the Company’s first quarter of
2010.   The adoption of ASU No. 2010-01 is not expected to have a
material impact on the Company’s consolidated financial statements.





Effective
January 1, 2009, the Company adopted the provisions of FASB Accounting
Standards Codification (“ASC”) Topic 805, “Business
Combinations.”  This pronouncement provides new guidance that changes
the accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance and is effective for contingent
assets or liabilities acquired in business combinations for which the
acquisition date is on or after the first annual reporting period beginning on
or after
December 15, 2008.  The adoption of this pronouncement did not have a
material effect on the Company’s consolidated financial statements currently,
but its effects will depend on the nature of future acquisitions completed by
the Company, if any.






44





Effective
January 1, 2009, the Company adopted the provisions of a pronouncement
issued in December 2007 on what is now codified as FASB ASC Topics 805, Business Combinations, and
810, Consolidation.
Certain provisions of this pronouncement are required to be adopted
retrospectively for all periods presented. Such provisions include a requirement
that the carrying value of noncontrolling interests (previously referred to as
minority interests) be removed from the mezzanine section of the balance sheet
and reclassified as equity; and consolidated net income or loss to be recast to
include net income or loss attributable to the noncontrolling
interest.  As a result of this adoption, the Company reclassified
noncontrolling interests in the amount of $2.3 million from the mezzanine
section to equity in its December 31, 2008 balance sheet.




In April
2009, the FASB issued ASC Topic 320-10-35, Investment – Debt and Equity
Securities, Overall, Subsequent Measurement,which amends existing
guidance for determining whether impairment is other-than-temporary (OTTI) for
debt securities.  The pronouncement requires an entity to assess
whether it intends to sell, or it is more likely than not that it will be
required to sell a security in an unrealized loss position before recovery of
its amortized cost basis.  If either of these criteria is met, the
entire difference between amortized cost and fair value is recognized in
earnings.  For securities that do not meet the aforementioned
criteria, the amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to other factors is
recognized in other comprehensive income.    Additionally,
the pronouncement expands and increases the frequency of existing disclosures
about other-than-temporary impairments for debt and equity
securities.  This pronouncement is effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009.  The adoption of this
pronouncement on April 1, 2009 did not have a material impact on the Company’s
results of operations or financial position.




In April
2009, the FASB issued  ASC Topic 820-10-65-4, Transition Related to FASB Staff
Position FAS 157-4 Determining Fair Value When the Volume and Level of Activity
for the Asset and Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.  This pronouncement
emphasizes that even if there has been a significant decrease in the volume and
level of activity, the objective of a fair value measurement remains the
same.  Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants.  The
pronouncement provides a number of factors to consider when evaluating whether
there has been a significant decrease in the volume and level of activity for an
asset or liability in relation to normal market activity.   In
addition, when transactions or quoted prices are not considered orderly,
adjustments to those prices based on the weight of available information may be
needed to determine the appropriate fair value.  The pronouncement
also requires increased disclosures.  This pronouncement is effective
for interim and annual reporting periods ending after June 15, 2009, and will be
applied prospectively.  Early adoption is permitted for periods ending
after March 15, 2009.  The adoption of this pronouncement on July 1,
2009 did not have a material impact on the Company’s results of operations or
financial position.




In
April 2009, the FASB issued ASC 825-10-65-1,Transition Related to FSP FAS 107-1
and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. This pronouncement requires disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
that were previously only required in annual financial statements. This
pronouncement is effective for interim reporting periods ending after
June 15, 2009.  The adoption of this pronouncement on July
1, 2009 did not have a material impact on the Company’s results of operations or
financial position.






45




Other
recent accounting pronouncements did not or are not believed to have a material
impact on the Company's present or future consolidated financial
statements.





Fair
Value of Financial Information




The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value.  Accounts
receivable and due to factor: Due to the short-term nature of the
receivables, the fair value approximates the carrying value.  Accounts payable and accrued
expenses and customer deposit:  Due to the short-term nature of
the payables, the fair value approximates the carrying value.





In
accordance with generally accepted accounting principles, the Company measures
fair value of financial assets and liabilities by establishing a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three levels as follows:





·
            Level
      I - Quoted prices (unadjusted) in active markets for identical asset
      or liabilities that the Company has the ability to access as of the
      measurement date.  Financial assets and liabilities utilizing
      Level I inputs include active exchange-traded securities and
      exchange-based derivatives.


·
            Level
      II - Inputs other than quoted prices included within Level I that are
      directly observable for the asset or liability or indirectly observable
      through corroboration with observable market data. Financial assets and
      liabilities utilizing Level II inputs include fixed income securities,
      non-exchange-based derivatives, mutual funds, and fair-value
      hedges.


·
            Level
      III - Unobservable inputs for the asset or liability only used when there
      is little, if any, market activity for the asset or liability at the
      measurement date.  Financial assets and liabilities utilizing
      Level III inputs include infrequently-traded, non-exchange-based
      derivatives and commingled investment funds, and are measured using
      present value pricing models.





The
Company determined that as of December 31, 2009 and 2008, there were no
significant financial instruments that required fair value
measurement.





NOTE
3 - EARNINGS PER SHARE




The
Company computes and presents earnings per share in accordance with SFAS No.
128, “Earnings Per
Share”.  Basic earnings per share are computed based upon the
weighted average number of common shares outstanding during the
year.




Warrants
representing 3,565,000 shares of common stock at exercise prices ranging from
$0.40 to $2.00 per share and stock options
representing 2,895,000 shares of common stock at exercise prices ranging from
$0.20 to $1.25 per sharewere outstanding as of December 31, 2009, but
were excluded from the average number of common shares outstanding in the
calculation of earnings per share because the effect of inclusion would be
anti-dilutive.




Warrants
representing 3,565,000 shares of common stock at exercise prices ranging from
$0.40 to $2.00 per share were
outstanding as of December 31, 2008, but were excluded from the
average number of common shares outstanding in the calculation of earnings per
share because the effect of inclusion would be anti-dilutive.






46




The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per share computations:




Year ended December 31,
    2009:
              
              Loss
                (Numerator)
              
              
              Shares
      (Denominator)
              
              
              Per
      Share AmountBasic
      loss per share:Net
      loss attributable to common stockholders
              
              $
              (1,693,903
              )
              
              
              36,002,563
              
              
              $
              (0.05
              )Effect
      of Dilutive Securities:Options
              
              
              -
              
              
              
              -
              
              
              
              -Warrants
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss attributable to common stockholders
              
              $
              (1,693,903
              )
              
              
              36,002,563
              
              
              $
              (0.05
              )Year ended December 31,
    2008:Basic
      loss per share:Net
      loss attributable to common stockholders
              
              $
              (4,460,257
              )
              
              
              36,002,563
              
              
              $
              (0.12
              )Effect
      of Dilutive Securities:Options
              
              
              -
              
              
              
              -
              
              
              
              -Warrants
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss attributable to common stockholders
              
              $
              (4,460,257
              )
              
              
              36,002,563
              
              
              $
              (0.12
              )


NOTE
4 – ACCOUNTS RECEIVABLE





Accounts receivable is summarized as
follows:




December
      31,2009
            
            
            2008Trade
      accounts
      receivable
            
            $
            294,306
            
            
            $
            1,553,922Less
      allowance for doubtful accounts and subsequent credits
            
            
            (200,000
            )
            
            
            (246,000
            )$
            94,306
            
            
            $
            1,307,922








47





NOTE
5 - INVENTORIES





Inventories are summarized as
follows:




December
      31,2009
            
            
            2008Piece
      goods and
      trim
            
            $
            72,722
            
            
            $
            1,564,727Work
      in
      process
            
            
            35,295
            
            
            
            418,710Finished
      goods
            
            
            2,933,917
            
            
            
            3,203,0013,041,934
            
            
            
            5,186,438Less
      reserve for obsolescence and slow moving inventory
            
            
            (310,180
            )
            
            
            (261,000
            )$
            2,731,754
            
            
            $
            4,925,438





NOTE
6 - PROPERTY AND EQUIPMENT





Property and equipment is summarized
as follows:




December
      31,2009
            
            
            2008Furniture
      and
      fixtures
            
            $
            595,369
            
            
            $
            451,854Office
      equipment
            
            
            365,472
            
            
            
            256,454Machinery
      and
      equipment
            
            
            54,107
            
            
            
            48,695Leasehold
      improvements
            
            
            854,226
            
            
            
            119,910Computer
      software
            
            
            370,894
            
            
            
            352,1762,240,068
            
            
            
            1,229,089Less
      accumulated depreciation and amortization
            
            
            (712,035
            )
            
            
            (391,738
            )$
            1,528,033
            
            
            $
            837,351





Depreciation
and amortization expense amounted to $327,160 and $257,548 for the years ended
December 31, 2009 and 2008, respectively.





NOTE
7 – TRADEMARKS





Trademarks are summarized as
follows:


December
      31,2009
            
            
            2008Trademarks,
      at
      cost
            
            $
            682,063
            
            
            $
            662,716Less
      accumulated amortization
            
            
            (83,115
            )
            
            
            (62,107
            )$
            598,948
            
            
            $
            600,609








48





Future
annual estimated amortization expense is summarized as follows:





Years Ending December 31,2010
            
            $
            45,4702011
            
            
            45,4702012
            
            
            45,4702013
            
            
            45,4702014
            
            
            45,470Thereafter
            
            
            371,598$
            598,948





Trademark
amortization expense amounted to $43,985 and $33,749 for the years ended
December 31, 2009 and 2008, respectively.  For the year ended December
31, 2009, the Company recorded impairment losses of $123,036 related to trade
names the Company is no longer using.  The impairment losses were
charged to general and administrative expense.  There were no
impairment losses related to intangible assets recorded for the year ended
December 31, 2008.




NOTE
8 - INTANGIBLE ASSET AND NONCONTROLLING INTEREST




Intangible
asset consists of operational control rights related to the William Rast
Sourcing and William Rast Licensing entities.




On or
around April 27, 2005, Bella Rose entered into letter agreements (the “Letter
Agreements”) with William Rast Enterprises, LLC (“WRE”).  The Letter
Agreements contemplated the formation of a joint venture between the parties to
exploit the William RastTM trademark.  More particularly, the Letter
Agreements contemplated the formation of a sourcing company, which would have
rights to manufacture and sell William Rast branded apparel, and a licensing
company, which would own the William RastTM trademark and license rights to the
trademark to the sourcing company and other parties.  The Letter
Agreements also contemplated a services agreement, pursuant to which Justin
Timberlake would provide personal services to the licensing company and its
licensees in connection with the exploitation of the William Rast
brand.





While the
Letter Agreements contemplated that the venture would be operated by a separate
operating entity, which entity would be owned and managed 50% by Bella Rose and
50% by WRE, the venture’s business had been operated directly by Bella Rose
since inception.





On
October 1, 2006, Bella Rose and WRE entered into long-form definitive
agreements, including the limited liability company operating agreement of
William Rast Sourcing, LLC (the “Sourcing Operating Agreement”), the limited
liability company operating agreement of William Rast Licensing, LLC (the
“Licensing Operating Agreement”, and together with the Sourcing Operating
Agreement, the “Operating Agreements”), and the services agreement by and
between William Rast Licensing and Justin Timberlake (the Operating Agreements,
together with the Services Agreement, the “Transaction Documents”) to
memorialize the terms set forth in the Letter Agreements, with the exception
that Bella Rose has operational control over William Rast Sourcing, LLC and
William Rast Licensing, LLC.





WRE
received a 50% membership interest in William Rast Sourcing.  Bella
Rose was granted a 50% membership interest in William Rast Sourcing in exchange
for assigning all of the assets and liabilities of the William Rast apparel
business operated by Bella Rose.  Profits and losses are allocated to
each member in accordance with their respective membership
interests.  WRE is to receive minimum annual non-cumulative profit
allocations of 6% of net sales or, if less, the actual amount of profits for the year.  Bella
Rose was required to loan William Rast Sourcing up to $1.8 million in unsecured
working capital funds through December 31, 2008.  The Sourcing
Operating Agreement also includes certain rights related to the sale or transfer
of membership interests, including right of first refusal and drag along
rights.






49





WRE also
received a 50% membership interest in William Rast Licensing.  Bella
Rose was granted a 50% membership interest in William Rast Licensing in exchange
for contributing the William RastTM trademarks to the company.  Profits
and losses are allocated to each member in accordance with their respective
membership interests.  WRE is to receive minimum annual non-cumulative
profit allocations of 3% of net sales or, if less, the actual amount of profits
for the year.  Bella Rose was required to loan William Rast Licensing
up to $200,000 in unsecured working capital funds through December 31,
2008.  The Licensing Operating Agreement also includes certain rights
related to the sale or transfer of membership interests, including right of
first refusal and drag along rights.





William
Rast Licensing granted William Rast Sourcing a perpetual, royalty free,
exclusive, worldwide, nontransferable license to use the William Rast trademarks
in connection with the sourcing, marketing and distribution of men’s, women’s
and children’s apparel.





In
consideration for WRE entering into the Operating Agreements on terms which give
Bella Rose operational control over the Sourcing Company and the Licensing
Company, which operational control the Letter Agreements provided would be 50%
in favor of Bella Rose and 50% in favor of WRE, the Company, on October 1, 2006,
issued to WRE 571,429 shares of its common stock, par value $0.001 per
share.  The common stock issued contains restrictions related to the
sale or transfer of the shares, including right of first refusal and annual
volume limitations.  The market price of the Company’s common stock on
the date of issuance of the shares was $0.75.  The $428,572 value of
the common stock issued to WRE has been recorded as an intangible asset on Bella
Rose’s financial statements.  The intangible asset is expected to have
an indefinite life and is reviewed for impairment on a quarterly
basis.





Pursuant
to a services agreement entered into between William Rast Licensing and Justin
Timberlake, Mr. Timberlake agreed to provide William Rast Licensing and its
licensees (which includes William Rast Sourcing) with certain services in
connection with the launch, advertising, design, and styling of William Rast
branded apparel and other consumer products.  During the term of the
agreement, except as otherwise provided in the agreement, the services rendered
by Mr. Timberlake in the indirect endorsement of William Rast branded apparel
and other consumer products were exclusive to William Rast
Licensing.  The Services Agreement expired on December 31,
2008.





Beginning
October 1, 2006, William Rast Sourcing and William Rast Licensing are
consolidated under Bella Rose, a wholly-owned subsidiary of the
Company.  Until WRE has a basis in the capital of William Rast
Sourcing and William Rast Licensing, losses will not be allocated to
WRE.  Instead, all losses will be recognized by Bella Rose in
consolidation.  Subsequently, if profits are generated by William Rast
Sourcing and William Rast Licensing, then profits will not be allocated to WRE
until previously unrecognized noncontrolling interest losses are fully recouped
by Bella Rose.  Minimum profit allocations to WRE will be accounted
for as noncontrolling interest in the consolidated financial statements of the
Company.





Because
net liabilities of Bella Rose were transferred to William Rast Sourcing and
William Rast Licensing upon formation of the new entities, the settlement of
which is the sole responsibility of Bella Rose, there was no gain or loss
recognized upon the transfer of the net liabilities to the new
entities.





Assets
and liabilities of Bella Rose transferred to William Rast Sourcing and William
Rast Licensing on October 1, 2006 were transferred at their carrying value on
the books of Bella Rose on the date of transfer.






50





In May
2007, the limited liability company operating agreements of William Rast
Sourcing, LLC and William Rast Licensing, LLC were amended and restated to
reflect changes in distributions and the allocation of profits and losses among
the entities members.  The amended and restated operating agreements
provide for minimum quarterly noncontrolling interest cash distributions to WRE
based on net revenues, as defined in the operating agreements, generated by the
companies during the applicable quarter.  Effective January 1, 2007,
William Rast Sourcing will pay WRE a minimum quarterly noncontrolling interest
distribution of 6% of applicable net sales generated by William Rast Sourcing
during the quarterly period, and William Rast Licensing will pay WRE a minimum
quarterly noncontrolling interest distribution of 3% of applicable net sales
generated by William Rast Licensing during the quarterly
period.  Noncontrolling interest distributions are to be paid 45 days
following the applicable quarter.




On
November 9, 2007, the limited liability company operating agreement of William
Rast Sourcing, LLC was further amended to reflect a modification of the
distributions to WRE.  For the calendar quarters ending June 30, 2007,
September 30, 2007 and December 31, 2007, all cash distributions William Rast
Sourcing, LLC was required to pay to WRE pursuant to the amended and restated
Operating Agreement were not be paid or accrued for future payment with respect
to such calendar quarters.




Total
noncontrolling interest recorded for the years ended December 31, 2009 and 2008
amounted to $1,192,960 and $1,326,293, respectively, and represent minimum
distributions accrued for each applicable year.  Cash distributions to
WRE, if any, are also recorded as noncontrolling interest in the Company’s
consolidated statements of operations.




On
November 13, 2007, the Company issued a warrant to purchase 150,000 shares of
its common stock to WRE.  The warrant has an exercise price of $0.40,
vests immediately and has a term of five years.  The warrant was
valued at approximately $27,000 using the Black Scholes valuation
model.




NOTE
9 - DUE TO FACTOR





The
Company uses a factor for working capital and credit administration
purposes.  Under the factoring agreements, the factor purchases a
substantial portion of the Company’s trade accounts receivable and assumes
credit risk with respect to certain accounts.




The
factor agreements provide that the Company can borrow an amount up to 85% of the
value of its approved factored customer invoices.  The Company can
also borrow up to 50% of its eligible inventory (as defined in the
agreements).  Maximum borrowings under the Company’s People’s
Liberation and William Rast inventory facility are not to exceed $1.3 million of
eligible inventory.  Maximum borrowings, including borrowings related
to factored accounts receivable and inventory, related to the Company’s J.
Lindeberg facility are not to exceed $1.5 million.  The factor
commission is 0.8% of the customer invoice amount for terms up to 60 days, plus
one quarter of one percent (.25%) for each additional thirty-day
term.




Receivables
sold in excess of maximums established by the factor are subject to recourse in
the event of nonpayment by the customer.  The Company is contingently
liable to the factor for merchandise disputes and customer claims on receivables
sold to the factor.




To the
extent that the Company draws funds prior to the deemed collection date of the
accounts receivable sold to the factor, interest is charged at the factor’s
prime lending rate plus 1% per annum.  Effective January 1, 2010, the
interest rate on the Company’s William Rast facility was increased to the
factor’s prime lending rate plus 2%.  Factor advances and ledger debt
are collateralized by accounts receivable, inventories, equipment and general
intangibles.  Ledger debt (payables to suppliers that use the same
factor as the Company) amounted to approximately $1.1 million and $12,000 at
December 31, 2009 and
2008, respectively.  From time to time, the factor issues letters of
credit and vendor guarantees on the Company’s behalf. There were no
outstanding letters of credit or vendor guarantees as of December 31,
2009.  Outstanding letters of credit and vendor guarantees totaled
approximately $91,000 as of December 31, 2008.






51


The J.
Lindeberg factoring agreements provide for corporate guaranties from the
Company’s related entities, People’s Liberation, Inc., Bella Rose, LLC, and
Versatile Entertainment, Inc.





Due to factor is summarized as
follows:




December
      31,2009
            
            
            2008Outstanding
      receivables:Without
      recourse
            
            $
            3,108,669
            
            
            $
            3,423,524With
      recourse
            
            
            990,761
            
            
            
            692,1554,099,430
            
            
            
            4,115,679Advances
            
            
            (3,685,612
            )
            
            
            (3,520,281
            )Open
      credits
            
            
            (416,347
            )
            
            
            (765,767
            )$
            (2,529
            )
            
            $
            (170,369
            )





NOTE
10- WILLIAM RAST LIFESTYLE APPAREL DESIGN AGREEMENTS




Effective November 15, 2007, William
Rast Sourcing entered into a design services agreement  with Paris68
LLC and Johan and Marcella Lindeberg.  The design services agreement
provided that the Company’s William Rast lifestyle collection be developed and
designed in collaboration with Paris68, the independent design consultancy of
Johan and Marcella Lindeberg.  Johan Lindeberg, best known for his
role as Creative Director of the Swedish brand J. Lindeberg, designs the
Company’s men’s collection while Marcella Lindeberg designs the Company’s
women’s collection.  The initial collections were launched in February
of 2008.  The design services agreement with Paris68 and Johan and
Marcella Lindeberg was for a three-year period ending December
2010.





In accordance with the terms of the
design services agreement, the Company was required to make minimum design fee
payments totaling $6.5 million over the term of the agreement.  In
addition to the minimum annual design fees, the design services agreement also
provided for royalty payments for the contract years ending December 31, 2009
and 2010 of 7% of net sales of the collections products in excess of $7.5
million up to $20 million, and 5% of net sales of the collection’s products in
excess of $20 million.





Future
contractual design fee payments due under the design services agreement were to
be amortized in accordance with the revenue derived from sales of the collection
products.  Expense amortized to sales recorded for the year ended
December 31, 2008 amounted to approximately $678,000.




Effective
December 1, 2008, the design services agreement with Paris68 LLC was
restructured.  The restructured design services agreement with Paris68
LLC provides for the payment of design fees at a rate of $20,000 per month in
addition to travel and other expenses incurred by the design team through June
2010 and eliminates the royalties payable to Paris68 LLC under the terms of the
original contract.




As a
result of the restructuring of the design services agreement dated effective
November 15, 2007, prepaid design fees incurred through December 1, 2008
amounting to $1.6 million were expensed to selling, design and production
expense during the fourth quarter of 2008.  Total design fees paid to
Paris68 pursuant to the contract from November 15, 2007 through November 30,
2008 amounted to $2.3 million, including the $1.6 million expensed in the fourth
quarter of 2008.  Total design fees paid to Paris68 for the year ended
December 31, 2009 amounted to approximately $622,000.






52





NOTE
11 - CHARLOTTE RUSSE DISTRIBUTION AGREEMENT AND LITIGATION





Distribution
Agreement




On
December 16, 2008, the Company entered into an agreement (the “Agreement”) with Charlotte
Russe, pursuant to which the Company’s wholly-owned subsidiary, Versatile,
agreed to exclusively sell to Charlotte Russe, in North America and Central
America, People’s Liberation® branded apparel, apparel accessories, eyewear,
jewelry, watches, cosmetics and fragrances, and to provide Charlotte Russe with
marketing and branding support for People’s Liberation branded apparel and
apparel accessories.




Pursuant
to the Agreement, the Company is to design, source, sample, fit and deliver an
assortment of finished goods selected by Charlotte Russe and sell such
merchandise to Charlotte Russe at wholesale prices.  Charlotte Russe
has the exclusive right to market, distribute, and sell People’s Liberation
branded merchandise purchased from the Company in North America and Central
America through Charlotte Russe® branded retail stores and related distribution
channels, including outlet locations and direct-to-consumer
sales.  The Company ceased to sell People’s Liberation branded
merchandise in such territories to parties other than Charlotte Russe effective
April 30, 2009.  The Company intends to continue to market and sell
its People’s Liberation branded merchandise internationally, with the exception
of Central America.  Product sales to Charlotte Russe under the terms
of this agreement began shipping in June 2009.




In
consideration for the exclusive rights granted to Charlotte Russe under the
Agreement, Charlotte Russe agreed to purchase from the Company a minimum amount
of People’s Liberation branded merchandise during each contract year. The
aggregate minimum purchase obligation for the period from inception of the
Agreement through the end of its initial term on December 31, 2012 is $65
million.  The amount of the minimum purchase obligation varies by
contract year, and may be less than or greater than $65 million if the Agreement
is terminated prior to expiration of the initial term or is renewed for one or
more additional renewal periods.




Included
in customer deposits as of December 31, 2008, is a $1 million payment received
from Charlotte Russe in December 2008 upon execution of the
Agreement.  Advance payments were applied against future minimum
purchase requirements for the related contract year of the
Agreement.




The
initial term of the Agreement expires on December 31, 2012, and may be extended
by Charlotte Russe for two additional one-year renewal periods with minimum
purchase requirements of an aggregate of $65 million during such two-year
period.  Charlotte Russe may elect to terminate the Agreement early by
delivering written notice to the Company at any time between January 1, 2011 and
June 30, 2011, in which event the Agreement shall terminate, at Charlotte
Russe’s election, on either (i) July 1, 2011 with the payment of an early
termination fee, or (ii) December 31, 2011.




In
addition to its minimum purchase obligations, if Charlotte Russe elects to renew
the Agreement beyond the initial term, then commencing January 1, 2013,
Charlotte Russe will pay the Company a royalty equal to a negotiated percentage
of the amount by which actual wholesale sales of merchandise for a contract year
exceed the minimum purchase obligation for such contract year.




Litigation




On
October 27, 2009, the Company filed a complaint for damages and equitable relief
against Charlotte Russe in the Superior Court of the State of California, County
of Los Angeles, Central District (Versatile Entertainment, Inc. v. Charlotte
Russe Merchandising, Inc., BC424674) (the “Charlotte Russe
Action”).  On that same day, the Company also filed suit against
Advent International Corporation and certain
of its subsidiaries, and David Mussafer and Jenny J. Ming (collectively, the
“Advent Defendants”) in the Superior Court of the State of California, County of
Los Angeles, Central District (Versatile Entertainment, Inc. v. Advent
International Corporation, BC424675) (the “Advent Action”). Advent International
Corporation, through its subsidiaries, acquired Charlotte Russe in October
2009.  The complaints relate to the Company’s Agreement with Charlotte
Russe described above.






53


On
October 26, 2009, the Company received a letter from Charlotte Russe purportedly
terminating the Agreement as a result of the Company’s alleged fraudulent
inducement of Charlotte Russe to enter into the Agreement as well as the
Company’s alleged subsequent material breaches of the Agreement.  The
Company believes the allegations in the letter are demonstrably false and that
the termination of the Agreement by Charlotte Russe was improper, constituting a
material breach of the Agreement by Charlotte Russe for which the Company is
entitled to damages.  Additionally, the Company asserts that before
acquiring Charlotte Russe, Advent International Corporation and certain of its
subsidiaries and management, including David Mussafer and Jenny J. Ming,
evaluated Charlotte Russe’s ongoing business and contractual relations, and
decided that they would wrongfully attempt to avoid the contractual obligations
under the Agreement by asserting fabricated breaches of contract against the
Company, thus intentionally interfering with the Company’s contract with
Charlotte Russe.




The
Company’s complaint in the Charlotte Russe Action includes four causes of
action, including one for declaratory relief in which it seeks declarations that
(i) by Charlotte Russe’s efforts to wrongfully terminate the Agreement and their
sale of People’s Liberation brand goods at “close-out” prices, they have
breached the express terms of the Agreement; (ii) the Agreement is in full force
and effect notwithstanding Charlotte Russe’s purported termination thereof;
(iii) Charlotte Russe is required to perform its obligations under the Agreement
and that no performance obligation has been excused; (iv) the Company’s actions,
including those alleged acts complained of in Charlotte Russe’s October 26
letter, do not constitute material breaches of the Agreement; and (v) the
express terms of the Agreement require Charlotte Russe to indemnify, hold
harmless and defend the Company from any future or additional damages or costs
incurred by the Company as a result of Charlotte Russe’s breach of the Agreement
and as a result of the Company’s lawsuit.




In the
Charlotte Russe Action, the Company has also asserted claims for:






·
            breach
      of contract by Charlotte Russe for, among other things, wrongfully
      terminating the Agreement and for selling People's Liberation branded
      apparel at "close-out" prices;




·
            fraudulent
      misrepresentation relating to the misrepresentation and concealment of
      certain material facts from the Company, including making false
      representations about their ability and intent to promote People’s
      Liberation branded products for sale in their stores, their ability to
      perform their obligations under the Agreement, their discounting of
      People’s Liberation branded apparel in violation of the Agreement and the
      facts underlying their purported termination of the Agreement;
      and




·
            negligent
      misrepresentation relating to the misrepresentation and concealment of
      certain material facts from the Company, including making false
      representations about their ability and intent to promote People’s
      Liberation branded products for sale in their stores, their ability to
      perform their obligations under the Agreement, their discounting of
      People’s Liberation branded apparel in violation of the Agreement and the
      facts underlying their purported termination of the
    Agreement.




The
Company is seeking compensatory damages of no less than $59,000,000, punitive
damages, preliminary and permanent injunctions enjoining Charlotte Russe and the
other defendants from engaging in acts
which diminish the value of the People’s Liberation brand, and an award of
attorneys’ fees and costs incurred in relation to each cause of
action.






54


In the
Advent Action, the Company asserts one cause of action for intentional
interference with contract, for which the Company is seeking compensatory
damages of no less than $59,000,000, punitive damages, as well as an award of
attorney’s fees and costs incurred in relation to the action.




On
October 28, 2009, Charlotte Russe Holding, Inc. and Charlotte Russe
Merchandising, Inc. served a complaint against People’s Liberation, Inc. and
Versatile Entertainment, Inc., which complaint was filed in the Superior Court
of the State of California, County of Los Angeles, Central District (Charlotte Russe Holding, Inc. vs.
Versatile Entertainment, Inc., BC424734).  Charlotte Russe
subsequently filed a First Amended Complaint asserting claims for:




·
            rescission
      of the Agreement based on fraudulent misrepresentations made by us to
      induce Charlotte Russe to enter into the
  Agreement;  ·
              restitution after rescission based upon our breach of
      the Agreement as described below;
  ·
              breach
      of contract by us for, among other things, (i) failing to provide the
      promised services of Marcella Lindeberg; (ii) permitting other retailers
      to sell People’s Liberation branded products in Charlotte Russe’s
      exclusive territory; (iii) failing to provide the products in
      compliance with the Agreement; (iv) failing to maintain the promised
      quality of the products; (v) failing to provide the promised services of
      Colin Dyne; (vi) failing to provide the promised services of a dedicated
      work team; (vii) failing to provide the promised management services under
      the Agreement; and (viii) failing to deliver all products in the time
      required under the Agreement;
  ·
              fraud; and
 
 ·
              negligent misrepresentation.


Charlotte
Russe is seeking restitution of all consideration paid to the Company under the
Agreement, compensatory and punitive damages, and an award of attorneys’ fees
and costs incurred in relation to each cause of action.




The
Company intends to vigorously pursue the Charlotte Russe Action and the Advent
Action and to vigorously defend any actions brought forth by Charlotte
Russe.  Although the purported termination of the Company’s exclusive
distribution agreement by Charlotte Russe will continue to have a significant
impact on the Company’s subsidiary that holds the People’s Liberation brand
business, Versatile Entertainment, management believes it does not affect the
ability of the Company as a whole to continue as a going concern because of the
continued operations and expected sales, cash flows and results of operations
from its other brands, William Rast and J. Lindeberg USA.  As of
December 31, 2009, the Company has approximately $575,000 of factored accounts
receivable due from Charlotte Russe and approximately $463,000 of inventory on
hand related to purchase orders received from Charlotte Russe.  In
January 2010, the Company received approximately $120,000 of additional
inventory from its vendor related to purchase orders received from Charlotte
Russe prior to the dispute.  This inventory is not included in the
consolidated balance sheet at December 31, 2009.  Approximately 20% of
the inventory on hand was subsequently sold to third parties at an overall price
above the cost of production.  The Company has not recorded a reserve
for bad debts related to factored accounts receivable due from Charlotte Russe
or a reserve for inventory purchased on behalf of Charlotte Russe as of December
31, 2009, as the Company believes it will prevail in its actions against
Charlotte Russe.  The Company does not believe that it will incur a
loss related to these assets and the Company believes that it will be able to
sell its remaining inventory at or above the cost of production.







55


NOTE
12 – J. LINDEBERG USA, LLC AND DUE TO MEMBER




Effective
July 1, 2008, the Company, through its wholly-owned subsidiary, Bella Rose, and
Lindeberg Sweden entered into an operating agreement and other related
agreements for the Company’s newly formed subsidiary, J. Lindeberg
USA.  Pursuant to the agreements, J. Lindeberg USA will source,
market, and distribute J. Lindeberg® branded apparel in the United States on an
exclusive basis.  The agreements provide that the Company and
Lindeberg Sweden each hold a 50% interest in J. Lindeberg USA with the business
of J. Lindeberg USA being operated by the Company.  Under the terms of
the agreements, Lindeberg Sweden was required to contribute to J. Lindeberg USA
$20,000 in cash as well as certain assets consisting primarily of accounts
receivable and inventory.  The Company was required to contribute to
J. Lindeberg USA $20,000 in cash and will be required to contribute up to a
maximum of $1.5 million in working capital or related guaranties through
December 2010.  The agreements also provide that Lindeberg Sweden
will, among other things, make available to J. Lindeberg USA for purchase all
new collections of J. Lindeberg® branded apparel, and provide for the
factory-direct purchase by the Company of J. Lindeberg® branded apparel on terms
no less favorable to the Company than terms received by Lindeberg Sweden or its
affiliates for the same or substantially the same merchandise.  In
addition, the agreements provide for a license from Lindeberg Sweden to J.
Lindeberg USA of the J. Lindeberg® mark and other related marks for use in the
United States on an exclusive basis for a period of 25 years.  The
operating agreement provides that J. Lindeberg AB has the option to purchase the
Company’s share of J. Lindeberg USA at a negotiated purchase price as outlined
in the agreement.





The
following table summarizes the estimated fair values of the assets and
liabilities contributed on July 1, 2008 to J. Lindeberg USA.  Member
contribution receivable represents in-transit inventory contributed to J.
Lindeberg USA by Lindeberg Sweden in July 2008.





Current
      assets:Cash
            
            $
            40,000Accounts
      receivable
            
            
            726,191Inventory
            
            
            488,700Member
      contribution receivable
            
            
            1,002,669Property and equipment
            
            
            50,000Deposits
            
            
            385,140Total assets contributed
            
            
            2,692,700Current
      liabilities:Due
      to
      member
            
            
            385,140Total
      liabilities assumed
            
            
            385,140Net
      assets contributed
            
            $
            2,307,560







56


This
transaction is an acquisition of a business and accounting standards require
proforma financial information to be disclosed in the Company’s annual financial
statements.  Unaudited proforma consolidated results of operations for
the year ended December 31, 2008, as though J. Lindeberg USA had been acquired
as of January 1, 2008, are as follows:





Year
      EndedDecember
      31,2008Net
      sales
            
            $
            36,489,010Net
      loss
            
            $
            (4,663,09
            )Basis
      and diluted loss per share
            
            $
            (0.13
            )





The
pro-forma consolidated results are not necessarily indicative of the operating
results that would have been achieved had the transaction been in effect as of
the beginning of the period presented and should not be construed as being
representative of future operating results.





Due to
member as of December 31, 2009 and 2008 represent amounts payable to J.
Lindeberg AB related to finished good purchases and the New York retail store
and showroom deposits.





NOTE
13 – J. LINDEBERG RETAIL STORE PURCHASE




Effective
May 13, 2009, the Company purchased certain assets related to the operation of a
J. Lindeberg retail store in Los Angeles, California, from an unrelated
party.  The asset purchase agreement provided for the payment of
$100,000 in cash upon closing and cancellation of approximately $250,000 of
trade accounts receivable due from the seller.  The asset purchase
agreement also provided that the Company acquire certain leasehold improvements,
furniture and fixtures, and computer and store equipment.  On May 18,
2009, the Company entered into a new lease agreement for the store space that
expires in January 2015.




NOTE
14 – WILLIAM RAST EYEWEAR LICENSE AGREEMENT




On
December 3, 2009, the Company’s subsidiary, William Rast Licensing, entered into
a binding term sheet with Viva Optique, Inc. for the worldwide license of
William Rast eyewear for men and women.  In accordance with the
binding term sheet, the initial term of the license agreement ends on December
31, 2013 and includes an option to renew for an additional three-year term
through December 2016.   The license agreement provides for the
payment of royalties based on net sales at a negotiated rate and minimum royalty
amounts for each contract year.  The binding term sheet contemplates
the signing of a definitive long form license agreement consistent with the
terms of the binding term sheet.  On the date of signing of the
binding term sheet, the Company received a payment of $125,000 to be applied
against minimum royalty amounts in the first contract year.




NOTE
15 – SPONSORSHIP AGREEMENT




On
January 29, 2010, the Company entered into a sponsorship agreement with Sony
Electronics Inc.  The sponsorship agreement provided Sony Electronics
with the title sponsorship at the Company’s William Rast fashion show held
during Fashion Week in New York City in February 2010.  The
sponsorship agreement also grants Sony Electronics with title sponsorship in the
Company’s “My Name is William Rast 2010 Campaign” and the placement of Sony
products in its William Rast retail and pop-up stores.  The
sponsorship agreement expires in December 2010.




57


NOTE
16 - STOCK INCENTIVE PLAN, OPTIONS AND WARRANTS


On
January 5, 2006, the Company adopted its 2005 Stock Incentive Plan (the “Plan”),
which authorized the granting of a variety of stock-based incentive
awards.  The Plan is administered by the Board of Directors, or a
committee appointed by the Board of Directors, which determines the recipients
and terms of the awards granted.  The Plan provides for a total of
5,500,000 shares of common stock to be reserved for issuance under the
Plan.




The
Company recognizes stock-based compensation costs on a straight-line basis over
the vesting period of each award, which is generally between one to four
years.




During
the year ended December 31, 2009, the Company issued 394,000 options to
employees, officers and directors at an exercise price of $0.20 per
share.  During the year ended December 31, 2008, the Company issued
690,000 options to employees, officers and directors at exercise prices ranging
from $0.30 to $0.50 per share.  Options to purchase 2,227,147 and
1,539,135 shares were exercisable as of December 31, 2009 and 2008,
respectively.  Total stock based compensation expense for the years
ended December 31, 2009 and 2008 was approximately $151,000 and $183,000,
respectively.  The compensation expense recognized during the year
ended December 31, 2009 increased basic and diluted loss per share reported in
the Company’s consolidated statement of operations from $0.04 to $0.05 per
share.  The compensation expense recognized during the year ended
December 31, 2008 did not change basic and diluted loss per share reported in
the Company’s consolidated statement of operations.  The total fair
value of options granted to employees, officers, directors and outside
consultants during the years ended December 31, 2009 and 2008 was approximately
$12,000 and $101,000, respectively.  There were no stock options or
warrants exercised during the years ended December 31, 2009 and
2008.





The fair
value of options is estimated on the date of grant using the Black-Scholes
option pricing model.  The valuation determined by the Black-Scholes
pricing model is affected by the Company’s stock price as well as assumptions
regarding a number of highly complex and subjective variables.  These
variables include, but are not limited to, expected stock price volatility over
the term of the awards, and actual and projected employee stock option exercise
behaviors.  Stock price volatility is estimated based on a peer group
of public companies and expected term is estimated using the “safe harbor”
provisions provided in SAB 107.  Under SAB 110, the safe harbor
provisions provided by SAB 107 were extended beyond December 31, 2007 for
companies that did not have sufficient historical data to calculate the expected
term of their related options.  The Company does not have sufficient
historical data to calculate expected term and the safe harbor provisions of SAB
107 were used to calculate expected term for options granted during the
periods.  The weighted-average assumptions the Company used as inputs
to the Black-Scholes pricing model for options granted during the year ended
December 31, 2009 included a dividend yield of zero, a risk-free interest rate
of 2.5%, expected term of 4.0 years and an expected volatility of
85%.  The weighted-average assumptions the Company used as inputs to
the Black-Scholes pricing model for options granted during the year ended
December 31, 2008 included a dividend yield of zero, a risk-free interest rate
of 2.9%, expected term of 3.7 years and an expected volatility of
58%.




For
stock-based awards issued to officers, employees and directors, stock-based
compensation is attributed to expense using the straight-line single option
method.  Stock-based compensation expense recognized in the
consolidated statement of operations for the year ended December 31, 2009 and
2008 is included in selling, design and production expense and general and
administrative expense, and is based on awards ultimately expected to
vest.  ASC Topic 718 requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.  For the year ended December 31, 2009,
the Company used historical data to calculate the expected forfeiture
rate.  For the year ended December 31, 2008, the Company did not have
sufficient historical data to calculate the expected forfeiture rate and as
such, the Company recognized forfeitures as they occurred.






58


Options
awarded to non-employees are charged to expense when the services are performed
and benefit is received as provided by FASB ASC Topic 505-50.





For the
years ended December 31, 2009 and 2008, total stock-based compensation expense
included in the consolidated statements of operations was $151,058 and $183,058,
charged to the following expense categories:




Year
      ended
              December
      31,
              2009
            
            
            Year
      ended
              December
      31,
              2008Selling
      expense
            
            $
            4,952
            
            
            $
            5,733Design
      and
      production
            
            
            17,276
            
            
            
            20,142General
      and
      administrative
            
            
            128,830
            
            
            
            157,183Total
      stock-based
      compensation
            
            $
            151,058
            
            
            $
            183,058





The
following table summarizes the activity in the Plan:




Number
      of Shares
            
            
            Weighted
      Average Exercise PriceOptions
      outstanding – January 1,
      2008
            
            
            2,416,000
            
            
            $
            0.72Granted
            
            
            690,000
            
            
            
            0.41Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            (390,000
            )
            
            
            0.79Options
      outstanding – December 31, 2008
            
            
            2,716,000
            
            
            
            0.64Granted
            
            
            394,000
            
            
            
            0.20Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            (215,000
            )
            
            
            0.83Options
      outstanding – December 31, 2009
            
            
            2,895,000
            
            
            $
            0.56







59









Additional
information relating to stock options and warrants outstanding and exercisable
at December 31, 2009, summarized by exercise price, is as follows:




Outstanding
      Weighted Average
            
            
            Exercisable
              Weighted
      AverageExercise
      Price Per Share
            
            
            Shares
            
            
            Life
      (years)
            
            
            Exercise
      Price
            
            
            Shares
            
            
            Exercise
      Price$
            0.20
            
            (options)
            
            
            379,000
            
            
            
            9.5
            
            
            $
            0.20
            
            
            
            72,000
            
            
            $
            0.20$
            0.30
            
            (options)
            
            
            90,000
            
            
            
            8.5
            
            
            $
            0.30
            
            
            
            90,000
            
            
            $
            0.30$
            0.31
            
            (options)
            
            
            48,000
            
            
            
            7.5
            
            
            $
            0.31
            
            
            
            48,000
            
            
            $
            0.31$
            0.38
            
            (options)
            
            
            265,000
            
            
            
            7.7
            
            
            $
            0.38
            
            
            
            256,106
            
            
            $
            0.38$
            0.40
            
            (options)
            
            
            450,000
            
            
            
            8.5
            
            
            $
            0.40
            
            
            
            300,690
            
            
            $
            0.40$
            0.40
            
            (warrants)
            
            
            150,000
            
            
            
            2.9
            
            
            $
            0.40
            
            
            
            150,000
            
            
            $
            0.40$
            0.46
            
            (options)
            
            
            415,000
            
            
            
            7.5
            
            
            $
            0.46
            
            
            
            415,000
            
            
            $
            0.46$
            0.50
            
            (options)
            
            
            699,000
            
            
            
            7.9
            
            
            $
            0.50
            
            
            
            539,601
            
            
            $
            0.50$
            0.50
            
            (warrants)
            
            
            290,000
            
            
            
            2.9
            
            
            $
            0.50
            
            
            
            290,000
            
            
            $
            0.50$
            1.25
            
            (options)
            
            
            549,000
            
            
            
            6.7
            
            
            $
            1.25
            
            
            
            505,750
            
            
            $
            1.25$
            1.25
            
            (warrants)
            
            
            625,000
            
            
            
            0.9
            
            
            $
            1.25
            
            
            
            625,000
            
            
            $
            1.25$
            2.00
            
            (warrants)
            
            
            2,500,000
            
            
            
            0.9
            
            
            $
            2.00
            
            
            
            2,500,000
            
            
            $
            2.006,460,000
            
            
            
            4.2
            
            
            $
            1.18
            
            
            
            5,792,147
            
            
            $
            1.27







A summary
of the changes in the Company’s unvested stock options is as
follows:




Number
      of Shares
            
            
            Weighted
      Average Grant Date Fair ValueUnvested
      stock options – January 1, 2008
            
            
            1,443,667
            
            
            $
            0.32Granted
            
            
            690,000
            
            
            
            0.15Vested
            
            
            (566,802
            )
            
            
            (0.27
            )Forfeited
            
            
            (390,000
            )
            
            
            (0.32
            )Unvested
      stock options – December 31, 2008
            
            
            1,176,865
            
            
            
            0.24Granted
            
            
            394,000
            
            
            
            0.03Vested
            
            
            (688,012
            )
            
            
            (0.20
            )Forfeited
            
            
            (215,000
            )
            
            
            (0.31
            )Unvested
      stock options – December 31, 2009
            
            
            667,853
            
            
            $
            0.14





As of
December 31, 2009, there were 2,227,147 vested stock options.  As of
December 31, 2009, there was approximately $82,000 of total unrecognized
compensation expense related to share-based compensation arrangements granted
under the Plan.  The cost is expected to be recognized on a
weighted-average basis over the next three years.  The aggregate
intrinsic value of stock options outstanding was zero at December 31, 2009 and
2008 as the market value of the options was lower than the exercise
value.




The
Company has recorded a 100% valuation allowance on its deferred tax asset
related to net operating loss carryforwards.  As a result, the
stock-based compensation has not been tax effected on the consolidated
statements of operations.  For the years ended December 31, 2009 and
2008, the deferred tax effect related to nonqualified stock options is not
material.






60




During
the year ended December 31, 2008, the Company issued a warrant to purchase
40,000 shares of its common stock to a consulting firm for
services.  The warrant has an exercise price of $0.50, a five-year
term and vested over the 9-month term of the service contract.  The
warrant was valued at $6,700 using the Black-Scholes option pricing
model.




NOTE
17 - INCOME TAXES




On
November 22, 2005, People’s Liberation (formerly Century Pacific Financial
Corporation) acquired all of the outstanding voting securities of Bella Rose and
Versatile, each of which became a wholly-owned subsidiary of the
Company.  As a result, Versatile and Bella Rose (including its 50%
owned subsidiaries, William Rast Sourcing, William Rast Licensing and J.
Lindeberg USA) are consolidated and taxes are reported by the parent, People’s
Liberation.  Taxes are calculated on a consolidated basis at
C-Corporation tax rates.




Deferred
income taxes arise principally from temporary differences in the method of
depreciating property and equipment for income tax reporting purposes and the
recognition of expense related to the allowance for doubtful accounts, factor
open credits and inventory reserves for income tax reporting
purposes.  The Company had Federal net operating losses available to
carryforward to future periods of approximately $5.3 million as of December 31,
2009.  Federal net operating losses expire beginning 2027 and state
net operating losses expire beginning 2017.  A valuation allowance has
been provided for the deferred income tax asset related to net operating loss
carryforwards.  At this time, the Company cannot determine that it is
more likely than not that it will realize the future income tax benefits related
to its net operating losses.




The
Company files U.S. Federal tax returns and franchise tax returns in several U.S.
states.  For the U.S. Federal return, all periods are subject to tax
examination by the U.S. Internal Revenue Service.  There were no
examinations by the Internal Revenue Service during the years ended December 31,
2009 and 2008.




The
provision (benefit) for income taxes for the years ended December 31, 2009 and
2008 consists of the following:





2009
            
            
            2008Federal:Current
    provision
            
            $
            -
            
            
            $
            -Deferred
benefit
            
            
            -
            
            
            
            (46,750
            )-
            
            
            
            (46,750
            )State:Current
    provision
            
            
            53,992
            
            
            
            19,750Deferred
benefit
            
            
            -
            
            
            
            (8,250
            )53,992
            
            
            
            11,500$
            53,992
            
            
            $
            (35,250
            )






61





The
difference between the provision (benefit) for income taxes and the expected
income tax provision (benefit) determined by applying the statutory Federal and
state income tax rates to pre-tax accounting loss for the years ended December
31, 2009 and 2008 are as follows:




2009
            
            
            2008Federal statutory
      rate
            
            
            34.0
            %
            
            
            34.0
            %State taxes net of Federal
      benefit
            
            
            6.0
            
            
            
            6.0Net operating loss valuation
      allowance
            
            
            (40.0
            )
            
            
            (40.0
            )LLC gross receipts tax and
      minimum statutory state income taxes
            
            
            5.7
            
            
            
            0.6Other
            
            
            2.6
            
            
            
            (1.7
            )8.3
            %
            
            
            (1.1
            )%







The
components of the Company’s consolidated deferred income tax balances as of
December 31, 2009 and 2008 are as follows:




2009
            
            
            2008Deferred
      income tax assets - current:Factored accounts receivable
      and bad debt reserves
            
            $
            142,000
            
            
            $
            98,000Other reserves
            
            
            124,100
            
            
            
            140,000266,100
            
            
            
            238,000Less:  Valuation
      allowance
            
            
            (266,100
            )
            
            
            (238,000
            )Net
      deferred income tax assets - current
            
            $
            -
            
            
            $
            -Deferred
      income tax asset – long-term:Net operating loss
      carryforwards
            
            $
            2,126,000
            
            
            $
            1,788,000Deferred
      income tax liabilities – long-term:Property and
      equipment
            
            
            (224,000
            )
            
            
            (155,000
            )1,902,000
            
            
            
            1,633,000Less:  Valuation
      allowance
            
            
            (1,902,000
            )
            
            
            (1,633,000
            )Deferred income taxes –
      long-term
            
            $
            -
            
            
            $
            -







NOTE
18 - RELATED PARTY TRANSACTIONS




Colin
Dyne became Chief Executive Officer and a director of the Company on May 21,
2007.  Colin Dyne is a significant stockholder of the Company, and
served as a consultant prior to joining the Company as its Chief Executive
Officer, advising on strategic sales initiatives.  There were no
consulting fees paid to Mr. Dyne during the years ended December 31, 2009 and
2008.




Mr. Dyne
also serves as Vice Chairman of the Board of Directors of Talon International,
Inc. (OTCBB: TALN), owner of Talon zippers.  Mr. Dyne founded Tag-It,
Inc., a subsidiary of Talon, in 1991.  Mr. Dyne served as Talon’s
President from inception and as its Chief Executive Officer from 1997 to
2005.  During the years ended December 31, 2009 and 2008, the Company
purchased trim products from Talon amounting to approximately $219,000 and
$536,000, respectively.






62





Kenneth
Wengrod, a member of the Company’s Board of Directors, currently serves as
President of FTC Commercial Corp. (“FTC”), a company which he founded in 2002
and in which he holds a minority
equity position.  FTC is a global finance commercial service company
primarily focused in the apparel industry.  The Company is party to
various factoring agreements with FTC as further described in Note 9 to the
consolidated financial statements.  As of December 31, 2009, total
factored accounts receivable included in due to factor amounted to approximately
$4.1 million.  Outstanding advances as of December 31, 2009 amounted
to approximately $3.7 million, and are included in the due to factor
balance.  In connection with Mr. Wengrod’s appointment as a director,
on September 21, 2007, the Company granted to Mr. Wengrod a ten-year option to
purchase 24,000 shares of the Company’s common stock at an exercise price of
$0.50 per share pursuant to the Company’s 2005 Stock Incentive
Plan.  On June 26, 2008 and June 12, 2009, Mr. Wengrod received an
additional 30,000 options at an exercise price of $0.30 per share and 48,000
options at an exercise price of $0.20 per share, respectively, to purchase
shares of the Company’s common stock as compensation for director services
provided to the Company.




We are
party to a consulting arrangement with Susan White, a member of the Company’s
Board of Directors, pursuant to which Ms. White provides image and marketing
consulting services to the Company.  During the years ended December
31, 2009 and 2008, the Company paid Ms. White approximately $97,000 and $53,000,
respectively, for such consulting services.




Pursuant
to a private placement transaction entered into on September 28, 2007, the
Company’s former international distributor consultant, Andreas Kurz, though an
entity of which he is a trustee, Akil Trust, purchased 200,000 shares of the
Company’s common stock which increased Akil Trust’s aggregate holdings to
450,000 shares of the Company’s common stock as of December 31,
2007.  During the year ended December 31, 2008, Akil Trust sold it
holdings in the Company’s common stock.  See Note 20 for a
summary of the consulting agreement entered into by Andreas Kurz and his
consulting firm, Akari International.




Pursuant
to a private placement transaction entered into on September 28, 2007, the
Company’s exclusive distributor in Germany, Unifa GmbH, purchased 500,000 shares
of the Company’s common stock.  Net sales to this distributor amounted
to approximately $581,000 and $1.3 million during the years ended December 31,
2009 and 2008, respectively.




Pursuant
to a private placement transaction entered into on September 28, 2007, the
Company’s former financial advisor, Europlay Capital Advisors, LLC, purchased
200,000 shares of the Company’s common stock which increased its aggregate
holdings to 450,000 shares of the Company’s common
stock.  See Note 20 for a summary of the consulting agreement
entered into by the Company and Europlay Capital Advisors.




NOTE
19 – OFFICER COMPENSATION




Colin
Dyne




On May
21, 2007, the Board of Directors appointed Colin Dyne as the Company’s Chief
Executive Officer and Co-Chairman of the Board of Directors. Mr. Dyne received
an annual salary of $200,000 from January 1 through March 31, 2008 and $395,000
from April 1, 2008 through January 31, 2009.  On February 1, 2009, the
Company temporarily reduced all officer salaries by 10%, resulting in a new
annual salary base of $355,500 for Mr. Dyne through December 20,
2009.  On December 21, 2009, the Board approved a reversal of the base
salary reduction and Mr. Dyne was paid a lump-sum amount of $40,000 to equal his
base salary of $395,000 in effect prior to the salary reduction of February 1,
2009.  On December 21, 2009, the Board also approved an annual salary
of $395,000 for Mr. Dyne on a go-forward basis.  Mr. Dyne also
receives medical insurance reimbursements and an auto allowance of $2,000 per
month.  Annual bonuses are determined at the discretion of the Board
of Directors and amounted to $75,000 for the year ended December 31,
2008.  There was no bonus for the year ended December 31,
2009.






63
 Darryn
Barber




On
January 3, 2006, the Company entered into an employment agreement with Darryn
Barber pursuant to which he served as the Company’s Chief Financial Officer and
Chief Operating Officer.  The agreement was for a term of 2 years
commencing as of November 22, 2005 and terminating on November 21,
2007.  Mr. Barber received a base salary of $212,000 in the first year
of his appointment, and was to receive a base salary of $232,000 during the
second year of his contract.  On June 5, 2007, in connection with a
restructuring of senior management, the Company and Mr. Barber agreed to reduce
his base salary to $200,000 per annum beginning June 5, 2007.  In
addition to his base salary, Mr. Barber was to receive an annual bonus of not
less than $25,000 and no more than $100,000 based on objectives determined by
our Board of Directors.  On July 7, 2006, in accordance with his
employment agreement, Mr. Barber was granted a stock option to purchase 300,000
shares of the Company’s common stock at an exercise price of $1.25 per share
which is now fully vested.  In the event Mr. Barber was terminated
without cause, the Company was to continue to pay Mr. Barber’s then current base
salary for the remaining term of the agreement, without regard to any employment
of Mr. Barber by a third party.




On
November 8, 2006, the Company and Darryn Barber entered into an amendment to his
employment agreement.  Pursuant to the amendment, Mr. Barber resigned
from his position as Chief Operating Officer of the Company, effective the same
date, but will continue to serve us as the Company’s Chief Financial
Officer.  The amendment also extended the exercise period of Mr.
Barber’s option to purchase 300,000 shares of the Company’s common stock to a
period of one year following termination of Mr. Barber’s service with the
Company for any reason other than for cause (as defined in the employment
agreement).  Previously, Mr. Barber’s option was to remain exercisable
for a period of at least six months following termination of his service with
the Company for any reason other than for cause.




On June 5, 2007, the Company’s Board of
Directors approved an award to Darryn Barber of options to purchase 150,000
shares of its common stock.  The options have an exercise price of
$0.46 per share, the closing price of the Company’s common stock on the
Over-The-Counter Bulletin Board on the date of the award, are fully vested, and
have a term of ten years.




On August 7, 2007, the Company’s Board
of Directors approved an award to Darryn Barber of options to purchase 100,000
shares of its common stock.  The options have an exercise price of
$0.38 per share, the closing price of the Company’s common stock on the
Over-The-Counter Bulletin Board on the date of the award, are fully vested and
have a term of ten years.




On
November 14, 2007, the Company’s Board of Directors approved an award to Darryn
Barber of options to purchase 450,000 shares of its common stock.  The
options have an exercise price of $0.50 per share, the closing price of the
Company’s common stock on the Over-The-Counter Bulletin Board on the date of the
award, and have a term of ten years.  The options vest in quarterly
installments of 45,000 beginning February 14, 2008 through May 14,
2010.




Mr.
Barber became the Company’s Chief Financial Officer on November 22,
2005.  From January 1 through March 31, 2008, Mr. Barber received an
annual salary of $200,000, which was increased to $250,000 on April 1,
2008.  On May 8, 2008, the Board of Directors expanded the role of Mr.
Barber to focus on business development, international expansion and growth of
the Company’s portfolio of brands both organically and via acquisition, in
addition to his responsibilities as Chief Financial Officer of the
company.  In connection with his added responsibilities, Mr. Barber
was appointed as our President, his annual salary was increased to $275,000 per
annum, and he was awarded a monthly car allowance of $1,500.  On
February 1, 2009, the Company temporarily reduced all officer salaries by 10%,
resulting in a new annual salary base of $247,500 for Mr. Barber through
December 20, 2009.  On December 21, 2009, the Board of Directors
approved a reversal of the base salary reduction and Mr.
Barber was paid a lump-sum amount of $25,190 to equal his base salary of
$275,000 in effect prior to the salary reduction of February 1,
2009.  On December 21, 2009, the Board of Directors also approved an
annual salary of $275,000 for Mr. Barber on a go-forward basis.  Mr.
Barber also receives medical insurance reimbursements in addition to an auto
allowance of $1,500 per month.  Mr. Barber’s annual bonus amounted to
$22,500 for the year ended December 31, 2008.  There was no bonus for
the year ended December 31, 2009.






64


Thomas
Nields




On
November 8, 2006, Thomas Nields was appointed Chief Operating Officer of the
Company.  Pursuant to an oral agreement between the Company and Mr.
Nields, Mr. Nields was to be paid an annual salary of $250,000, and a
discretionary bonus to be determined annually by the Company’s Board of
Directors.  On June 5, 2007, in connection with a restructuring of
senior management, the Company and Mr. Nields agreed to reduce his base salary
to $200,000 per annum beginning June 5, 2007.  Beginning April 1, 2008
through January 31, 2009, Mr. Nields salary was increased to
$235,000.  On February 1, 2009, the Company temporarily reduced all
officer salaries by 10%, resulting in a new annual salary base of $211,500 for
Mr. Nields through December 20, 2009.  On December 21, 2009, the Board
approved a reversal of the base salary reduction and Mr. Nields was paid a
lump-sum amount of $21,538 to equal his base salary of $235,000 in effect prior
to the salary reduction of February 1, 2009.  On December 21, 2009,
the Board also approved an annual salary of $235,000 for Mr. Nields on a
go-forward basis.  Mr. Nields also receives medical insurance
reimbursements and an auto allowance of $1,200 per month.  Mr.
Nields’s annual bonuses amounted to $22,500 for the year ended December 31,
2008.   There was no bonus for the year ended December 31,
2009.




On June 22, 2006, the Company’s Board
of Directors approved an award to Thomas Nields of options to purchase 100,000
shares of the Company’s common stock.  The options have an exercise
price of $1.25 per share and have a term of ten years.  The options
vested 25% on July 1, 2007, and the remaining 75% shall vest in equal monthly
installments thereafter through July 1, 2010.




On June
5, 2007, the Company’s Board of Directors approved an award to Thomas Nields of
options to purchase 150,000 shares of the Company’s common stock.  The
options have an exercise price of $0.46 per share, the closing price of the
Company’s common stock on the Over-The-Counter Bulletin Board on the date of the
award, are fully vested, and have a term of ten years.




On August
7, 2007, the Company’s Board of Directors approved an award to Thomas Nields of
options to purchase 100,000 shares of its common stock.  The options
have an exercise price of $0.38 per share, the closing price of the Company’s
common stock on the Over-The-Counter Bulletin Board on the date of the award,
are fully vested and have a term of ten years.




On August
7, 2008, the Company’s Board of Directors approved an award to Thomas Nields of
options to purchase 250,000 shares of its common stock.  The options
have an exercise price of $0.40 per share, the closing price of the Company’s
common stock on the Over-The-Counter Bulletin Board on the date of the award,
and have a term of ten years.  The options vest in eight quarterly
installments of 31,250 shares beginning November 7, 2008 through August 7,
2010.




Andrea
Sobel




On May
22, 2008, Andrea Sobel was appointed Executive Vice President of Branding and
Licensing of the Company.  Ms. Sobel entered into an employment
agreement with the Company on May 16, 2008.  Pursuant to the
agreement, Ms. Sobel is employed by the Company on an "at-will" basis, and will
be paid a base salary of $200,000 per annum.  During the first year of
her employment, Ms. Sobel will be entitled to a bonus in the amount of three
percent (3%) of license royalties received by the Company.  If at any
time prior to May 16, 2011, the Company terminates Ms. Sobel's employment without
cause and Ms. Sobel delivers to the Company a signed settlement agreement and
general release, the Company will pay Ms. Sobel the equivalent of six months
base salary, at her then current rate of pay.  On February 1, 2009,
the Company temporarily reduced all officer salaries by 10%, resulting in a new
annual salary base of $180,000 for Ms. Sobel through December 20,
2009.  On December 21, 2009, the Board approved a reversal of the base
salary reduction and Ms. Sobel was paid a lump-sum amount of $18,326 to equal
her base salary of $200,000 in effect prior to the salary reduction of February
1, 2009.  On December 21, 2009, the Board also approved an annual
salary of $200,000 for Ms. Sobel on a go-forward basis.  Ms. Sobel
also receives medical insurance reimbursements and an auto allowance of $500 per
month.  Ms. Sobel’s annual bonus amounted to $7,500 for the year ended
December 31, 2008.  There was no bonus for the year ended December 31,
2009.






65


On May 16, 2008, the Company’s Board of
Directors approved an award to Andrea Sobel of options to purchase 200,000
shares of its common stock.  The options have an exercise price of
$0.40 per share, the closing price of the Company’s common stock on the
Over-The-Counter Bulletin Board on the date of the award, and have a term of ten
years.  The options vested 100,000 shares on May 1, 2008 and will vest
5,555 per month thereafter through October 1, 2010.




On June
12, 2009, the Company’s Board of Directors approved an award to Ms. Sobel of
options to purchase 45,000 shares of the Company’s common stock.  The
options vest 25% after one year, and the remaining 75% vest in equal monthly
installments thereafter through July 12, 2013.




NOTE 20 – CONSULTING
AGREEMENTS




On
February 1, 2007, the Company entered into a consulting agreement with Akari
Enterprises, LLC, a consulting firm formed and controlled by Andreas
Kurz.  Akari Enterprises was responsible for negotiating exclusive
distribution agreements with distributors outside of the United States and
managed People’s Liberation and William Rast’s international distribution
relationships.  The consulting agreement provided for commissions to
be paid to Akari Enterprises based on a defined formula related to net
international sales and terminated on December 31, 2009.  Total
commissions paid to Akari International pursuant to the consulting agreement
amounted to approximately $53,000 for the year ended December 31,
2008.  On December 17, 2007, the Company granted Mr. Kurz an option to
purchase 50,000 shares of the Company’s common stock at an exercise price of
$0.50 per share.  The option vested monthly through December 17, 2009
and had a term of five years.  In May 2008, the consulting agreement
was terminated and the stock options granted to Andreas Kurz were subsequently
forfeited.




Effective
October 1, 2007, the Company entered into a consulting agreement with Europlay
Capital Advisors, LLC.  Under the terms of the consulting agreement,
Europlay Capital Advisors was the Company’s exclusive financial advisor to raise
capital and provide other financial advisory and investment banking services for
a term of one year.  Europlay Capital Advisors was to receive a fee
for the successful completion of a financing transaction or acquisition at a
negotiated rate.  In conjunction with the consulting agreement, the
Company issued to Europlay Capital Advisors a warrant to purchase 250,000 shares
of common stock at an exercise price of $0.50 per share.  The warrant
vested over the term of the consulting agreement and has a term of five
years.  No proceeds were received by the Company as a result of the
warrant issuance.  There were no financing transactions completed by
the Company pursuant to the consulting agreement and the consulting agreement
expired pursuant to its terms in 2008.






66


NOTE
21 – LEASES




The
Company leases its principal executive office space under a lease agreement that
expires in March 2012.  The facility is approximately 13,000 sq. ft,
and is located in Los Angeles, California.  It is from this facility
that the Company conducts all of its design, executive and administrative
functions.    Finished goods are shipped from third-party
warehouses in Ontario and Los Angeles, California.  Internet products
are shipped from a third-party warehouse in Long Beach,
California.  We have showrooms located in Los Angeles, New York City
and Atlanta.  Our New York City showroom lease expires in April 2011,
our Los Angeles showroom lease expires in May 2013 and our Atlanta showroom
lease expires in June 2011.  We have William Rast retail stores
located in Los Angeles, San Jose and Cabazon, California, and we will be opening
a new William Rast retail store in Miami, Florida, in the third quarter of
2010.  Our William Rast retail store leases expire on various dates
beginning April 2011 through January 2020.   We have J. Lindeberg
retail stores located in New York City and Los Angeles and we will be opening a
new J. Lindeberg retail store in Miami, Florida, in the third quarter of
2010.  Our J. Lindeberg retail store leases expire on various dates
beginning June 2014 through March 2017.   The Company accounts
for its leases in accordance generally accepted accounting principles, whereby
step provisions, escalation clauses, tenant improvement allowances, increases
based on an existing index or rate, and other lease concessions are accounted
for in the minimum lease payments and are charged to operations on a straight
line basis over the related lease term.  Total rent expense for the
years ended December 31, 2009 and 2008 amounted to approximately $1,391,000 and
$540,000, respectively.




Future
annual minimum payments due under the leases are summarized as
follows:







Years Ending December 31,2010
            
            $
            2,385,7622011
            
            
            2,376,9072012
            
            
            1,974,3172013
            
            
            1,824,5052014
            
            
            1,549,109Thereafter
            
            
            4,809,532$
            14,920,132







NOTE
22 - GEOGRAPHIC INFORMATION




The
Company designs, markets and sells high-end casual apparel under the brand names
People’s Liberation, William Rast and, in the United States, J.
Lindeberg.  The types of products developed and sold by the Company
are not sufficiently different to account for these products separately or to
justify segmented reporting by product type.






67


The
Company distributes its products internationally and has reporting requirements
based on geographic regions.  All of the Company’s long-lived assets
are located in the United States.  Sales are attributed to countries
based on customer delivery locations, as follows:




Year
      Ended December 31,2009
            
            
            2008Net
      Sales:United States
            
            $
            32,189,642
            
            
            $
            27,025,241Canada
            
            
            2,151,931
            
            
            
            2,159,282Germany
            
            
            580,781
            
            
            
            1,067,116Netherlands
            
            
            357,470
            
            
            
            -Italy
            
            
            69,687
            
            
            
            646,261Turkey
            
            
            62,443
            
            
            
            31,995Belgium
            
            
            18,233
            
            
            
            296,060United Kingdom
            
            
            -
            
            
            
            237,496Australia
            
            
            19,576
            
            
            
            141,788South Africa
            
            
            6,390
            
            
            
            65,570Greece
            
            
            13,392
            
            
            
            61,001Other
            
            
            165,261
            
            
            
            458,283$
            35,634,806
            
            
            $
            32,190,093







NOTE
23 - CUSTOMER CONCENTRATION




During
the year ended December 31, 2009, two customers comprised greater than 10% of
the Company’s sales.  Sales to these customers amounted to 18.6% and
18.0% of net sales for the year ended December 31, 2009.  During the
year ended December 31, 2008, one customer comprised greater than 10% of the
Company’s sales.  Sales to this customer amounted to 28.9% of net
sales for the year ended December 31, 2008.  At December 31, 2009 and
2008, the majority of receivables due from these customers are included in due
to factor.




NOTE
24 - SUPPLIER CONCENTRATION




During
the year ended December 31, 2009, three suppliers comprised greater than 10% of
the Company’s consolidated purchases.  Purchases from these suppliers
amounted to 11.0%, 18.3% and 30.1% for the year ended December 31,
2009.  At December 31, 2009, accounts payable and accrued expenses
included an aggregate of approximately $1.2 million due to these
vendors.  During the year ended December 31, 2008, three suppliers
comprised greater than 10% of the Company’s purchases.  Purchases from
these suppliers amounted to 10.6%, 11.7% and 12.2% for the year ended December
31, 2008.  At December 31, 2008, accounts payable and accrued expenses
included an aggregate of approximately $715,000 due to these
vendors.




During
the years ended December 31, 2009 and 2008, the Company purchased substantially
all of its J. Lindeberg brand products from J. Lindeberg AB of Sweden, the
beneficial owner of 50% of the Company’s subsidiary, J. Lindeberg
USA.  Total purchases from J. Lindeberg AB for the years ended
December 31, 2009 and 2008 amounted to approximately $2.4 million and $905,000,
respectively.  Included in Due to Member as of December 31, 2009 and
2008 is approximately $427,000 and $42,000, respectively, due to J. Lindeberg AB
for product purchases.






68


NOTE
25 - OFF-BALANCE SHEET RISK AND CONTINGENCIES




Financial
instruments that potentially subject the Company to off-balance sheet risk
consist of factored accounts receivable.  The Company sells the
majority of its trade accounts receivable to a factor and is contingently liable
to the factor for merchandise disputes and other customer claims.  At
December 31, 2009, total factor receivables approximated $4.1
million.  The factor also issues letters of credit and vendor
guarantees on the Company’s behalf.  There were no outstanding letters
of credit and vendor guarantees as of December 31, 2009.  Ledger debt
(payables to suppliers that use the same factor as the Company) amounted to
approximately $1.1 million at December 31, 2009.




The
Company is subject to certain legal proceedings and claims arising in connection
with its business.  In the opinion of management, with the exception
of the Charlotte Russe legal action described in Note 11, there are currently no
claims that will have a material adverse effect on the Company’s consolidated
financial position, results of operations or cash flows.




Pursuant
to the operating agreement the Company entered into with J. Lindeberg USA Corp
and J. Lindeberg AB, the Company contributed $20,000 in cash to its 50% owned
subsidiary, J. Lindeberg USA, LLC, and will be required to contribute up to a
maximum of $1.5 million in working capital or related guaranties through
December 2010.  At this point in time, the cash amount in excess of
$20,000 that the Company will be required to contribute to J. Lindeberg USA,
LLC, if any, is uncertain.  The Company’s  J. Lindeberg USA,
LLC, factoring agreements provide for corporate guaranties from its related
entities, People’s Liberation, Inc., Bella Rose, LLC, and Versatile
Entertainment, Inc.




In
accordance with the bylaws of the Company, officers and directors are
indemnified for certain events or occurrences arising as a result of the officer
or director’s serving in such capacity.  The term of the
indemnification period is for the lifetime of the officer or
director.  The maximum potential amount of future payments the Company
could be required to make under the indemnification provisions of its bylaws is
unlimited.  At this time, the Company believes the estimated fair
value of the indemnification provisions of its bylaws is minimal and therefore,
the Company has not recorded any related liabilities.




In
addition to the indemnification required by the Company’s Amended and Restated
Certificate of Incorporation and bylaws, the Company has entered into indemnity
agreements with each of its current officers, directors and a key
employee.  These agreements provide for the indemnification of the
Company’s directors, officers and key employee for all reasonable expenses and
liabilities incurred in connection with any action or proceeding brought against
them by reason of the fact that they are or were the Company’s
agents.  The Company believes these indemnification provisions and
agreements are necessary to attract and retain qualified directors, officers and
employees.




The
Company enters into indemnification provisions under its agreements in the
normal course of business, typically with suppliers, customers, distributors and
landlords.  Under these provisions, the Company generally indemnifies
and holds harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of the Company’s activities or, in some cases, as
a result of the indemnified party’s activities under the
agreement.  These indemnification provisions often include
indemnifications relating to representations made by the Company with regard to
intellectual property rights.  These indemnification provisions
generally survive termination of the underlying agreement.  The
maximum potential amount of future payments the Company could be required to
make under these indemnification provisions is unlimited.  The Company
has not incurred material costs to defend lawsuits or settle claims related to
these indemnification agreements.  As a result, the Company believes
the estimated fair value of these agreements is minimal.  Accordingly,
the Company has not recorded any related liabilities.






69


NOTE
26 – PROFIT SHARING PLAN




The
Company has established a 401(k) profit-sharing plan for the benefit of eligible
employees.  The Company may make contributions to the plan as
determined by the Board of Directors.  There were no contributions
made during the years ended December 31, 2009 and 2008.






70




Item
9.            Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure




Not
applicable.




Item 9A(T).    Controls and
Procedures




Evaluation
of Controls and Procedures




Members
of the our management, including our Chief Executive Officer, Colin Dyne, and
Chief Financial Officer and President, Darryn Barber, have evaluated the
effectiveness of our disclosure controls and procedures, as defined by paragraph
(e) of Exchange Act Rules 13a-15 or 15d-15, as of December 31, 2009, the end of
the period covered by this report.  Based upon that evaluation,
Messrs. Dyne and Barber concluded that our disclosure controls and procedures
were effective as of December 31, 2009.




Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the fourth quarter
ended December 31, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.




Management’s
Report on Internal Control over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended.  Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.  Our
internal control over financial reporting includes those policies and procedures
that:





(i)           pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;





(ii)          provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of management and directors;
and





(iii)         provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition our assets that could have a material effect on
our financial statements.





Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  In addition, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009.  In making this assessment, we used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework.  Based on our assessment and
those criteria, we have concluded that our internal control over financial
reporting was effective as of December 31, 2009.






71


This
annual report does not include an attestation report by our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only our management report in
this annual report.






Item
9B.          Other
Information




None




PART
III






Item
10.           Directors,
Executive Officers and Gorporate Governance




On April
1, 2009, the Board of Directors, pursuant to authority granted to it under our
Amended and Restated Certificate of Incorporation, approved the division of the
directors of People’s Liberation into three classes designated Class I, Class II
and Class III and the re-appointment of our existing directors into the newly
formed classes. The initial Class I director is Kenneth Wengrod, the initial
Class II director is Susan White and the initial Class III directors are Dean
Oakey and Colin Dyne. Directors hold office for staggered terms of three years.
One of the three classes is elected each year to succeed the directors whose
terms are expiring. The Class I director, the Class II director and the Class
III directors are serving terms that expire in 2012, 2010 and 2011,
respectively.




The
following table sets forth the name, age and position of each of our executive
officers and directors as of December 31, 2009.  There are no family
relationships between our executive officers and directors.




Name
            
            Age
            
            Director Class
            
            Position HeldColin
      Dyne
            
            46
            
            III
            
            Chief
      Executive Officer, Director and Chairman of the BoardDarryn
      Barber
            
            34
            
            
            
            President
      and Chief Financial OfficerThomas
      Nields
            
            44
            
            
            
            Chief
      Operating OfficerAndrea
      Sobel
            
            42
            
            
            
            Executive
      Vice President of Branding and LicensingDean
      Oakey
            
            52
            
            III
            
            DirectorSusan
      White
            
            59
            
            II
            
            DirectorKenneth
      Wengrod
            
            59
            
            I
            
            Director





Colin Dyne became our Chief
Executive Officer and a director of the company on May 21,
2007.  Colin Dyne is a significant stockholder of the company, and has
served as a consultant to the company since December 2005, advising on strategic
sales initiatives.  Mr. Dyne also serves as Vice Chairman of the Board
of Directors of Talon International, Inc. (OTCBB: TALN), owner of Talon
zippers.  Mr. Dyne founded Tag-It, Inc., a subsidiary of Talon, in
1991.  Mr. Dyne served as Talon’s President from inception and as its
Chief Executive Officer from 1997 to 2005.




Darryn Barber has served as
our Chief Financial Officer since November 22, 2005 and as our President and
Chief Financial Officer since May 8, 2008.  Prior to joining us, Mr.
Barber spent five years as a senior associate at Europlay Capital Advisors, LLC
and its affiliates.  Mr. Barber has been successful in evaluating,
developing, and operating businesses in the entertainment and technology
fields.  Mr. Barber was responsible for preparing business models,
financial planning, evaluating and valuing businesses, providing corporate and
strategic advice and preparing businesses for strategic
transactions.  Mr. Barber brings over 10 years experience in owning
and operating businesses.  Prior to Europlay Capital Advisors, Mr.
Barber was Director of Operations of Trademark Cosmetics, a private label
cosmetic manufacturing company.  Mr. Barber earned an MBA from
California State University Northridge and a BA in business economics from the
University of California Santa Barbara.






72


Thomas Nields has served as
our Chief Operating Officer since November 8, 2006.  Prior to joining
us, Mr. Nields held various positions at Talon International, Inc., owner of
Talon zippers, from November 1994 to October 2006.  These positions
included Director of Global Operations, President of Talon, Inc. (a wholly-owned
subsidiary of Talon International, Inc.) and Vice President of
Production.  During his employment with Talon, Mr. Nields was
responsible for implementing and managing production facilities in eight
countries including the U.S., Mexico and Hong Kong.




Andrea Sobel has served as
our Executive Vice President of Branding and Licensing since May 22,
2008.  Ms. Sobel has over 15 years of experience in licensing,
marketing and brand development.  Since 2007, she was Vice President
of Marketing with SANRIO, where she was responsible for market development and
brand positioning of that company's Hello Kitty and other character
brands.  Between 2004 and 2007 and between 1999 and 2002, she was also
a principal and licensing, merchandising and marketing consultant with ALS
Consulting, a firm specializing in marketing and brand
development.  Between 2002 and 2004, Ms. Sobel was Director of
Licensing and Business Development for Murad, Inc.  From 1990 to 1999,
she was with Guess?, Inc. in a series of progressively responsible positions
culminating with Vice President of Licensing and Product Development from 1995
to 1999.  She holds a Bachelor of Arts in History and Spanish from the
University of California at Berkeley and an MBA from UCLA's Anderson School of
Business.




Dean Oakey has served as a
director since November 22, 2005 and was selected to become a director of the
company due to his knowledge of the apparel industry.  Mr. Oakey is
the Managing Partner of CDP Management Partners, LLC, a merchant banking firm
focusing on principal investments and consulting in the restaurant, food
processing, and retail industries.  Mr. Oakey has held this position
since April 2009.  From June 1997 to April 2009, Mr. Oakey served as
the Managing Director of Investment Banking for SMH Capital, Corp., an
investment banking firm.  In this capacity, Mr. Oakey was responsible
for business development and management duties, with a focus on the consumer
products and services industries.




Susan White joined our Board
of Directors on May 21, 2007 and was selected to become a director of the
company due to her experience in apparel branding and marketing.  Ms.
White has served as Chief Executive Officer and President of Brand Identity
Solutions, LLC, a branding, marketing and licensing consulting company, since
1987.  Ms. White also is the CEO and president of Whitespeed, LLC, an
internet design, branding and marketing company.  Ms. White previously
served as Director of Marketing and Advertising Worldwide for Warnaco from
November 1997 through August 1999.




Kenneth Wengrod joined our
Board of Directors on September 21, 2007 and was selected to become a director
of the company due to his knowledge and experience in the apparel
industry.  Mr. Wengrod currently serves as President of FTC Commercial
Corp., a company which he founded in 2002 ("FTC") and in which he continues to
hold a minority equity position.  FTC is a global finance commercial
service company primarily focused in the apparel industry.  From 1996
to 2002, Mr. Wengrod was the Chief Financial Officer and General Manager of
Meridian Textiles f/k/a Mark Fabrics where he was responsible for the operations
of the multi-million dollar fabric converting company.  Prior to
joining Meridian Textiles, Mr. Wengrod was the Chief Operating Officer of
Rampage Clothing Co. from 1992 to 1995, and was a Senior Vice President of
Barclays Commercial Corp. from 1987 to 1992.  Mr. Wengrod holds a
Bachelor of Science degree in Economics from Northeastern
University.






73


Director
Independence
  Our board
of directors currently consists of four members: Colin Dyne (our Chief Executive
Officer), Dean Oakey, Susan White and Kenneth Wengrod.  Each of Colin
Dyne, Dean Oakey, Susan White and Kenneth Wengrod were elected at a meeting of
shareholders held on June 13, 2008 to serve until our 2009 annual meeting or
until his or her successor is duly elected and qualified.  On April 1, 2009, the
Board of Directors, pursuant to authority granted to it under our Amended and
Restated Certificate of Incorporation, approved the division of the directors of
People’s Liberation into three classes designated Class I, Class II and Class
III and the re-appointment of our existing directors into the newly formed
classes.  As a result of this Board action, directors now hold office
for staggered terms of three years.  One of the three classes is
elected each year to succeed the directors whose terms are
expiring.  Last year, Kenneth Wengrod was elected to serve as the
Class I director at our meeting of shareholders held on June 12,
2009.  The Class I director (Kenneth Wengrod), the Class II director
(Susan White) and the Class III directors (Dean Oakey and Colin Dyne) are
serving terms that expire at the annual meeting of stockholders to be held in
2012, 2010 and 2011, respectively.





We do not
have a separately designated audit, compensation or nominating committee of our
board of directors and the functions customarily delegated to these committees
are performed by our full board of directors.  We are not a “listed
company” under SEC rules and are therefore not required to have separate
committees comprised of independent directors.  We have, however,
determined that none of our current directors are “independent” as that term is
defined in Section 5605 of the NASDAQ Listing Rules as required by the NASDAQ
Stock Market.  As we do not maintain an audit committee, we do not
have an audit committee "financial expert" within the meaning of Item 407(d) of
Regulation S-K.




We may
establish an audit committee, compensation committee, and nominating and
corporate governance committee upon the expansion of our board to include at
least three directors who are independent under the applicable rules of the SEC
and NASDAQ.




Compliance
with Section 16(a) of the Exchange Act




Section
16(a) of the Securities Exchange Act of 1934 requires that our executive
officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, file reports of ownership and changes
in ownership with the SEC.  Executive officers, directors and
greater-than-ten percent stockholders are required by SEC regulations to furnish
us with all Section 16(a) forms they file.  Based solely on our review
of the copies of the forms received by us and written representations from
certain reporting persons that they have complied with the relevant filing
requirements, we believe that, during the year ended December 31, 2009, all of
our executive officers, directors and greater-than-ten percent stockholders
complied with all Section 16(a) filing requirements.




Code
of Ethics




We have
adopted a Code of Ethics applicable to all of our Board members and to all of
our employees, including our Chief Executive Officer, President and Chief
Financial Officer, Chief Operating Officer and Executive Vice President of
Branding and Licensing.  The Code of Ethics constitutes a “code of
ethics” as defined by applicable SEC rules and a “code of conduct” as defined by
applicable NASDAQ rules.  The Code of Ethics has been publicly filed
with the SEC as an exhibit to this Annual Report on Form 10-K.  Our
code of ethics is posted on our Internet website located at www.pplbusa.com in
the section titled “Corporate Governance.”  You may also request a
copy of the Code of Ethics by writing or calling us at:




People’s
Liberation, Inc.


Attn:  Investor
Relations


1212 S.
Flower Street, 5th
Floor


Los
Angeles, CA 90015


(213)
745-2123




Any
waiver of the Code of Ethics pertaining to a member of our Board or one of our
executive officers will be disclosed in a report on Form 8-K filed with the
SEC.






74


Item
11.          Executive
Compensation




Summary Compensation Table




The
following table sets forth information concerning all compensation paid for
services provided to us in all capacities for each of the two fiscal years ended
December 31, 2009 and 2008 as to each person serving as our Chief Executive
Officer and Chief Financial Officer during 2009 and the two most highly
compensated executive officers other than the Chief Executive Officer and Chief
Financial Officer who were serving as executive officers at the end of the 2009
fiscal year whose compensation exceeded $100,000 (referred to as named executive
officers).




Name
      and Principal Position
            
            Year
            
            
            Salary
              ($)
            
            
            Bonus
      (1)
              ($)
            
            
            Option
      Awards (2)
              ($)
            
            
            All
      Other
              Compensation
      (7)
              ($)
            
            
            Total
              ($)Colin
      Dyne(3)
              Chief Executive
      Officer
            
            
            2009
              2008
            
            
            
            398,803
              346,257
            
            
            
            -
              75,000
            
            
            
            -
              -
            
            
            
            41,001
              35,148
            
            
            
            439,804
              456,405Darryn
      Barber(4)
              Chief Financial Officer and
      President
            
            
            2009
              2008
            
            
            
            275,016
              253,626
            
            
            
            -
              22,500
            
            
            
            -
              -
            
            
            
            34,132
              21,777
            
            
            
            309,148
              297,903Thomas
      Nields(5)
              Chief Operating
      Officer
            
            
            2009
              2008
            
            
            
            235,008
              226,260
            
            
            
            -
              22,500
            
            
            
            -
              35,099
            
            
            
            30,253
              19,512
            
            
            
            265,261
              303,371Andrea
      Sobel(6)
              Executive Vice President of
      Branding and Licensing
            
            
            2009
              2008
            
            
            
            200,016
              125,779
            
            
            
            -
              7,500
            
            
            
            1,286
              36,286
            
            
            
            14,030
              9,482
            
            
            
            215,332
              179,047




(1)
            Represents
      cash bonuses paid to our named executive
  officers.




(2)
            The
      amounts in this column represent the grant date fair value with respect to
      stock options granted in the applicable fiscal year.  Amounts
      previously disclosed for the fiscal year ended December 31, 2008 have been
      revised to reflect grant date fair value instead of the dollar amount
      recognized for financial statement reporting purposes, as disclosed in our
      prior filings on Form 10-K.  For additional information on the
      valuation assumptions with respect to option grants, including the options
      granted in 2009 and 2008, please see Note 16 to our financial statements
      for the years ended December 31, 2009 and 2008.  These amounts
      do not reflect the actual value that may be realized by the named
      executive officers which depends on the value of our shares in the
      future.




(3)
            Mr.
      Dyne became our Chief Executive Officer on May 21,
  2007.




(4)
            Mr.
      Barber became our Chief Financial Officer on November 22, 2005 and our
      President on May 8, 2008.




(5)
            Mr.
      Nields was named our Chief Operating Officer effective November 6,
      2006.




(6)
            Ms.
      Sobel joined us in May 2008 as our Executive Vice President of Branding
      and Licensing.  Ms. Sobel has an employment agreement with us,
      the terms of which are described
hereafter.




(7)
            Other
      compensation indicated in the above table consists of medical and
      disability insurance and car
allowances.






75
 Narrative
Disclosure to Summary Compensation Table





We do not
have a separate compensation committee and therefore, our executive compensation
program is administered by our Board of Directors.  The Board is
responsible for, among other functions: (1) administering our stock incentive
plan; and (2) negotiating, reviewing and awarding the annual salary, bonus,
stock options and other benefits of our executive officers.





Compensation
Philosophy




The
objectives of our executive compensation program include the
following:





·
            Alignment– to align
      the interests of executives and shareholders through equity-based
      compensation awards;




·
            Retention– to attract,
      retain and motivate highly qualified, high performing executives to lead
      our growth; and




·
            Performance– to
      provide rewards that are dependent upon the executive’s achievements and
      company performance.




Compensation
Elements




We
compensate senior executives through a variety of components, including base
salary, annual incentives, equity incentives, and benefits and perquisites, in
order to provide our executives with an overall compensation package which we
believe is competitive.  The mix and value of these components are
impacted by a variety of factors, such as negotiations of an executive with us,
the executive’s position within the company, and the overall performance of the
company and the individual.  The purpose and key characteristics for
each component are described below.





Base
Salary





Base
salary provides executives with a steady income stream and is based upon the
executive’s level of responsibility, experience, individual performance and
contributions to our overall success.





Annual
Incentive Bonuses





Annual
incentive bonuses are a variable performance-based component of
compensation.  The primary objective of an annual incentive bonus is
to align a portion of total pay opportunities for executives to the attainment
of our company’s performance goals, as well as performance goals of the
individual.





Equity
Incentives





Equity
incentives are intended to align senior executive and shareholder interests by
linking a portion of executive pay to long-term shareholder value creation and
financial success over a multi-year period.  Equity incentives are
also provided to our executives to attract and enhance the retention of
executives and other key employees and to facilitate stock ownership by our
senior executives.  The Board considers individual and company
performance when determining long-term incentive opportunities.






76


Health
& Welfare Benefits





The named
executive officers participate in a variety of retirement, health and welfare,
and paid time-off benefits designed to enable us to attract and retain our
workforce in a competitive marketplace.  Health and welfare and paid
time-off benefits help ensure that we have a productive and focused
workforce.





Severance
and Change of Control Arrangements





We do not
have a formal plan for severance or separation pay for our employees and
officers, with the exception of Andrea Sobel (as further described
below).  In the future, we may include severance provisions in
employment agreements of our executive officers that could be triggered in the
event of involuntary termination without cause or in the event of a change in
control.





Other
Benefits





In order
to attract and retain highly qualified executives, we provide some of our named
executive officers with automobile allowances that we believe are consistent
with current market practices.  Our executives also may participate in
our 401(k) plan.





Process
for Setting Executive Compensation





When
making pay determinations for named executive officers, the Board may consider
factors including: (1) actual company performance as compared to pre-established
goals, (2) individual executive performance and expected contribution to our
future success, (3) changes in economic conditions and the external marketplace
and (4) the recommendation of our Chief Executive Officer.  The Board
may also consider compensation information from data gathered from annual
reports and proxy statements from companies that the Board generally considers
comparable to our company.  Ultimately, our Board uses its judgment
when determining how much to pay our executive officers and attempts to set the
pay for our executive officers at levels that it believes are competitive and
necessary to attract and retain talented executives capable of achieving our
long-term objectives.




Compensation
for Fiscal Year Ended December 31, 2009




In the
fiscal year ended December 31, 2009, we compensated our executive officers
through a combination of a base salary and options to purchase shares of our
common stock.  In addition, we provided other perquisites to our
executive officers, which consisted of medical insurance and car
allowances.




Beginning
in the second quarter of 2007, each of our executive officers was earning a base
salary of $200,000, which the Board considered to be low, in an effort to
conserve cash and improve our operating performance.  Effective April
1, 2008, after negotiations with our Chief Executive Officer, our Board resolved
to increase the annual salary of Colin Dyne to $395,000, and the annual salaries
of Darryn Barber and Tom Nields to $250,000 and $235,000,
respectively.  The salary increases were provided to align the base
salary component of our executive officer compensation to levels the Board
believed were appropriate at the time.  Effective as of February 1,
2009, the Board, in consultation with our Chief Executive Officer and Chief
Financial Officer, resolved to temporarily reduce the base salaries of each of
our named executive officers by 10% through April 30, 2009.  The
reduction in salary was made to improve our future operating cash flow in view
of the changes in current economic conditions.  The temporary base
salary reduction continued beyond the April 30, 2009 date contemplated by the
Board in February 2009 and resulted in a base salary reduction through December
20, 2009.  On December 21, 2009, the Board approved a reversal of the
base salary reduction and each of our executive officers was paid a
lump-sum amount to equal their respective base salary in effect prior to the
salary reduction of February 1, 2009.  The reversal of the salary
reduction was made to retain and motivate our executives to lead and grow our
company.






77


There
were no bonuses paid to our senior management team in the fiscal year ended
December 31, 2009, as determined by our Board of Directors based on the
performance of the company.  During 2009, aside from an employment
agreement entered into with Andrea Sobel, we were not party to any written
employment agreements with our named executive officers.  The
following is a description of the material terms of each of our named executive
officer’s employment arrangements with us:




Colin
Dyne




On May
21, 2007, our Board of Directors appointed Colin Dyne as our Chief Executive
Officer and Co-Chairman of the Board of Directors. Mr. Dyne received an annual
salary of $200,000 from January 1 through March 31, 2008 and $395,000 from April
1, 2008 through January 31, 2009.  On February 1, 2009, we temporarily
reduced all officer salaries by 10%, resulting in a new annual salary base of
$355,500 for Mr. Dyne through December 20, 2009.  On December 21,
2009, the Board approved a reversal of the base salary reduction and Mr. Dyne
was paid a lump-sum amount of $40,000 to equal his base salary of $395,000 in
effect prior to the salary reduction of February 1, 2009.  On December
21, 2009, the Board also approved an annual salary of $395,000 for Mr. Dyne on a
go-forward basis.  Mr. Dyne also receives medical insurance
reimbursements and an auto allowance of $2,000 per month.  Annual
bonuses are determined at the discretion of the Board of Directors and amounted
to $75,000 for the year ended December 31, 2008.  Mr. Dyne did not
receive a bonus for the year ended December 31, 2009.




Darryn
Barber




Mr. Barber became our Chief Financial
Officer on November 22, 2005.  From January 1 through March 31, 2008,
Mr. Barber received an annual salary of $200,000, which was increased to
$250,000 on April 1, 2008 as described above.  On May 8, 2008, our
Board expanded the role of Mr. Barber to focus on business development,
international expansion and growth of the company’s portfolio of brands both
organically and via acquisition, in addition to his responsibilities as Chief
Financial Officer of the company.  In connection with his added
responsibilities, Mr. Barber was appointed as our President, his annual salary
was increased to $275,000 per annum, and he was awarded a monthly car allowance
of $1,500.  As discussed above, on February 1, 2009, we temporarily
reduced all officer salaries by 10%, resulting in a new annual salary base of
$247,500 for Mr. Barber through December 20, 2009.  On December 21,
2009, the Board approved a reversal of the base salary reduction and Mr. Barber
was paid a lump-sum amount of $25,190 to equal his base salary of $275,000 in
effect prior to the salary reduction of February 1, 2009.  On December
21, 2009, the Board also approved an annual salary of $275,000 for Mr. Barber on
a go-forward basis.  Mr. Barber also receives medical insurance
reimbursements and an auto allowance of $1,500 per month.  Mr.
Barber’s annual bonus amounted to $22,500 for the year ended December 31,
2008.  Mr. Barber did not receive a bonus for the year ended December
31, 2009.




Thomas
Nields




On
November 8, 2006, Mr. Nields was appointed our Chief Operating
Officer.  Mr. Nields earned a base salary of $200,000 from January 1
through April 8, 2008, which was subsequently increased to $235,000 as described
above.  On February 1, 2009, we temporarily reduced all officer
salaries by 10%, resulting in a new annual salary base of $211,500 for Mr.
Nields through December 20, 2009.  On December 21, 2009, the Board
approved a reversal of the base salary reduction and Mr. Nields was paid a
lump-sum amount of $21,538 to equal his base salary of $235,000 in effect prior
to the salary reduction of February 1, 2009.  On December 21, 2009,
the Board also approved an annual salary of $235,000 for Mr. Nields on a
go-forward basis.  Mr. Nields also receives medical insurance
reimbursements and an auto allowance
of $1,200 per month.  Mr. Nields’ annual bonus amounted to $22,500 for
the year ended December 31, 2008.  Mr. Nields did not receive a bonus
for the year ended December 31, 2009.  On August 7, 2008, we also
awarded Mr. Nields an option to purchase 250,000 shares of our common stock at
an exercise price of $0.40 per share.






78


Andrea
Sobel




On May
22, 2008, Andrea Sobel was appointed our Executive Vice President of Branding
and Licensing.  Ms. Sobel entered into an employment agreement with
the company on May 16, 2008.  Pursuant to the agreement, Ms. Sobel is
employed on an "at-will" basis, and will be paid a base salary of $200,000 per
annum.  Pursuant to the terms of her employment agreement, Ms. Sobel
was granted an option to purchase 200,000 shares of our common stock at an
exercise price of $0.40 per share.  During the first year of her
employment, Ms. Sobel was entitled to a bonus in the amount of three percent
(3%) of license royalties received by the company.  There were no
license royalties received by the company during the first year of Ms. Sobel’s
employment.  The employment agreement also provides that Ms. Sobel
will receive all operative employee compensation, fringe benefit and perquisite,
and other benefit and welfare plans or arrangements of the company then in
effect from time to time and in which similarly situated executive officers of
the company generally are entitled to participate.  If at any time
prior to May 16, 2011, we terminate Ms. Sobel's employment without cause and Ms.
Sobel delivers to us a signed settlement agreement and general release, we will
pay Ms. Sobel the equivalent of six months base salary, at her then current rate
of pay.  On February 1, 2009, we temporarily reduced all officer
salaries by 10%, resulting in a new annual salary base of $180,000 for Ms. Sobel
through December 20, 2009.  On December 21, 2009, the Board approved a
reversal of the base salary reduction and Ms. Sobel was paid a lump-sum amount
of $18,326 to equal her base salary of $200,000 in effect prior to the salary
reduction of February 1, 2009.  On December 21, 2009, the Board also
approved an annual salary of $200,000 for Ms. Sobel on a go-forward
basis.  Ms. Sobel also receives medical insurance reimbursements and
an auto allowance of $500 per month.  Ms. Sobel’s annual bonus
amounted to $7,500 for the year ended December 31, 2008.  Ms. Sobel
did not receive a bonus for the year ended December 31, 2009.  On June
12, 2009, we also awarded Ms. Sobel an option to purchase 45,000 shares of our
common stock at an exercise price of $0.20 per share.




Outstanding
Equity Awards at Fiscal Year-End 2009




The
following table presents information regarding outstanding options held by our
named executive officers as of the end of our fiscal year ended December 31,
2009.  None of the named executive officers exercised options during
the fiscal year ended December 31, 2009.




Number
      of Securities Underlying
              Unexercised
      Options (#)Name
            Grant
      Date
            Exercisable
            Unexercisable
            Option
      Exercise
              Price
      ($)
            Option
      Expiration DateDarryn
      Barber
            July
      7, 2006(1)
            300,000
            --
            1.25
            July
      7, 2016June
      5, 2007(2)
            150,000
            --
            0.46
            June
      5, 2017August
      7, 2007(3)
            100,000
            --
            0.38
            August
      7, 2017November
      14, 2007(4)
            360,000
            90,000
            0.50
            November
      14, 2017Tom
      Nields
            June
      22, 2006(5)
            85,417
            14,583
            1.25
            June
      22, 2016June
      5, 2007(6)
            150,000
            --
            0.46
            June
      5, 2017August
      7, 2007(7)
            100,000
            --
            0.38
            August
      7, 2017August
      7, 2008(8)
            156,250
            93,750
            0.40
            August
      7, 2018Andrea
      Sobel
            May
      16, 2008(9)
            144,440
            55,560
            0.40
            May
      16, 2018June
      12, 2009(10)
            --
            45,000
            0.20
            June
      12, 2019




(1)
            200,000
      shares vested on the date of grant, and the right to purchase the
      remaining 100,000 underlying shares vested in monthly 25,000 share
      increments over the four months following the grant
  date.






79




(2)
            These
      options vested immediately on the date of
grant.




(3)
            These
      stock options vested 50% on August 1, 2008, and the remaining 50% vested
      in equal monthly installments thereafter through August 1,
      2009.




(4)
            These
      stock options vest in ten equal quarterly installments of 45,000 shares
      commencing February 14, 2008 through May 14,
  2010.




(5)
            These
      stock options vested 25% on the first anniversary of the date of grant,
      and the remaining 75% vest in equal monthly installments thereafter
      through July 1, 2010.




(6)
            These
      options vested immediately on the date of
grant.




(7)
            These
      stock options vested 50% on August 1, 2008, and the remaining 50% vested
      in equal monthly installments thereafter through August 1,
      2009.




(8)
            These
      stock options vest in eight equal quarterly installments of 31,250 shares
      commencing November 7, 2008 through August 7,
  2010.




(9)
            These
      stock options vest 50% on May 1, 2009, and the remaining 50% vest in equal
      monthly installments thereafter through October 1,
  2010.




(10)
            These
      stock options vest 25% on June 12, 2010 and the remaining 75% vest in
      equal monthly installments thereafter through July 12,
    2013.




Director
Compensation




The
following table details the total compensation earned by the company’s
non-employee directors in 2009:




Name
            
            Fees
      Earned or
              Paid
      in Cash
              ($)
            
            
            Option
              Awards(4)
              ($)
            
            
            All
      Other Compensation
              ($)
            
            
            Total
              ($)Dean
      Oakey (1)
            
            
            10,000
            
            
            
            1,250
            
            
            
            -
            
            
            
            11,250Susan
      White (2)
            
            
            10,000
            
            
            
            1,250
            
            
            
            96,980
            
            
            
            108,230Kenneth
      Wengrod (3)
            
            
            10,000
            
            
            
            1,250
            
            
            
            -
            
            
            
            11,250Total
            
            
            30,000
            
            
            
            3,750
            
            
            
            96,980
            
            
            
            130,730




(1)
            Mr.
      Oakey has been a member of our Board of Directors since November
      2005.  On June 12, 2009, Mr. Oakey was granted an option to
      purchase 48,000 shares of our common stock at a per share exercise price
      of $0.20.  This option vests monthly through June 12, 2010 and
      has a term of ten years.  Mr. Oakey did not exercise any of his
      option awards during the fiscal year ended December 31,
    2009.




(2)
            Ms.
      White joined our Board of Directors on May 21, 2007.  On June
      12, 2009, Ms. White was granted an option to purchase 48,000 shares of our
      common stock at a per share exercise price of $0.20.  This
      option vests monthly through June 12, 2010 and has a term of ten
      years.  Ms. White did not exercise any of her options during the
      fiscal year ended December 31, 2009.  Ms. White also provided
      consulting services to the Company and received $96,980 of consulting fees
      during the fiscal year ended December 31,
2009.




(3)
            Mr.
      Wengrod joined our Board of Directors on September 21, 2007.  On
      June 12, 2009, Mr. Wengrod was granted an option to purchase 48,000 shares
      of our common stock at a per share exercise price of
      $0.20.  This option vests monthly through June 12, 2010 and has
      a term of ten years.  Mr. Wengrod did not exercise any of his
      options during the fiscal year ended December 31, 2009.




(4)
            The
      amounts in this column represent the grant date fair value with respect to
      stock options granted in the applicable fiscal year.  For
      additional information on the valuation assumptions with respect to option
      grants, including the options granted in 2009, please see Note 16 to our
      financial statements for the years ended December 31,
      2009.  These amounts do not reflect the actual value that may be
      realized by the Directors which depends on the value of our shares in the
      future.






80




The
general policy of our Board is that compensation for non-employee directors
should be a mix of cash and equity based compensation.  We do not pay
management directors for Board service in addition to their regular employee
compensation.  Currently, we pay our non-employee directors an annual
fee of $10,000.  Our directors are also reimbursed for travel expenses
associated with attendance at Board meetings.  There were no
reimbursements for travel expenses for the fiscal year ended December 31,
2009.




We do not
have a formal policy with regard to option grants to our Board of
Directors.  However, when a director is elected or appointed to our
Board, we generally follow a practice of granting an option to such director to
purchase up to 30,000 shares of our common stock, with the size of the option
grant being determined based on the number of months the new director will serve
as a director in the fiscal year in which the option grant is
awarded.  Thereafter, we generally issue annual option grants to all
non-employee directors to purchase up to 48,000 shares.  In June 2009,
our non-employee directors, Mr. Oakey, Ms. White and Mr. Wengrod, received
48,000 options each to purchase shares of our common stock.




We are
party to a consulting arrangement with Susan White, a member of our Board of
Directors, pursuant to which Ms. White provides image and marketing consulting
services to us.  Effective April 1, 2009, we entered into a
consulting agreement with Innovative Brand Solutions LLC, an entity owned
by our director, Susan White. The agreement provides that Ms. White will
provide marketing and branding services on our behalf and receive a monthly
payment of $10,000 for a period of one year ending April 1,
2010.  During the year ended December 31, 2009, we paid Ms. White
approximately $96,980 for marketing and branding services provided to the
company.




2005
Stock Incentive Plan




Our 2005
Stock Incentive Plan was adopted on November 23, 2005 and became effective on
January 5, 2006.  A total of 5,500,000 shares of common stock have
been reserved for issuance upon exercise of awards granted under the 2005 Stock
Incentive Plan.  Any shares of common stock subject to an award, which
for any reason expires or terminates unexercised, are again available for
issuance under the 2005 Stock Incentive Plan.




Our 2005
Stock Incentive Plan will terminate after 10 years from the date on which our
board approved the plan, unless it is terminated earlier by our
board.  The plan authorizes the award of stock options and stock
purchase grants.




Our 2005
Stock Incentive Plan is administered by our full board of
directors.  To the extent we expand our board of directors, we intend
to form a compensation committee, all of the members of which will be
independent directors under applicable federal securities laws and outside
directors as defined under applicable federal tax laws.  Following its
formation, the compensation committee will have the authority to construe and
interpret the plan, grant awards and make all other determinations necessary or
advisable for the administration of the plan.




Our 2005 Stock Incentive Plan provides
for the grant of both incentive stock options that qualify under Section 422 of
the Internal Revenue Code and nonqualified stock options.  Incentive
stock options may be granted only to employees of ours or any parent or
subsidiary of ours.  All awards other than incentive stock options may
be granted to our employees, officers, directors, consultants, independent
contractors and advisors of ours or any parent or subsidiary of
ours.  The exercise price of incentive stock options must be at least
equal to the fair market value of our common stock on the date of
grant.  The exercise price of incentive stock options granted to 10%
shareholders must be at least equal to 110% of that value.  The
exercise price of nonqualified stock options will be determined by our board of
directors when the options are granted.






81


In
general, options will vest over a four-year period.  The term of
options granted under our 2005 Stock Incentive Plan may not exceed 10
years.




Awards
granted under our 2005 Stock Incentive Plan may not be transferred in any manner
other than by will or by the laws of descent and distribution or as determined
by our board of directors.  Unless otherwise restricted by our board
of directors, nonqualified stock options may be exercised during the lifetime of
the optionee only by the optionee, the optionee’s guardian or legal
representative or a family member of the optionee who has acquired the option by
a permitted transfer.  Incentive stock options may be exercised during
the lifetime of the optionee only by the optionee or the optionee’s guardian or
legal representative.  Options granted under our 2005 Stock Incentive
Plan generally may be exercised for a period of three months after the
termination of the optionee’s service with us or any parent or subsidiary of
ours.  Options will generally terminate immediately upon termination
of employment for cause.




The
purchase price for restricted stock will be determined by our board of directors
or compensation committee, as applicable, at the time of grant.  Stock
bonuses may be issued for past services or may be awarded upon the completion of
services or performance goals.




If we are
subject to a sale, merger, consolidation, reorganization, liquidation or change
in control, our Board of Directors may take actions which include (but shall not
be limited to) establishing, amending or waiving the type, terms, conditions or
duration of, or restrictions on rights so as to provide for earlier, later,
extended or additional time for exercise and other modifications.  In
addition, the Board of Directors may take such actions with respect to all
participants, to certain categories of participants or only to individual
participants in the plan.  Moreover, the Board of Directors may take
such action before or after granting rights to which the action relates and
before or after any public announcement with respect to such sale, merger,
consolidation, reorganization, liquidation or change in control that is the
reason for such action.




Indemnification
of Directors and Executive Officers and Limitation of Liability




Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
for:




·
            any
      breach of their duty of loyalty to the corporation or its
      stockholders;


·
            acts
      or omissions not in good faith or which involve intentional misconduct or
      a knowing violation of law;


·
            unlawful
      payments of dividends or unlawful stock repurchases or redemptions;
      or


·
            any
      transaction from which the director derived an improper personal
      benefit.




Article
Fifth, paragraph D of our Amended and Restated Certificate of Incorporation
states that no director shall have personal liability to us or our stockholders
for monetary damages for breach of fiduciary duty as a
director.  However, the provision does not eliminate or limit the
liability of a director (i) for any breach of the director’s duty of loyalty to
us or our stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporations law, or (iv) for any
transaction from which the director derived an improper personal
benefit.




Article
IX, Section 1 of our bylaws states that we shall indemnify any person who was,
or is threatened to be, made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a Director, officer,
employee or agent of the company, or is or was serving at the request of the
company as a Director, officer, employee or agent of another company,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the State of
Delaware.  Such indemnification (unless ordered by a court) shall be
made as authorized in a specific case upon a determination that indemnification
of the Director, officer, employee or agent is proper in the circumstances
because he has met the applicable standards of conduct set forth in the General
Corporation Law of the State of Delaware.  Such determination shall be
made (1) by the Board of Directors by a majority vote of a quorum consisting of
Directors who were not parties to such action, suit or proceeding, or (2) if
such quorum is not obtainable, or even if obtainable a quorum of disinterested
Directors so directs, by independent legal counsel in a written opinion, or (3)
by our stockholders.






82


In
addition to the indemnification required in our Amended and Restated Certificate
of Incorporation and bylaws, we have entered into indemnity agreements with each
of our current officers, directors and a key employee.  These
agreements provide for the indemnification of our directors, officers and key
employee for all reasonable expenses and liabilities incurred in connection with
any action or proceeding brought against them by reason of the fact that they
are or were our agents.  We believe these indemnification provisions
and agreements are necessary to attract and retain qualified directors, officers
and key employees.




A
stockholder’s investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions.  At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
regarding which indemnification by us is sought, nor are we aware of any
threatened litigation that may result in claims for
indemnification.




Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, key employees or persons controlling us
pursuant to the foregoing provisions, we have been informed that, in the opinion
of the SEC, this indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.




Item
12.          Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters




The
following table presents information regarding the beneficial ownership of our
common stock as of March 8, 2010 by:




·
            each
      of the executive officers listed in the summary compensation
      table;




·
            each
      of our directors;




·
            all
      of our directors and executive officers as a group;
  and




·
            each
      shareholder known to us to be the beneficial owner of more than 5% of our
      common stock.




Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to
securities.  Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.  Shares of our common stock subject to
options and warrants from the Company that are currently exercisable or
exercisable within 60 days of March 8, 2010 are deemed to be outstanding and to
be beneficially owned by the person holding the options or warrants for the
purpose of computing the percentage ownership of that person but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.






83


The
information presented in this table is based on 36,002,563 shares of our common
stock outstanding on March 8, 2010.  Unless otherwise indicated, the
address of each of the executive officers and directors and 5% or more
shareholders named below is c/o People’s Liberation, Inc., 1212 S. Flower
Street, 5th
Floor, Los Angeles, CA 90015.




Name
      of Beneficial Owner
            
            Number
      of Shares
              Beneficially
      Owned
            
            Percentage
      of
              Shares
      OutstandingExecutive
      Officers and Directors:Colin
      Dyne (1)
              Director,
      Chief Executive Officer and Secretary
            
            7,531,560
            
            20.9%Darryn
      Barber (2)
              Chief
      Financial Officer
            
            1,087,560
            
            2.9%Thomas
      Nields (3)
              Chief
      Operating Officer
            
            852,524
            
            2.3%Andrea
      Sobel (4)
              Executive
      Vice President of Branding and Licensing
            
            172,215
            
            *Dean
      Oakey (5)
              Director
            
            485,983
            
            1.3%Susan
      White (6)
              Director
            
            94,000
            
            *Kenneth
      Wengrod (7)
              Director
            
            94,000
            
            *Named
      Directors and officers as a group (7 persons) (8)
            
            10,317,842
            
            26.9%5%
      Shareholders:Gerard
      Guez (9)
            
            10,698,387
            
            29.7%Bristol
      Investment Fund Ltd (10)
            
            3,528,700
            
            9.8%


___________________________




*
            Less
      than 1%




(1)
            Consists
      of 7,531,560 shares of common
stock.




(2)
            Consists
      of 132,560 shares of common stock and 955,000 options to purchase common
      stock.




(3)
            Consists
      of 290,024 shares of common stock and 562,500 options to purchase common
      stock.




(4)
            Consists
      of 172,215 options to purchase common
stock.




(5)
            Consists
      of 77,483 shares of common stock, warrants to purchase 278,500 shares of
      common stock and options to purchase 130,000 shares of common
      stock.




(6)
            Consists
      of 94,000 options to purchase common
stock.




(7)
            Consists
      of 94,000 options to purchase common
stock.




(8)
            Consists
      of 8,031,627 shares of common stock, warrants to purchase 278,500 shares
      of common stock and options to purchase 2,007,715 shares of common
      stock




(9)
            Consists
      of 10,698,387 shares of common stock.  On December 10, 2007,
      Gerard Guez entered into a purchase agreement with Daniel Guez, whereby
      Gerard Guez purchased 10,698,387 shares of common stock held by Daniel
      Guez.  The address of Gerard Guez is 9000 Sunset Boulevard,
      Penthouse West Hollywood,
CA  90069.




(10)
            Consists of 3,528,700 shares of common
      stock.  Paul Kessler, as Director, exercises voting and
      investment authority over the shares held by this company.  The
      address of Bristol Investment Fund, Ltd. is Caledonian Fund Services
      (Cayman) Limited, 69 Dr. Roy's Drive, Georgetown, Grand Cayman KY1-1102,
      Cayman Islands.







84


Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table sets forth certain information regarding our equity compensation
plans as of December 31, 2009.




Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plansEquity
      compensation plans approved by security holders (1)
            
            2,895,000
            
            $0.56
            
            2,605,000Equity
      compensation plans not approved by security holders
            
            1,065,000
            
            $0.93
            
            --Total
            
            3,960,000
            
            
            
            2,605,000




(1)
            Consists
      of shares underlying our 2005 Stock Incentive Plan, of which an aggregate
      of 5,500,000 shares have been reserved for issuance.  All
      outstanding awards under the 2005 option plan consist of stock
      options.






Material
Features of Individual Equity Compensation Plans not Approved by
Stockholders




Sanders
Morris Harris Inc. acted as placement agent in connection with our capital
raise, which we completed on November 23, 2005.  In partial
consideration for their services as placement agent, we issued to Sanders Morris
Harris and its employees, Dean Oakey and Jonah Sulak, warrants to purchase an
aggregate of 625,000 shares of common stock at an exercise price of $1.25 per
share.  The warrants are fully vested and have a term of 5
years.




Effective
October 1, 2007, we entered into a consulting agreement with Europlay Capital
Advisors, LLC.  Under the terms of the consulting agreement, Europlay
Capital Advisors acted as our exclusive financial advisor to raise capital and
provide other financial advisory and investment banking services to us for a
term of one year.  In conjunction with the consulting agreement, we
issued to Europlay Capital Advisors a warrant to purchase 250,000 shares of our
common stock at an exercise price of $0.50 per share.  The warrant is
fully vested and has a term of five years.  No proceeds were received
by us as a result of the warrant issuance.




On
November 13, 2007, we issued a warrant to purchase 150,000 shares of our common
stock to William Rast Enterprises, LLC.  The warrant has an exercise
price of $0.40, vested immediately and has a term of five years.  No
proceeds were received by us as a result of the warrant issuance.




On March
19, 2008, we issued a warrant to purchase 40,000 shares of our common stock to
CCG Investor Relations for consulting services.  The warrant has an
exercise price of $0.50, a five-year term and vested over the 9-month term of
the service contract.  No proceeds were received by us as a result of
the warrant issuance.






85


Item
13.          Certain
Relationships and Related Transactions, and Director
Independence




Other
than the employment arrangements described above in “Executive Compensation” and
the transactions described below, since January 1, 2008, there has not been, nor
is there currently proposed, any transaction or series of similar transactions
to which we were or will be a party:




·
            in
      which the amount involved exceeds $120,000;
and




·
            in
      which any director, executive officer, shareholder who beneficially owns
      5% or more of our common stock or any member of their immediate family had
      or will have a direct or indirect material
  interest.




Transactions
with Officers and Directors and 5% Shareholders




Colin
Dyne became our Chief Executive Officer and a director of the company on May 21,
2007.  Mr. Dyne serves as Vice Chairman of the Board of Directors of
Talon International, Inc. (OTCBB: TALN), owner of Talon zippers.  Mr.
Dyne founded Tag-It, Inc., a subsidiary of Talon, in 1991.  Mr. Dyne
served as Talon’s President from inception and as its Chief Executive Officer
from 1997 to 2005.  During the years ended December 31, 2009 and 2008,
we purchased trim products from Talon amounting to approximately $219,000 and
$536,000, respectively.




Kenneth
Wengrod, a member of our Board of Directors, currently serves as President of
FTC Commercial Corp., a company which he founded in 2002 and in which he
continues to hold a minority equity position.  We are party to various
factoring agreements with FTC as further described in Note 9 to the consolidated
financial statements.  As of December 31, 2009 and 2008, total
factored accounts receivable included in due to factor amounted to approximately
$4.1 million.  Outstanding advances as of December 31, 2009 and 2008
amounted to approximately $3.7 million and $3.5 million, respectively, and are
included in the due to factor balance.




We are
party to a consulting arrangement with Susan White pursuant to which Ms. White
provides image and marketing consulting services to us.  Effective
April 1, 2009, we entered into a consulting agreement with Innovative Brand
Solutions LLC, an entity owned by our director, Susan White. The agreement
provides that Ms. White will provide marketing and branding services on our
behalf and receive a monthly payment of $10,000 for a period of one year ending
April 1, 2010.During the year ended
December 31, 2009, we paid Ms. White approximately $96,980 for marketing and
branding services provided to the company.




Promoters
and Control Persons




On
December 15, 2004, Keating Reverse Merger Fund, LLC, a Delaware limited
liability company, David L. Hadley (our former chief executive officer) and
Natural Technologies, Inc., an Arizona corporation entered into a purchase
agreement pursuant to which certain shareholders of the company sold 5,625,287
shares (on a pre-reverse stock split basis) of the common stock of the company,
representing approximately 70.99% of the outstanding shares of common stock of
the company, to Keating Reverse Merger Fund, LLC, for an aggregate purchase
price of $375,000.




On
January 31, 2005, we entered into an Assumption Agreement with Global Medical
Technologies, Inc., Natural Technologies, Inc. and Mr. Hadley pursuant to which
we contributed all of the shares of common stock of our inactive subsidiaries,
Century Pacific Financial Corp. and Century Pacific Investment Management
Corporation, to Global Medical Technologies, Inc.  Global Medical
Technologies, Inc. agreed to assume all of our liabilities and to indemnify us
for any loss we incur with respect to such assumed
liabilities.  Global Medical, Natural Technologies, and Mr. Hadley
also released us from all obligations and claims.  In February 2005,
we distributed all of the outstanding shares of common
stock of Global Medical Technologies, Inc. on a pro rata basis to our
stockholders.  Following the distribution, Global Medical
Technologies, Inc. continued to operate its medical equipment reconditioning
business as an independent company.  After this distribution, we
existed as a “shell company” under the name of Century Pacific Financial
Corporation with nominal assets whose sole business was to identify, evaluate
and investigate various companies to acquire or with which to
merge.






86


On
February 16, 2005, we received a non-interest bearing, unsecured demand loan
from Keating Reverse Merger Fund in the amount of $50,000 to provide working
capital for operating expenses.  On June 28, 2005 we issued 5,000,000
restricted common shares (on a pre-reverse stock split basis) in full payment of
the $50,000 note payable to Keating Reverse Merger Fund.  We granted
Keating Reverse Merger Fund piggyback registration rights with respect to these
shares.




On
November 22, 2005, we consummated an exchange transaction in which we acquired
all of the outstanding ownership interests of Bella Rose, LLC, a California
limited liability company (“Bella Rose”) and Versatile Entertainment, Inc., a
California corporation (“Versatile”) from their respective shareholders and
members, in exchange for an aggregate of 2,460,106.34 shares of our series A
convertible preferred stock which, on January 5, 2006, converted into 26,595,751
shares of our common stock on a post reverse stock split basis.  At
the closing of the exchange transaction, Versatile and Bella Rose became our
wholly-owned subsidiaries.  The exchange transaction was accounted for
as a reverse merger (recapitalization) with Versatile and Bella Rose deemed to
be the accounting acquirers, and People’s Liberation, Inc. the legal
acquirer.




On
November 22, 2005, we entered into a certain financial advisory agreement with
Keating Securities, LLC under which Keating Securities, LLC was compensated by
us for its advisory services rendered to us in connection with the closing of
the exchange transaction with Versatile Entertainment, Inc. and Bella Rose,
LLC.  The transaction advisory fee was $350,000, with the payment
thereof made at the closing of the exchange transaction.




Kevin R.
Keating, a former director of the company, is the father of the principal member
of Keating Investments, LLC.  Keating Investments, LLC is the managing
member of Keating Reverse Merger Fund and is also the managing member and 90%
owner of Keating Securities, LLC, a registered broker-dealer.  Kevin
Keating resigned from our Board of Directors on May 21, 2007.




Item
14.          Principal Accounting
Fees and Services




Our Board
of Directors does not have an Audit Committee.  The functions
customarily delegated to an Audit Committee are performed by our full Board of
Directors.  Effective November 30, 2005, Grobstein, Horwath &
Company, LLP became our principal independent accounting firm.  In
2009, the personnel of Grobstein, Horwath & Company joined with Crowe
Horwath LLP.  As a result of this event, the Company’s client
relationship with Grobstein, Horwath & Company ceased and, effective
February 20, 2009, Crowe Horwath LLP became the Company’s principal independent
accounting firm.  All audit work for the fiscal years ended December
31, 2009 and 2008 was performed by the full time employees of Grobstein, Horwath
& Company, LLP or Crowe Horwath, LLP, as applicable.  Generally,
the Board approves in advance audit and non-audit services to be provided by our
independent accounting firm. In other cases, in accordance with Rule 2-01(c)(7)
of Securities and Exchange Commission Regulation S-X, the Board has delegated
pre-approval authority to the Chairman of the Board for matters which arise or
otherwise require approval between regularly scheduled meetings of the Board of
Directors, provided that the Chairman reports such approvals to the Board at the
next regularly scheduled meeting of the Board of Directors. No services were
approved by the Board of Directors in accordance with Item 2-01(c)(7)(i)(C) of
Regulation S-X.






87


Audit
Fees




Fees for
audit and review services provided by Crowe Horwath LLP and Grobstein, Horwath
& Company, LLP totaled approximately $164,000 during the year ended December
31, 2009, including fees associated with the December 31, 2008 audit, and the
reviews of our quarterly financial statements for the periods ended March 31,
2009, June 30, 2009 and September 30, 2009.




Fees for
audit and review services provided by Grobstein, Horwath & Company, LLP
totaled approximately $150,000 during the year ended December 31, 2008,
including fees associated with the December 31, 2007 audit, and the reviews of
our quarterly financial statements for the periods ended March 31, 2008, June
30, 2008 and September 30, 2008.




Audit-Related
Fees




There
were no audit-related services provided for the year ended December 31,
2009.  Audit-related services provided by Grobstein, Horwath &
Company, LLP amounted to approximately $70,000 and related to the audit of the
financial statements of J. Lindeberg USA Corp., an entity acquired in part by
the Company during the year ended December 31, 2008.




Tax
Fees




Fees for
tax services provided by Crowe Horwath LLP during the year ended December 31,
2009 amounted to approximately $48,000.  Tax services provided during
the year ended December 31, 2009 primarily consisted of the preparation of the
Federal and State tax returns for the Company and its subsidiaries, other tax
compliance services and transfer pricing research.




Fees for
tax services provided by Grobstein, Horwath & Company, LLP during the year
ended December 31, 2008 amounted to approximately $32,000.  Tax
services provided during the year ended December 31, 2008 primarily consisted of
the preparation of the Federal and State tax returns for the Company and its
subsidiaries and other tax compliance services.




All
Other Fees




No other
fees were incurred during the years ended December 31, 2009 and 2008 for
services provided by Crowe Horwath LLP or Grobstein, Horwath & Company,
LLP.






88


Item
15.         Exhibits, Financial
Statement Schedules




(a)          Documents
filed as part of this report




1.           Financial
Statements.




See Index
to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is
incorporated herein by reference.




2.           Financial Statement
Schedules.




All
financial statement schedules are omitted because the information is
inapplicable or presented in the Notes to Financial Statements.




3.           Exhibits.  See Item
15(b) below.










(c)          Financial
Statement Schedule.  See Item 15(a) above.






89




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




PEOPLE’S
      LIBERATION, INC.Date:
      March 30, 2010
            /s/ Darryn
      Barber
              By:  Darryn
      Barber
              Its:  Chief
      Financial Officer and President
              (Principal
      Financial and Accounting Officer)









POWER
OF ATTORNEY






The
undersigned directors and officers of People's Liberation, Inc. do hereby
constitute and appoint Colin Dyne and Darryn Barber, and each of them, with full
power of substitution and resubstitution, as their true and lawful attorneys and
agents, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorney and
agent, may deem necessary or advisable to enable said corporation to comply with
the Securities Exchange Act of 1934, as amended and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically but without limitation, power
and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments hereto, and we do hereby ratify and
confirm all that said attorneys and agents, or either of them, shall do or cause
to be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




Name
            
            Title
            
            Date/s/ Colin
      Dyne
              Colin
      Dyne
            
            Chief
      Executive Officer, Secretary, and Director (Principal Executive
      Officer)
            
            March
      30, 2010/s/
      Darryn
      Barber
              Darryn
      Barber
            
            Chief
      Financial Officer and President (Principal Financial and Accounting
      Officer)
            
            March
      30, 2010/s/ Susan
      White
              Susan
      White
            
            Director
            
            March
      30, 2010/s/ Ken
      Wengrod
              Ken
      Wengrod
            
            Director
            
            March
      30, 2010/s/ Dean
      Oakey
              Dean
      Oakey
            
            Director
            
            March
      30, 2010






90


INDEX TO
EXHIBITS




Exhibit
      Number
            
            Exhibit Title2.1
            
            Contribution
      Agreement, effective as of July 1, 2008, by and among J. Lindeberg, USA,
      LLC, Bella Rose, LLC and J. Lindeberg USA Corp.  Incorporated by
      referenced to Exhibit 2.1 to our Current Report on Form 8-K (dated August
      6, 2008), filed on August 12, 2008.3.1
            
            Amended
      and Restated Certificate of Incorporation of People’s Liberation, Inc.
      Incorporated by referenced to Exhibit 3.1 to our Current Report on Form
      8-K (dated July 14, 2008), filed on July 18, 2008.3.2
            
            Bylaws
      of People’s Liberation, Inc.  Incorporated by reference to
      Exhibit 3.10 to our Registration Statement on Form SB-2 (File No.
      333-130930), filed on January 9, 2006.4.1
            
            2005
      People’s Liberation, Inc. Option Plan.  Incorporated by
      reference to Exhibit 4.1 to our Registration Statement on Form SB-2 (File
      No. 333-130930), filed on January 9, 2006.**10.1
            
            Form
      of Indemnity Agreement.  Incorporated by reference to Exhibit
      10.12 to our Registration Statement on Form SB-2 (File No. 333-130930),
      filed on January 9, 2006.10.2
            
            Factor
      Agreement entered into on October 14, 2004 by and between Versatile and
      FTC Commercial Corp. Incorporated by reference to Exhibit 10.3 to our
      Current Report on Form 8-K (dated November 22, 2005), filed November 25,
      2005.10.3
            
            Amendment
      No. 1 To Factoring Agreement between Versatile and FTC Commercial Corp.
      dated September 30, 2005.  Incorporated by reference to Exhibit
      10.4 to our Current Report on Form 8-K (dated November 22, 2005), filed
      November 25, 2005.10.4
            
            Factoring
      Agreement entered into by and between Bella Rose and FTC Commercial Corp.
      dated October 12, 2005.  Incorporated by reference to Exhibit
      10.5 to our Current Report on Form 8-K (dated November 22, 2005), filed
      November 25, 2005.10.5
            
            Registration
      Rights Agreement dated November 23, 2005 among the Registrant and Sanders
      Morris Harris Inc. as agent and attorney-in-fact for the Investors
      identified therein.  Incorporated by reference to Exhibit 10.8
      to our Current Report on Form 8-K (dated November 22, 2005), filed
      November 25, 2005.10.6
            
            Form
      of Common Stock Purchase Warrant.  Incorporated by reference to
      Exhibit 10.10 to our Current Report on Form 8-K (dated November 22, 2005),
      filed November 25, 2005.10.7
            
            Amended
      and Restated Limited Liability Company Operating Agreement of William Rast
      Licensing, LLC, dated as of January 1, 2007 by and between Bella Rose, LLC
      and William Rast Enterprises, LLC.  Incorporated by reference to
      Exhibit 10.2 to our Current Report on Form 8-K (dated May 8, 2007), filed
      with the Securities and Exchange Commission on May 14, 2007.10.8
            
            Amended
      and Restated Limited Liability Company Operating Agreement of William Rast
      Sourcing, LLC, dated as of January 1, 2007 by and between Bella Rose, LLC
      and William Rast Enterprises, LLC.  Incorporated by reference to
      Exhibit 10.1 to our Current Report on Form 8-K (dated May 8, 2007), filed
      with the Securities and Exchange Commission on May 14, 2007.   91
  10.9
            Factoring
      Agreement entered into on October 1, 2006 by and between William Rast
      Sourcing, LLC and FTC Commercial Corp. Incorporated by reference to
      Exhibit 10.18 to our Current Report on Form 10-KSB filed March 16,
      2007.10.10
            Letter
      Agreement by and between William Rast Sourcing, LLC and FTC Commercial
      Corp. dated October 1, 2006.  Incorporated by reference to
      Exhibit 10.19 to our Current Report on Form 10-KSB filed March 16,
      2007.10.11
            Letter
      Agreement by and between Versatile Entertainment, Inc. and FTC Commercial
      Corp. dated September 1, 2006.  Incorporated by reference to
      Exhibit 10.20 to our Current Report on Form 10-KSB filed March 16,
      2007.10.12
            Amendment
      No. 1 to Inventory Loan Facility Agreement entered into on October 1, 2006
      by and between Versatile Entertainment, Inc. and FTC Commercial
      Corp.  Incorporated by reference to Exhibit 10.21 to our Current
      Report on Form 10-KSB filed March 16, 2007.10.13
            Letter
      Agreement by and between Bella Rose, LLC d/b/a William Rast and FTC
      Commercial Corp. dated September 1, 2006.  Incorporated by
      reference to Exhibit 10.22 to our Current Report on Form 10-KSB filed
      March 16, 2007.10.14
            Registration
      Rights Agreement dated September 28, 2007, by and among People’s
      Liberation and the investors identified on the signature pages
      thereof.  Incorporated by reference to Exhibit 10.3 to our
      Quarterly Report on Form 10-QSB filed with the Securities and Exchange
      Commission on November 14, 2007.10.15
            Form
      of Warrant issued to Europlay Capital Advisors, LLC, dated October 1,
      2007.  Incorporated by reference to Exhibit 10.4 to our
      Quarterly Report on Form 10-QSB filed with the Securities and Exchange
      Commission on November 14, 2007.10.16
            Form
      of Warrant issued to William Rast Enterprises, LLC, dated November 13,
      2007.  Incorporated by reference to Exhibit 10.5 to our
      Quarterly Report on Form 10-QSB filed with the Securities and Exchange
      Commission on November 14, 2007.10.17
            First
      Amendment to Amended and Restated Operating Agreement of William Rast
      Sourcing, LLC dated as of November 9, 2007, and effective as of April 1,
      2007, by and between Bella Rose, LLC and William Rast Enterprises,
      LLC.  Incorporated by reference to Exhibit 10.30 to our
      Registration Statement on Form SB-2 (File No. 333-147684) filed on
      November 28, 2007.10.18
            First
      Amendment to Amended and Restated Operating Agreement of William Rast
      Licensing, LLC dated as of November 9, 2007, and effective as of April 1,
      2007, by and between Bella Rose, LLC and William Rast Enterprises,
      LLC.  Incorporated by reference to Exhibit 10.31 to our
      Registration Statement on Form SB-2 (File No. 333-147684) filed on
      November 28, 2007.10.19
            Amendment
      No. 1 to Inventory Loan Facility Agreement entered into as of October 23,
      2007, by and between FTC Commercial Corp. and William Rast Sourcing,
      LLC.  Incorporated by reference to Exhibit 10.34 to our
      Registration Statement on Form SB-2 (File No. 333-147684) filed on
      November 28, 2007.10.20
            Amendment
      No. 2 to Inventory Loan Facility Agreement entered into as of October 23,
      2007 by and between FTC Commercial Corp. and Versatile Entertainment,
      Inc.  Incorporated by reference to Exhibit 10.35 to our
      Registration Statement on Form SB-2 (File No. 333-147684) filed on
      November 28, 2007.   92
  10.21
            Design
      Services Agreement between William Rast Sourcing, LLC and Paris68, LLC
      dated February 27, 2008.  Incorporated by reference to Exhibit
      10.33 to our Current Report on Form 10-KSB filed March 24,
      2008.10.22
            Employment
      Agreement by and between People’s Liberation, Inc. and Andrea Sobel dated
      May 16, 2008.  Incorporated by reference to Exhibit 10.1 to our
      Current Report on Form 8-K (dated May 16, 2008), filed with the Securities
      and Exchange Commission on May 22, 2008. **10.23
            Operating
      Agreement of J. Lindeberg USA, LLC, effective as of July 1, 2008, by and
      among J. Lindeberg USA, LLC, Bella Rose, LLC and J. Lindeberg USA
      Corp.  Incorporated by referenced to Exhibit 10.1 to our Current
      Report on Form 8-K (dated August 6, 2008), filed on August 12,
      2008.10.24
            JL
      Sweden Services Agreement, effective as of July 1, 2008, by and between J.
      Lindeberg AB and J. Lindeberg USA, LLC.  Incorporated by
      referenced to Exhibit 10.2 to our Current Report on Form 8-K (dated August
      6, 2008), filed on August 12, 2008.10.25
            Management
      Services Agreement, effective as of July 1, 2008, by and between People's
      Liberation, Inc. and J. Lindeberg USA, LLC.  Incorporated by
      referenced to Exhibit 10.3 to our Current Report on Form 8-K (dated August
      6, 2008), filed on August 12, 2008.10.26
            Trademark
      License Agreement, effective as of July 1, 2008, by and between J.
      Lindeberg AB and J. Lindeberg USA, LLC.  Incorporated by
      referenced to Exhibit 10.4 to our Current Report on Form 8-K (dated August
      6, 2008), filed on August 12, 2008.10.27
            Factoring
      Agreement, dated August 6, 2008, by and between J. Lindeberg USA, LLC and
      FTC Commercial Corp.  Incorporated by referenced to Exhibit 10.5
      to our Current Report on Form 8-K (dated August 6, 2008), filed on August
      12, 2008.10.28
            Inventory
      Loan Facility Agreement, dated August 6, 2008, by and between J. Lindeberg
      USA, LLC and FTC Commercial Corp.  Incorporated by referenced to
      Exhibit 10.6 to our Current Report on Form 8-K (dated August 6, 2008),
      filed on August 12, 2008.10.29
            Form
      of Guaranty entered into in favor of FTC Commercial
      Corp.  Incorporated by referenced to Exhibit 10.7 to our Current
      Report on Form 8-K (dated August 6, 2008), filed on August 12,
      2008.10.30
            Letter
      Agreement, dated December 16, 2008, by and between Charlotte Russe
      Holding, Inc. and its wholly-owned subsidiary, Charlotte Russe
      Merchandising, Inc., the Company, and the Company’s wholly-owned
      subsidiary Versatile Entertainment, Inc.  Incorporated by
      reference to Exhibit 10.36 to our Current Report on Form 10-K filed March
      31, 2009. ***10.31
            Standard
      Office Lease, dated January 22, 2009, by and between 1212 Flower Real
      Estate, LLC and People’s Liberation, Inc.  Incorporated by
      reference to Exhibit 10.37 to our Current Report on Form 10-K filed March
      31, 2009.   93
  10.32
            Standard
      Industrial/Commercial Multi-Tenant Lease- Gross, dated January 22, 2009,
      by and between 1212 Flower Real Estate, LLC and People’s Liberation,
      Inc.  Incorporated by reference to Exhibit 10.38 to our Current
      Report on Form 10-K filed March 31, 2009.10.33
            Addendum
      to Standard Industrial/Commercial Multi-Tenant Lease- Gross, dated January
      22, 2009, by and between 1212 Flower Real Estate, LLC and People’s
      Liberation, Inc.  Incorporated by reference to Exhibit 10.39 to
      our Current Report on Form 10-K filed March 31, 2009.10.34
            Independent
      Consultant Agreement, dated April 1, 2009, by and between People’s
      Liberation, Inc. and Innovative Brand Solutions,
      LLC.  Incorporated by reference to Exhibit 10.1 to our Current
      Report on Form 10-Q filed May 15, 2009.10.35
            Amendment
      No. 1 to Factoring Agreement dated January 1, 2010 by and between FTC
      Commercial Corp. and William Rast Sourcing, LLC.10.36
            Amendment
      No. 2 to Factoring Agreement dated January 1, 2010 by and between FTC
      Commercial Corp. and William Rast Sourcing, LLC.14.1
            People’s
      Liberation, Inc. Code of Ethical Conduct.  Incorporated by
      reference to Exhibit 14.1 to our Current Report on Form 10-KSB filed March
      7, 2006.21.1
            Subsidiaries
      of People’s Liberation, Inc.23.1
            Consent
      of Independent Registered Public Accounting Firm.24.1
            Power
      of Attorney (included on signature page)31.1
            Certification
      of Principal Executive Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Principal Financial Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002.


**  Each
a management contract or compensatory plan or arrangement required to be filed
as an exhibit to this annual report on Form 10-K.


***  Certain
portions of this agreement have been omitted and filed separately with
the Securities and Exchange Commission  pursuant to a  request
for an order granting  confidential  treatment pursuant to Rule 24b-2
of the Rules and  Regulations  under the  Securities and Exchange
Act of 1934, as amended.






94