**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

### **FORM10-Q**

| x                                                                                                                                                                                                                                                                                                                                         | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                    |
| **For the  Quarterly Period Ended June 30, 2006**                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                    |
| **or**                                                                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                    |
| o                                                                                                                                                                                                                                                                                                                                         | ** ** | **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: 1-14208**

**MOSSIMO, INC.**

(Exact name ofRegistrant as specified in its charter)

| **Delaware**                     |   | **33-0684524**            |
|----------------------------------|--------|---------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  ID No.) |
| incorporation or  organization)  |   |                      |
|                             |   |                      |
| **2016  Broadway**               |   |                      |
| **Santa  Monica, California**    |   | **90404**                 |
| (Address of  principal           |   | (Zip Code)                |
| executive  offices)              |   |                      |

 

**(310)460-0040**

(Registrant’stelephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for any shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No       o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  

Large acceleratedfiler o     AcceleratedFiler o     Non-acceleratedfiler x

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

As of June 30, 2006, the Registrant had 16,002,775 shares of CommonStock, $0.001 par value, outstanding.

 

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**MOSSIMO,INC.**

**FORM 10-Q**

For the Six MonthsEnded June 30, 2006
| PART I – FINANCIAL  INFORMATION                                                                       |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |
| ITEM 1 –  Financial Statements (Unaudited):                                                           |
|                                                                                                       |
| Condensed consolidated  balance sheets as of June 30, 2006 and December 31, 2005                           |
|                                                                                                       |
| Condensed  consolidated statements of earnings for the three and six months ended June  30, 2006 and 2005  |
|                                                                                                       |
| Condensed  consolidated statements of cash flows for the six months ended June 30, 2006  and 2005          |
|                                                                                                       |
| Notes to condensed  consolidated financial statements                                                      |
|                                                                                                       |
| ITEM 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |
|                                                                                                       |
| ITEM 3 –  Quantitative and Qualitative Disclosure about Market Risk                                   |
|                                                                                                       |
| ITEM 4 – Controls  and Procedures                                                                     |
|                                                                                                       |
| PART II – OTHER INFORMATION                                                                           |
|                                                                                                       |
| ITEM 1 – Legal Proceedings                                                                            |
|                                                                                                       |
| ITEM 1A – Risk Factors                                                                                |
|                                                                                                       |
| ITEM 6 – Exhibits                                                                                     |
|                                                                                                       |
| SIGNATURES                                                                                                 |
|                                                                                                       |
| CERTIFICATIONS                                                                                             |

 

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MOSSIMO, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPTSHARE DATA)

(Unaudited)
| ** **                                                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ASSETS                                                                                                                                                    |       |              |       |                  |       |
| CURRENT ASSETS:                                                                                                                                           |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                |       | $                 | 21,490     |                  | $          | 19,658 |   |
| Restricted cash                                                                                                                                           |       | 843               |       | 726                   |       |
| Accounts receivable,  net                                                                                                                                 |       | 6,042             |       | 4,372                 |       |
| Merchandise  inventory                                                                                                                                    |       | 263               |       | 101                   |       |
| Deferred income  taxes                                                                                                                                    |       | 3,702             |       | 4,004                 |       |
| Prepaid expenses  and other current assets                                                                                                                |       | 426               |       | 388                   |       |
| Total current  assets                                                                                                                                     |       | 32,766            |       | 29,249                |       |
|                                                                                                                                                      |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT,  at cost, net of accumulated depreciation and amortization                                                                        |       | 808               |       | 893                   |       |
|                                                                                                                                                      |       |              |       |                  |       |
| DEFERRED INCOME TAXES                                                                                                                                     |       | 1,581             |       | 1,923                 |       |
|                                                                                                                                                      |       |              |       |                  |       |
| TRADENAME                                                                                                                                                 |       | 84                |       | 90                    |       |
|                                                                                                                                                      |       |              |       |                  |       |
| OTHER ASSETS                                                                                                                                              |       | 60                |       | 79                    |       |
|                                                                                                                                                      |       | $                 | 35,299     |                  | $          | 32,234 |   |
|                                                                                                                                                      |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                      |       |              |       |                  |       |
| Accounts payable                                                                                                                                          |       | $                 | 887        |                  | $          | 884 |   |
| Accrued  liabilities                                                                                                                                      |       | 1,102             |       | 503                   |       |
| Accrued  commissions                                                                                                                                      |       | 1,542             |       | 388                   |       |
| Accrued bonuses                                                                                                                                           |       | 2,144             |       | 3,458                 |       |
| Total current  liabilities                                                                                                                                |       | 5,675             |       | 5,233                 |       |
|                                                                                                                                                      |       |              |       |                  |       |
| DEFERRED RENT                                                                                                                                             |       | 117               |       | 128                   |       |
| Total  liabilities                                                                                                                                        |       | 5,792             |       | 5,361                 |       |
|                                                                                                                                                      |       |              |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                      |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                |       |              |       |                  |       |
| Preferred stock,  par value $.001; authorized shares 3,000,000; no shares issued or outstanding                                                           |       | —            |       | —                |       |
| Common stock,  par value $.001; authorized shares 30,000,000; issued and outstanding  16,002,775 at June 30, 2006 and and 15,828,754 at December 31, 2005 |       | 15                |       | 15                    |       |
| Additional  paid-in capital                                                                                                                               |       | 41,316            |       | 40,222                |       |
| Accumulated  deficit                                                                                                                                      |       | (11,824           | )          | (13,364               | )          |
| Net  stockholders’ equity                                                                                                                            |       | 29,507            |       | 26,873                |       |
|                                                                                                                                                      |       | $                 | 35,299     |                  | $          | 32,234 |   |

 

See accompanyingnotes to consolidated financial statements

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MOSSIMO, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(IN THOUSANDS, EXCEPT PERSHARE DATA)

(Unaduited)
| ** **                                              | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                       | ** ** | **June 30,**                     | ** ** |
| ** **                                              | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Revenue from  license royalties and design service fees |       | $                                       | 9,020      |                                  | $          | 8,113 |   | $ | 11,581 |   | $ | 15,467 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Product sales                                           |       | 1,278                                   |       | 932                                   |       | 3,655 |   | 2,242 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Total revenues                                          |       | 10,298                                  |       | 9,045                                 |       | 15,236 |   | 17,709 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Operating  expenses:                                    |       |                                    |       |                                  |       |   |   |   |   |
| Cost of product sales                                   |       | 545                                     |       | 695                                   |       | 1,842 |   | 1,734 |   |
| Selling, general and administrative                     |       | 5,438                                   |       | 5,353                                 |       | 11,215 |   | 9,928 |   |
| Total operating expenses                                |       | 5,983                                   |       | 6,048                                 |       | 13,057 |   | 11,662 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Operating  earnings                                     |       | 4,315                                   |       | 2,997                                 |       | 2,179 |   | 6,047 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Interest income                                         |       | 222                                     |       | 79                                    |       | 416 |   | 110 |   |
| Earnings before  income taxes                           |       | 4,537                                   |       | 3,076                                 |       | 2,595 |   | 6,157 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Income taxes                                            |       | 1,823                                   |       | 848                                   |       | 1,055 |   | 2,108 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Net earnings                                            |       | $                                       | 2,714      |                                  | $          | 2,228 |   | $ | 1,540 |   | $ | 4,049 |   |
|                                                    |       |                                    |       |                                  |       |   |   |   |   |
| Net earnings per  common share:                         |       |                                    |       |                                  |       |   |   |   |   |
| Basic                                                   |       | $                                       | 0.17       |                                  | $          | 0.14 |   | $ | 0.10 |   | $ | 0.26 |   |
| Diluted                                                 |       | $                                       | 0.17       |                                  | $          | 0.14 |   | $ | 0.10 |   | $ | 0.26 |   |
| Weighted average  common shares outstanding:            |       |                                    |       |                                  |       |   |   |   |   |
| Basic                                                   |       | 15,996                                  |       | 15,738                                |       | 15,943 |   | 15,738 |   |
| Diluted                                                 |       | 16,061                                  |       | 15,768                                |       | 15,997 |   | 15,762 |   |

 

See accompanying notes to consolidated financialstatements

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MOSSIMO, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)
| ** **                                                                           | ** ** | **For the Six Months** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                           | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                                                 |       |                                  |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                               |       |                                  |       |   |   |
| Net earnings                                                                         |       | $                                     | 1,540      |   | $ | 4,049 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation and  amortization                                                       |       | 159                                   |       | 252 |   |
| Inventory  write-down                                                                |       | 86                                    |       | 189 |   |
| Deferred rent                                                                        |       | (11                                   | )          | 2 |   |
| Provision for  bad debt                                                              |       | 208                                   |       | 48 |   |
| Deferred income  taxes                                                               |       | 644                                   |       | 1,865 |   |
| Excess tax  benefit from stock-based compensation                                    |       | (141                                  | )          | — |   |
| Stock-based  compensation                                                            |       | 96                                    |       | — |   |
| Changes in:                                                                          |       |                                  |       |   |   |
| Accounts receivable                                                                  |       | (1,878                                | )          | (3,588 | ) |
| Merchandise inventory                                                                |       | (248                                  | )          | (435 | ) |
| Prepaid expenses and other current assets                                            |       | (38                                   | )          | 61 |   |
| Other assets                                                                         |       | 19                                    |       | 44 |   |
| Accounts payable                                                                     |       | 3                                     |       | 761 |   |
| Accrued liabilities                                                                  |       | 740                                   |       | 50 |   |
| Accrued commissions                                                                  |       | 1,154                                 |       | 520 |   |
| Accrued bonuses                                                                      |       | (1,314                                | )          | 1,574 |   |
| Net cash provided by operating activities                                            |       | 1,019                                 |       | 5,392 |   |
|                                                                                 |       |                                  |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                               |       |                                  |       |   |   |
| Proceeds from  sale of available-for-sale securities                                 |       | —                                |       | 4,800 |   |
| Payments for  acquisition of property and equipment                                  |       | (68                                   | )          | (103 | ) |
| Net cash provided by (used in) investing activities                                  |       | (68                                   | )          | 4,697 |   |
|                                                                                 |       |                                  |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                               |       |                                  |       |   |   |
| Restricted cash –  certificates of deposit                                      |       | (117                                  | )          | (304 | ) |
| Excess tax  benefit from stock-based compensation                                    |       | 141                                   |       | — |   |
| Proceeds from  issuance of common stock                                              |       | 857                                   |       | — |   |
| Net cash provided by (used in) financing activities                                  |       | 881                                   |       | (304 | ) |
|                                                                                 |       |                                  |       |   |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                           |       | 1,832                                 |       | 9,785 |   |
| CASH AND CASH  EQUIVALENTS, beginning of year                                        |       | 19,658                                |       | 4,903 |   |
| CASH AND CASH  EQUIVALENTS, end of year                                              |       | $                                     | 21,490     |   | $ | 14,688 |   |
|                                                                                 |       |                                  |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                   |       |                                  |       |   |   |
| Cash paid during  the year for state income taxes                                    |       | $                                     | —     |   | $ | 25 |   |

 

See accompanyingnotes to consolidated financial statements

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**MOSSIMO,INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

1.  BASIS OF PRESENTATION

Thecondensed consolidated financial statements presented herein have not beenaudited, but include all material adjustments (consisting of normal recurringadjustments), which are, in the opinion of management, necessary for a fairstatement of the financial condition, results of operations and cash flows forthe periods presented. However, these results are not necessarily indicative ofresults for any other interim period or for the full year. The condensedconsolidated balance sheet data presented herein for December 31, 2005 wasderived from the Company’s audited consolidated financial statements for theyear then ended, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

Theconsolidated financial statements include the accounts of Mossimo, Inc. and itswholly-owned subsidiary, Modern Amusement, Inc. All significant inter-companybalances and transactions have been eliminated in consolidation.

On January 16, 2004, Mossimo, Inc.acquired substantially all the assets of Modern Amusement LLC through a whollyowned subsidiary, Modern Amusement, Inc. (“Modern Amusement”).  All inter-company accounts and transactionshave been eliminated in consolidation.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statements,and the reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

Certaininformation and footnote disclosures normally included in annual financialstatements in accordance with accounting principles generally accepted in theUnited States of America have been omitted pursuant to the Regulations of theSecurities and Exchange Commission. The Company believes the disclosuresincluded in the accompanying interim condensed consolidated financialstatements and notes thereto are adequate to make the information notmisleading, but should be read in conjunction with the financial statements andnotes thereto included in our Form 10-K for the year ended December 31, 2005.

As of March 31, 2006, the Company entered into anagreement and plan of merger by and among the Company, Iconix Brand Group,Inc., Moss Acquisition Corp., a wholly-owned subsidiary of Iconix, and MossimoGiannulli, the Chairman and Co-Chief Executive Officer and 64.6% stockholder ofthe Company (“Merger Agreement”). Pursuant to the agreement, the Company expects to merge with and intoMoss Acquisition Corp. which would be the surviving company.  The proposed merger is described in theCompany’s Current Report on Form 8-K filed with the Securities and ExchangeCommission on April 6, 2006.

As considerationfor investment banking services provided in connection with Mossimo’snegotiation and evaluation of the proposed merger and any alternativeproposals, Mossimo has agreed to pay B. Riley & Co., Inc. aninvestment banking fee of $600,000. This fee is not contingent on the completionof any transaction. Bryant R. Riley, a director of Mossimo, is chairman andchief executive officer of B. Riley & Co., Inc.  This fee was accrued in the first quarter of2006.

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*Share-BasedCompensation*

On January 1, 2006, the Company adopted Statementof Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123(R)”) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors for employee stock options based on estimated fair values. SFAS123(R) supersedes the Company’s previous accounting under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”)for periods beginning on or after January 1, 2006. In March 2005, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). TheCompany has applied the relevant provisions of SAB 107 in its adoption of SFAS123(R).

The Company adopted SFAS 123(R) using the modifiedprospective method, which requires the application of the accounting standardas of January 1, 2006, the first day of the Company’s 2006 fiscalyear.  The Company’s consolidatedfinancial statements as of and for the three and six months ended June 30, 2006reflect the impact of SFAS 123(R). In accordance with the modified prospectivetransition method, the Company’s consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R)for the three and six months ended June 30, 2006 was $48,000 and $96,000,respectively.

SFAS 123(R) requires companies to estimate the fairvalue of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service periods inthe Company’s consolidated statement of earnings. Prior to the adoption of SFAS123(R), the Company accounted for stock-based compensation in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations. The Company followed the proforma disclosure requirements of SFAS No. 123, “Accounting for Stock-BasedCompensation”, which requires presentation of the pro forma effect of the fairvalue based method on net earnings and net earnings per share in the financialstatement footnotes.

Stock-based compensation expense recognized during theperiod is based on the value of the portion of share-based payment awards thatis ultimately expected to vest during the period. Stock-based compensationexpense recognized in the Company’s consolidated statement of earnings for thethree and six months ended June 30, 2006 included compensation expense forshare-based payment awards granted prior to, but not yet vested as of December31, 2005 based on the grant date fair value estimated in accordance with thepro forma provisions of SFAS 123.  TheCompany uses the straight-line single option method of attributing the value ofthe share-based compensation expense.  Asstock-based compensation expense recognized in the consolidated statement ofearnings for the first and second quarter of 2006 is based on awards ultimatelyexpected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. In the Company’s pro forma information required under SFAS 123 forthe periods prior to 2005, the Company accounted for forfeitures as theyoccurred.

Upon adoption of SFAS 123(R), the Company continues touse the Black-Scholes option pricing model for valuation of share-based awardsgranted beginning in 2006.  The Company’sdetermination of fair value of share-based payment awards on the date of grantusing an option-pricing model is affected by the Company’s stock price as wellas assumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, the Company’s expected stockprice volatility over the term of the awards, and actual and projected employeestock option exercise behaviors.

2.  REVENUE RECOGNITION

Revenue fromlicense royalties and design service fees are recognized in accordance with theterms of the underlying agreements, which is generally after the designservices are performed, and as the licensee achieves sales of the Company’sproducts. During the periods presented herein, a substantial amount of theCompany’s revenue from license royalties and design fees were generated underthe

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Target Agreement under arate of 1% to 4% that declines as the contract year progresses and Targetachieves certain levels of retail sales. Accordingly, the Company’s revenuesfrom Target decreases as the year progresses. The declining rate is reset eachcontract year beginning on February 1. Revenue recognized in the first andsecond quarters of the Company’s calendar year in connection with the TargetAgreement is significantly higher than in the third and fourth quarters of theCompany’s calendar year due to the declining rates in the Target Agreement.Revenues from license royalties and design service fees under licenseagreements other than the Target Agreement are generally collected on aquarterly basis, and they range from 2% to 5% of sales, as defined in therespective agreements.

On March 31, 2006, the Company and Target restated the TargetAgreement.  The restated Target Agreementextends Target’s exclusive license to produce and distribute substantially allMossimo-branded products sold in the United States, its territories andpossessions through Target retail stores or any other retail store or othermerchandising activity operated by Target or its affiliates, including directmail and Internet merchandising until January 31, 2010.

Under the restated Target Agreement, the Company will ensure theavailability of Mossimo Giannulli, the Co-Chief Executive Officer of theCompany, to provide the services of creative director in connection withMossimo-branded products sold though Target stores. Target will pay the Companyan annual guaranteed minimum fee of $9,625,000 for each contract year (definedas each period from February 1 through January 31 during the term of theagreement), against which Target may charge back and offset certain amounts. Asamended, the agreement requires the Company to pay Target a one-time,nonrefundable reimbursement of fees paid by Target related to contract year2006 revenues in the amount of $6,000,000 on or before June 30, 2006.  The payment was made in the second quarter of2006 in accordance with the terms of the agreement, but was recorded as a reductionin revenue during the first quarter of 2006.

Modern Amusementrecognizes wholesale operations revenue from the sale of merchandise whenproducts are shipped, FOB Modern Amusement’s distribution facilities, and thecustomer takes title and assumes risk of loss, collection is reasonablyassured, pervasive evidence of an arrangement exists, and the sales price isfixed or determinable.

3. INVENTORY

The Company maintains inventories for theModern Amusement segment.   Inventoriesare valued at the lower of cost (first-in, first-out) or market and are made upprimarily of finished goods.  The Companycontinually evaluates its inventories by assessing slow moving current productas well as prior seasons’ remaining inventory. Market value of non-current inventory is estimated based on the impactof market trends, an evaluation of economic conditions and the value of currentorders relating to the future sales of this type of inventory.  Management makes reserves against suchinventory as seen appropriate, which reduces our gross margin, operating incomeand carrying value of inventories.

4.  EXECUTIVE BONUS PLANS

The Company has bonus planscovering two executive officers which are administered by the CompensationCommittee of the Board of Directors, and that provide for discretionary bonusesbased on the Company’s overall performance, with the total amount of thebonuses not to exceed a percent (as defined) of the excess over the minimumtotal guaranteed fees, if any, of license royalties paid to the Company underthe Target Agreement, and as defined in each of the respective bonus plans. TheCompany has expensed approximately $1.3 million and $1.0 million under theseagreements for the three month periods ended June 30, 2006 and 2005,respectively; and $2.0 million and $1.7 million for the six month periods endedJune 30, 2006 and 2005, respectively.

5.  INCOME TAXES

The Company accounts for income taxes in accordancewith Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accountingfor Income Taxes”. Deferred taxes result from the recognition of

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the income tax benefit to be derived from the Company’snet operating loss carry forward for income taxes purposes.

The Company recorded a provision for income taxes of $1,823,000 and$1,055,000 for the three and six months ended June 30, 2006, respectively,compared to a provision for income taxes of $848,000  and $2,108,000 for the three and six monthsended June 30, 2005, respectively.   Bothprovisions approximate the Company’s combined effective rate as estimated forthe entire fiscal year, for Federal and California state income taxes.  The income tax rate for the six months endedJune 30, 2006 is 41% compared to 34% for the comparable period of the prioryear.

At June 30, 2006, the Company has recorded a total net deferredtax asset of $5.28 million, with $3.70 million classified as current in theaccompanying condensed consolidated balance sheet, primarily reflecting theextension of the Target Agreement through January 31, 2010. The Company has consideredthe projected taxable income from the Target Agreement and other agreements inits estimate of deferred tax asset recoverability and has recorded a valuationallowance for its net deferred tax assets of $245,000 as of June 30, 2006.  The valuation allowance relates principallyto foreign tax credits for which there is uncertainty about theirrecoverability within the period prior to the expiration of the carryforwards.

TheCompany has approximately $2.07 million and $1.38 million of federal and stateincome tax net operating loss carry forwards, respectively, available to offsetfuture taxable income which expire in various years through 2022. The Company expects that futuretaxable income will be offset in the near-term, for the most part, by itsnet operating tax loss carry forwards.

In addition to theCompany’s taxable income being subject to federal, state and local incometaxes, the Company may be classified as a “personal holding company” from timeto time. Personal holding company status results from more than 50 percent ofthe value of outstanding stock being owned directly or indirectly by five orfewer individuals, and more than 60 percent of the Company’s income, asdefined, being derived from royalties. Personal holding companies are subjectto an additional federal tax at the highest personal income tax rate onundistributed after tax earnings.

Over 50 percent ofthe value of the Company’s outstanding stock is owned by one stockholder,however it is presently anticipated that in 2006, no more than 60 percent ofthe Company’s income, as defined, would be derived from license royalties.Accordingly, at this time the Company is not anticipating being classified as apersonal holding company at the end of 2006 and the Company intends to continueto take appropriate measures to avoid being classified as a personal holdingcompany at the end of 2006 and beyond. However, there can be no assurance thatthe Company will be successful in its efforts to avoid classification as apersonal holding company at the end of 2006 or in future years.

6.  EARNINGS PER SHARE AND STOCK OPTION PLANS

Basic earnings per share is computed by dividing net earnings availableto common stockholders by the weighted average number of common sharesoutstanding. Diluted earnings per share includes the effect of potential sharesoutstanding, including dilutive stock options, using the treasury stock method.Securities excluded from diluted weighted average shares outstanding arecomprised of stock options.

The reconciliation between earnings and weighted average sharesoutstanding for basic and diluted earnings per share is as follows (amounts inthousands, except per share data):

8

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| ** **                                  | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Net earnings                                |       | $                                | 2,714      |                           | $          | 2,228 |   | $ | 1,540 |   | $ | 4,049 |   |
| Weighted average  number of common shares:  |       |                             |       |                           |       |   |   |   |   |
| Basic                                       |       | 15,996                           |       | 15,738                         |       | 15,943 |   | 15,738 |   |
| Effect of dilutive securities-stock options |       | 64                               |       | 30                             |       | 54 |   | 24 |   |
| Diluted                                     |       | 16,061                           |       | 15,768                         |       | 15,997 |   | 15,762 |   |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share:                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                       |       | $                                | 0.17       |                           | $          | 0.14 |   | $ | 0.10 |   | $ | 0.26 |   |
| Effect of dilutive securities-stock options |       | —                           |       | —                         |       | — |   | — |   |
| Diluted                                     |       | $                                | 0.17       |                           | $          | 0.14 |   | $ | 0.10 |   | $ | 0.26 |   |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Excluded  securities - antidilutive         |       | 97                               |       | 394                            |       | 100 |   | 394 |   |

 

The Company adopted the Mossimo,Inc. 1995 Stock Option Plan (the “1995 Plan”), which provides for the grant ofstock options, stock appreciation rights and other stock awards to certainofficers and key employees of the Company and to certain advisors orconsultants to the Company. In addition, the Company adopted a Non-EmployeeDirectors Stock Option Plan (the “Directors Plan”) that provides for the grantof stock options to non-employee directors.  Stock options issued to employees are grantedat the market price on the date of grant, generally vest at 33% per year, andgenerally expire ten years from the date of grant.  We issue new shares ofcommon stock upon exercise of stock options. This plan expired at the annual meeting held on December 15, 2005,therefore, no additional share will be issued under this plan.

The Company adopted the Mossimo,Inc 2005 stock Option Plan (the “2005 Plan) to replace the 1995 Plan and theDirectors Plan both of which terminated as of December 31, 2005. The 2005 Planprovides for the grant of stock options to certain officers, key employees andnon-employee directors. A total of 1,500,000 shares have been reserved forissuance under the 2005 Plan. Options granted under the 2005 Plan will have anexercise price equal to the fair market value of the common stock on the dateof grant. Options will be exercisable in accordance with vesting schedules tobe established by the Compensation Committee. As of June 30, 2006, no optionshave been granted under the 2005 Plan.

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A summary of option activityfollows:
| ** **                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**      | ** ** | ** **                   | ** ** |
|----------------------------------------|------------|------------|------------|--------------|------------|-------------------|------------|------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**       | ** ** | ** **                   | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Remaining**     | ** ** | ** **                   | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Contractual**   | ** ** | ** **                   | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average**  | ** ** | **Term (in** | ** ** | **Aggregate Intrinsic** | ** ** |
| ** **                             | ** ** | **Shares** | ** ** | **Price**    | ** ** | **years)**        | ** ** | **Value**                    | ** ** |
|                                   |       |       |       |         |       |              |       |                         |       |
| Outstanding, at  December 31, 2005     |       | 554,331    |       | 6.34         |       |              |       |                         |       |
| Granted                                |       | —     |       | —       |       |              |       |                         |       |
| Exercised                              |       | (174,021   | )          | 4.93         |       |              |       |                         |       |
| Forfeited                              |       | (25,000    | )          | 10.40        |       |              |       |                         |       |
|                                   |       |       |       |         |       |              |       |                         |       |
| Outstanding, at  June 30,2006          |       | 355,310    |       | 6.72         |       | 5.18              |       | $                            | 1,048,460  |   |
|                                   |       |       |       |         |       |              |       |                         |       |
| Options exercisable, at  June 30, 2006 |       | 255,977    |       | 7.64         |       | 5.08              |       | $                            | 688,875    |   |

 

The weighted-average grant-datefair value of options granted during the six months ended June 30, 2005was $2.88.  There were no options grantedduring the three months ended June 30, 2005. The aggregate intrinsic value in the table above represents the totalpretax intrinsic value (the difference between our closing stock price on June30, 2006 and the exercise price, multiplied by the number of in-the-moneyoptions) that would have been received by the option holders had all optionholders exercised their options on June 30, 2006.  This amount changesbased on the fair market value of our stock. Total intrinsic value of optionsexercised for the six month period ended June 30, 2006 was $351,820.  No options were exercised during the sixmonth period ended June 30, 2005.  As ofJune 30, 2006, total unrecognized stock-based compensation expense related tonon-vested stock options was approximately $236,000, which is expected to berecognized over a weighted average period of approximately two years.

The followingtable summarizes stock-based compensation expense, net of tax, related toemployee stock options under SFAS 123(R) for the three and six months endedJune 30, 2006 which was allocated as follows (in thousands):
| ** **                                                                      | ** ** | **Three months Ended** | ** ** | **Six months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Stock-based  compensation expense included in operating expenses                |       | $                                | 48         |                           | $          | — |   | $ | 96 |   | $ | — |   |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Tax benefit                                                                     |       | (19                              | )          | —                         |       | (38 | ) | — |   |
|                                                                            |       |                             |       |                           |       |   |   |   |   |
| Stock-based  compensation expense related to employee stock options, net of tax |       | $                                | 29         |                           | $          | — |   | $ | 58 |   | $ | — |   |

 

As noted above, the impact of net earningsfrom the adoption of SFAS 123(R) was a reduction in net earnings of $29,000 or$0.00 per diluted share for the quarter ended June 30, 2006 and net earnings of$58,000 or $0.00 per diluted share for the six months ended June 30, 2006..  Prior to the adoption of SFAS 123(R),we presented all tax benefits resulting from the exercise of stock options asoperating cash flows in our consolidated statement of cash flows.  SFAS 123(R) requires such benefits to berecorded as financing cash flows.  Theimpact of this changes in not material to our statement of cash flows.

Before January 1, 2006, the Companyaccounted for stock-based compensation in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”,

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and related interpretations. The Companyfollows the pro forma disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation”, which requires presentation of the pro forma effectof the fair value based method on net earnings and net earnings per share inthe financial statement footnotes.

If compensation expense was determined based on the fair value method,the Company’s net earnings and earnings per share would have resulted in theapproximate pro forma amounts indicated below for the three and six monthperiods ended June 30, 2005 (in thousands, except per share data):
|                                                                                                                                              | ** ** | **Three months** | ** ** | **Six months** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                                   | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                                                                                                   | ** ** | **2005**              | ** ** | **2005**            | ** ** |
|                                                                                                                                         |       |                  |       |                |       |
| Net earnings as  reported                                                                                                                    |       | $                     | 2,228      |                | $          | 4,049 |   |
|                                                                                                                                         |       |                  |       |                |       |
| Deduct:                                                                                                                                      |       |                  |       |                |       |
| Total stock-based employee compensation expense  determined under fair market value based method for all awards, net of  related tax effects |       | (16                   | )          | (32                 | )          |
|                                                                                                                                         |       |                  |       |                |       |
| Pro forma net  earnings                                                                                                                      |       | $                     | 2,212      |                | $          | 4,017 |   |
|                                                                                                                                         |       |                  |       |                |       |
| Earnings per  share – basic and diluted                                                                                                 |       |                  |       |                |       |
| As reported – basic                                                                                                                     |       | $                     | 0.14       |                | $          | 0.26 |   |
| As reported – diluted                                                                                                                   |       | $                     | 0.14       |                | $          | 0.26 |   |
|                                                                                                                                         |       |                  |       |                |       |
| Pro forma – basic                                                                                                                       |       | $                     | 0.14       |                | $          | 0.26 |   |
| Pro forma –  diluted                                                                                                                    |       | $                     | 0.14       |                | $          | 0.26 |   |

 

The fair value of each option grantwas estimated as of the grant date using the Black-Scholes option-pricing modelfor the period ended June 30, 2005, assuming risk-free interest rates of 4.28percent; volatility of approximately 84 percent; zero dividend yield; andexpected lives of 6.50 years.

The expected term of the optionsrepresents the estimated period of time until exercise and is based onhistorical experience of similar options, giving consideration to thecontractual terms, vesting schedules and expectations of future employeebehavior. Expected stock price volatility is based on the historical volatilityof our stock for the period equal to the expected term. The risk-free interestrate is based on the U.S. Treasury yield in effect at the time of grant with anequivalent remaining term. The Company has not paid dividends in the past anddoes not currently plan to pay any dividends in the near future.

7 LITIGATION

On April 12, 2005, Mossimo Giannulli offered to acquire all of theoutstanding publicly held common stock of Mossimo at a price of $4.00 pershare.  Following the announcement, sixpurported class action lawsuits were filed in the Court of Chancery of theState of Delaware.  Each of the complaintsasserted that the Mossimo directors breached their fiduciary duties to Mossimo’sstockholders, and sought an injunction preventing the acquisition.  On April 19, 2005, the Board of Directorsappointed a Special Committee to consider and evaluate Mr. Giannulli’sproposal.  The Special Committee retainedHoulihan Lokey and Gibson Dunn & Crutcher to serve as the Committee’sindependent financial advisor and legal counsel, respectively, with respect tothe Committee’s evaluation of Mr. Giannulli’s proposal.  On May 27, 2005, the above referenced caseswere consolidated under the following caption: In re Mossimo, Inc. Shareholder Litigation, Consolidated Civil ActionNo.1246-N (the “Action”).

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On October 10, 2005, Mossimo and otherdefendants entered into a Memorandum of Understanding (“MOU”) to settle theAction.  Under the terms of the MOU, Mr.Giannulli agreed that his proposal to acquire all of Mossimo’s outstandingshares would be priced at $5.00 per share and that the tender offer pursuant towhich the acquisition was proposed to be consummated would be conditioned uponno less than 50 percent of all public stockholders of Mossimo unaffiliated withMr. Giannulli accepting or approving the tender offer.  The MOU further provided that plaintiffs’lead counsel would be afforded the opportunity to comment on and suggestinclusions to the disclosures made to the Company’s public stockholders inconjunction with the acquisition.  Inaddition, the Company agreed to negotiate in good faith with the plaintiffs’lead counsel concerning the amount of attorney fees and expenses to be paid,subject to Delaware Chancery Court approval. The Company also agreed to pay whatever fee and expense amount the DelawareChancery Court might have awarded to plaintiffs’ lead counsel.  In consideration of these terms, the partiesagreed that they would fully and finally release and discharge all claimsagainst each other.

The settlement was conditioned on theconsummation of the acquisition by Mr. Giannulli, the negotiation of adefinitive stipulation of settlement and the entry of a Final Order andJudgment approving the settlement by the Delaware Chancery Court.  On November 14, 2005 Giannulli announced thathe had withdrawn the proposal to acquire the outstanding shares of the Companythat he did not already own.  Theprovisions of the MOU have thus become moot.  After the announcement of Mossimo’s proposed merger with Iconix, theplaintiffs filed a first consolidated amended complaint alleging that Mossimoand its board of directors breached their fiduciary duties and engaged inself-dealing in approving the Merger Agreement.   Under the merger agreement, Mossimo and Mr.Giannulli are required to use their best efforts to have the litigationwithdrawn and terminated with prejudice or settle it to the reasonablesatisfaction of Iconix.  

On April 12, 2006, a purported shareholderclass action lawsuit was filed in the Superior Court of the State of Californiafor the County of Los Angeles entitled Laborers’ Local #231 Pension Fund vs.Mossimo, Inc. et al.  The lawsuit allegesthat Mossimo and its board of directors breached their fiduciary duties andengaged in self-dealing in approving the merger agreement and seeks, amongother relief, to enjoin the proposed merger of the Mossimo with Iconix, therescission of any agreements entered into in connection with the proposedmerger, and costs, including attorney’s fees.

Mossimo and its directors believe theallegations in the complaints filed in Delaware and California are withoutmerit and intend to defend the claims vigorously, but are not able at this timeto predict or estimate the outcome of these cases or their effect on theCompany’s financial statements.

8 SEGMENT INFORMATION

The Company operates in two businesssegments: Mossimo (design and licensing services) and Modern Amusement (Modern)(wholesale).  The following tablessummarize various financial amounts for each of our business segments (inthousands):

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| Quarter ended June 30, 2006 | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                        |       | $           | 9,020      |       | $          | 1,278     |       | $ | 10,298 |   |
| Gross Profit                                    |       | —      |       | 733        |       | 733       |       |
| Depreciation and  Amortization                  |       | 26          |       | 54         |       | 80        |       |
| Selling, general  and administrative expenses   |       | 4,606       |       | 832        |       | 5,438     |       |
| Operating Income  (loss)                        |       | 4,414       |       | (99        | )          | 4,315     |       |
| Interest Income                                 |       | 220         |       | 2          |       | 222       |       |
| Total Assets                                    |       | 30,720      |       | 4,579      |       | 35,299    |       |
| Capital  Expenditures                           |       | 18          |       | —     |       | 18        |       |
|                                                 |            |             |            |            |            |           |            |  |  |  |

 
| Quarter ended June 30, 2005                   | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                      |       | $           | 8,113      |       | $          | 932       |       | $ | 9,045 |   |
| Gross Profit                                  |       | —      |       | 237        |       | 237       |       |
| Depreciation and  Amortization                |       | 59          |       | 50         |       | 109       |       |
| Selling, general  and administrative expenses |       | 4,419       |       | 934        |       | 5,353     |       |
| Operating Income  (loss)                      |       | 3,694       |       | (697       | )          | 2,997     |       |
| Interest Income                               |       | 79          |       | —     |       | 79        |       |
| Total Assets                                  |       | 26,979      |       | 2,898      |       | 29,877    |       |
| Capital  Expenditures                         |       | 21          |       | 29         |       | 50        |       |
|                                               |            |             |            |            |            |           |            |  |  |  |

 
| Six months ended June 30,  2006               | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                      |       | $           | 11,581     |       | $          | 3,655     |       | $ | 15,236 |   |
| Gross Profit                                  |       | —      |       | 1,813      |       | 1,813     |       |
| Depreciation and  Amortization                |       | 51          |       | 108        |       | 159       |       |
| Selling, general  and administrative expenses |       | 9,277       |       | 1,938      |       | 11,215    |       |
| Operating Income  (loss)                      |       | 2,304       |       | (125       | )          | 2,179     |       |
| Interest Income                               |       | 413         |       | 3          |       | 416       |       |
| Total Assets                                  |       | 30,720      |       | 4,579      |       | 35,299    |       |
| Capital  Expenditures                         |       | 31          |       | 37         |       | 68        |       |
|                                               |            |             |            |            |            |           |            |  |  |  |

 
| Six months ended June 30,  2005               | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                      |       | $           | 15,467     |       | $          | 2,242     |       | $ | 17,709 |   |
| Gross Profit                                  |       | —      |       | 508        |       | 508       |       |
| Depreciation and  Amortization                |       | 120         |       | 132        |       | 252       |       |
| Selling, general  and administrative expenses |       | 8,036       |       | 1,892      |       | 9,928     |       |
| Operating Income  (loss)                      |       | 7,430       |       | (1,383     | )          | 6,047     |       |
| Interest Income                               |       | 110         |       | —     |       | 110       |       |
| Total Assets                                  |       | 26,979      |       | 2,898      |       | 29,877    |       |
| Capital Expenditures                          |       | 28          |       | 75         |       | 103       |       |
|                                               |            |             |            |            |            |           |            |  |  |  |

 

The following information should be considered when reading theabove table:

·                  The Company has no inter-segment revenue or expense.

·                  Corporate overhead has been allocated to the Mossimo segment.

·                  The provision for income tax is not allocated to businesssegments.

·                  All long-lived assets were geographically located in the UnitedStates.

·                  Revenue from countries other than the United States did not accountfor 10% or more of total revenue.

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·                  Gross profit is derived by reducing sales of the Modern segment of$1.28 million by $545,000 of cost of sales for thethree months ended June 30, 2006 toarrive at a gross profit of approximately $733,000, compared to sales of$932,000 reduced by cost of sales of $695,000 to arrive at a gross profit of$237,000 for the three months ended June 30, 2005.  For the six months ended June 30, 2006 salesof the Modern segment were $3.65 million reduced by cost of sales of $1.84million to arrive at a gross profit of approximately $1.81 million, compared tosales of $2.24 million reduced by cost of sales of $1.73 million to arrive at agross profit margin of $508,000 for the six months ended June 30, 2005.

·                  Operating expenses that have a direct correlation to each segmenthave been recorded in each respective segment.

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

**FORWARD LOOKINGINFORMATION**

This report on Form 10-Q contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward looking statements relate to matters such as theCompany’s future operating results, the success and longevity of its licensingprogram with Target in the United States, and other licensees, and the Company’ssuccess in executing its business plan for Modern Amusement. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as assumptions made by and information currently available to theCompany’s management. The words “anticipate”, “believe”, “may”, “estimate”, “plan”,“expect”, “future”, “intend”, “will”, “should”, “continue” and similarexpressions, variations of such terms or the negative of such terms as theyrelate to the Company or its management when used in this document, areintended to identify such forward-looking statements. In particular, theforward looking statements in this Form 10-Q include, among other things,statements regarding or expectations about our future revenues and earnings.Forward looking statements include known or unknown risks and uncertaintiesthat may cause our results, performance and stock price to be materiallydifferent from the forward looking statements. Such statements are based onmanagement’s current expectations and are subject to certain risks,uncertainties and assumptions, including those described in our Form 10-K forthe year ended December 31, 2005 under “Business—Risk Factors”. Should one ormore risks or uncertainties materialize, or should underlying assumptions proveincorrect, the Company’s actual results, performance or achievements coulddiffer materially from those expressed in, or implied by such forward-lookingstatements. The Company’s future operations, financial performance, businessand share price may be affected by a number of factors, including but notlimited to the financial condition of the apparel industry and the retailindustry, the overall level of consumer spending, the effect of intensecompetition from other apparel lines, within and outside of Target Stores,adverse changes in licensee or consumer acceptance of products bearing theMossimo or Modern Amusement name as a result of fashion trends or otherwise,the ability and/or commitment of Target and our other licensees to manufactureand market Mossimo branded products, our dependence on Target for most of ourrevenue, our dependence on key management personnel and the other factorsdescribed in our Form 10-K for the year ended December 31, 2005 under “Business—RiskFactors.” Accordingly, undue reliance should not be placed on theseforward-looking statements.

This discussion and analysis should be read in conjunction with theCompany’s financial statements for the year ended December 31, 2005 in ourannual report on Form 10-K.

As of March 31, 2006, the Company entered into an agreement and plan ofmerger by and among the Company, Iconix Brand Group, Inc., Moss AcquisitionCorp., a wholly-owned subsidiary of Iconix, and Mossimo Giannulli, the Chairmanand Co-Chief Executive Officer and 64.6% stockholder of the Company (“MergerAgreement”).  Pursuant to the agreement,the Company expects to merge with and into Moss Acquisition Corp. which wouldbe the surviving company.  The proposedmerger is described in the Company’s Current Report on Form 8-K filed with theSecurities and Exchange Commission on April 6, 2006.

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**Overview**

Mossimo, Inc. presently operates as a designer and licensor of appareland related products under the “Mossimo” brand and other brands it owns or mayacquire. The Company licenses the Mossimo brand to third parties domesticallyand internationally.  Our primarydomestic licensee is Target Corporation. In addition to our licensing agreement with Target, which we refer to inthis quarterly report as the Target Agreement, the Company also licenses itsMossimo trademarks and provides design services outside of the United States,and also licenses its Mossimo trademarks for use in collections of eyewear andwomen’s swimwear and body-wear sold in Target stores in the United States.

The Company entered into a multi-year licensing and design servicesagreement with Target in March 2000 which was subsequently amended inApril 2002, and in February and June 2003. Under the terms ofthe Target Agreement, Target has the exclusive license, for production anddistribution through Target stores, of substantially all Mossimo brandedproducts sold in the United States. The Company, therefore, can not enter intoany other wholesale or retail licensing agreements in the United States withrespect to the Mossimo brand.

Under the Target Agreement the Company provides design services and hasapproval rights for product design, marketing and advertising materials. Targetcollaborates on design and is responsible for product development, sourcing,quality control and inventory management with respect to the Target-licensedproduct line.  On March 31, 2006, theCompany and Target restated the Target Agreement.  The restated Target Agreement extends Target’sexclusive license to produce and distribute substantially all Mossimo-brandedproducts sold in the United States, its territories and possessions throughTarget retail stores or any other retail store or other merchandising activityoperated by Target or its affiliates, including direct mail and Internetmerchandising until January 31, 2010.

Under the restated Target Agreement, the Company will ensure theavailability of Mossimo Giannulli, the Co-Chief Executive Officer of theCompany, to provide the services of creative director in connection withMossimo-branded products sold though Target stores. Target will pay the Companyan annual guaranteed minimum fee of $9,625,000 for each contract year (definedas each period from February 1 through January 31 during the term of theagreement), against which Target may charge back and offset certain amounts. Asamended, the agreement requires the Company to pay Target a one-time, nonrefundablereimbursement of fees paid by Target related to contract year 2006 revenues inthe amount of $6,000,000 on or before June 30, 2006.  The payment was made in the second quarter of2006 in accordance with the terms of the agreement.

As consideration forinvestment banking services provided in connection with Mossimo’s negotiationand evaluation of the proposed merger and any alternative proposals, Mossimohas agreed to pay B. Riley & Co., Inc. an investment banking fee of$600,000. This fee is not contingent on the completion of any transaction.Bryant R. Riley, a director of Mossimo, is chairman and chief executive officerof B. Riley & Co., Inc.   Thisfee was accrued in the first quarter of 2006.

Target may renew the Restated Target Agreement, on the same terms andconditions, for additional terms of two years each by giving the Companywritten notice of its intent to renew at least one year prior to the end of thecurrent term.  The Company pays a 15%commission, based on fees received from Target, to a third party who assistedthe Company in connection with entering into the initial agreement with Target.The Target Agreement is subject to early termination under certaincircumstances.

The Company licensed the exclusive right to manufacture and distributeeyewear bearing its Mossimo trademarks through Target stores pursuant to alicense agreement with Luxottica Retail executed in July of 2006.   The agreement is effective May 1, 2006 andextends through April 30, 2009.

The Company has licensed the exclusive right to manufacture anddistribute women’s swimwear and bodywear bearing its Mossimo trademarks throughTarget stores in the United States pursuant to a 

15

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license agreementwith The Lunada Bay Corporation. This agreement extends through September 30,2007, and is renewable annually.

In May 2002, the Company entered into an agreement with Hudson’s BayCompany. Under the agreement, the Company provided product design services, andgranted a license for the Mossimo trademark to Hudson’s Bay Company exclusivelyin Canada, in return for license royalties and design service fees. Hudson’sBay Company collaborated on product design, and was responsible formanufacturing, importing, marketing, advertising, selling and distributingmerchandise bearing the Mossimo trademark. The initial term of the agreementwas three years beginning in May 2002. The agreement expired in May of 2005, we expect to receive royaltypayments through the third quarter of 2006. There are no plans to renew the agreement.

The Company enters into other International licensing agreements of itsMossimo branded products for certain geographical territories when the Companybelieves such arrangements provide effective manufacturing, distribution andmarketing of such products.  Historically,very little activity has occurred outside the United States.

In January 2004, the Company acquiredModern Amusement, which is focused on design and distribution of premiumbranded west coast-lifestyle casual sportswear apparel and related accessories foryoung men and young women under the Modern Amusement brand. The products areoffered at moderate to upper price points through traditional specialty storesand better department store distribution channels.  The Modern Amusement business includes sourcingmanufactured products, wholesale distribution, inventory management, marketing,promoting, and advertising of apparel and related accessories under the ModernAmusement brand. While the Modern Amusement business is relatively small, asthe Company expands into the wholesale products business, it will encounterincreased exposure to excess and obsolete inventories, potential delays andcancellations from sourcing manufactured products domestically andinternationally, and product returns and allowances from retail customers, aswell as marketing, promotion and advertising expenditures that may not resultin successful campaigns.

The Company’s strategy in developingModern Amusement is to diversify the Company’s current design and licensingbusinesses through the development of mass wholesale distribution channels.

Net sales for Modern Amusement for thequarter ended June 30, 2006 were $1.28 million with a gross profit margin of57.3%.  Selling, general andadministrative expense for Modern Amusement for the quarter ended June 30, 2006was $832,000.  For quarter ended June 30,2006, Modern Amusement had operating loss of $99,000.  Modern Amusement’s total assets as of June30, 2006 were $4.58 million.  Net salesfor the six months ended June 30, 2006 were $3.66 million with a gross profitmargin of 49.6%.  Selling, general andadministrative expenses for Modern Amusement for the six months ended June 30,2006 was $1.94 million.  For the sixmonths ended June 30, 2006, Modern Amusement had operating loss of $125,000.

In the MergerAgreement, the Company agreed that prior to the closing of the merger, it wouldsell all of the capital stock of Modern Amusement to Mr. Giannulli for$2,000,000.

On January 1,2006, the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors for employee stockoptions based on estimated fair values. The Company adopted SFAS 123(R) usingthe modified prospective method, which requires the application of theaccounting standard as of January 1, 2006, the first day of the Company’syear 2006.  The Company’s consolidatedfinancial statements as of and for the six months ended June 30, 2006 reflectthe impact of SFAS 123(R). In accordance with the modified prospectivetransition method, the Company’s consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). Stock-based compensation expense recognized during the three andsix month periods ended June 30, 2006, was $48,000 and $96,000,respectively,  before income tax, and isbased on the value of

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the portion of share-basedpayment awards that is ultimately expected to vest during the period.  As of June30, 2006, total unrecognized stock-based compensation expense related tonon-vested stock options was approximately $236,000, which is expected to berecognized over a weighted average period of approximately 2 years.

Prior to theadoption of SFAS 123(R), the Company accounted for stock-based compensation inaccordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations. The Companyfollowed the pro forma disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation”, which requires presentation of the pro forma effectof the fair value based method on net earnings and net earnings per share inthe financial statement footnotes. During the three and six month period ended June 30, 2005, nostock-based compensation expense was recognized in earnings.   The pro forma effect of the fair valuemethod on net earnings and earnings per share for the three and six monthperiod ended June 30, 2005 is presented in Note 6 in the Company’s interimconsolidated financial statements.  Theimpact on the financial statements from the adoption of SFAS 123(R) was notmaterial for the six month period ended June 30, 2006.

***Resultsof Operations***

# *Three Months Ended June 30, 2006 and2005*

*Revenues*

Total revenue fromlicense royalties and design service fees in the second quarter of 2006increased to $9.0 million compared to $8.1 million for the second quarter of2005.  The increase was primarily due toadditional revenue generated under the Target agreement.  For the second quarter of 2006, 93% of theCompany’s revenue from license royalties and design fees were generated underthe Target Agreement, compared to 92% for the same period in 2005. The royaltyrate under the Target Agreement declines, as the contract year progresses andTarget achieves certain levels of retail sales, from 4% to 1%. The decliningroyalty rate is reset each contract year beginning on February 1. Accordingly,revenue recognized in the first and second quarters of the Company’s calendaryear is significantly higher than in the third and fourth quarters due to thedeclining rates in the Target Agreement. Revenues from license royalties and design service fees under licenseagreements other than the Target Agreement are generally collected on aquarterly basis, and they range from 2% to 5% of sales, as defined in therespective agreements.

Design service fees and royalties recognized under theTarget Agreement were $8.4 million in the second quarter of 2006 compared to$7.4 million in the second quarter of 2005. The 14%  increase reflects growth in sales of women’sapparel, men’s apparel, children’s apparel, and shoes.  Royalties and design service fees fromcustomers other than Target decreased to $637,000 in the second quarter of 2006compared to $669,000 in the second quarter of 2005.  The decrease was due mainly to reducedroyalties received from our women’s swimwear and bodywear licensee, and ourlicensees in Chile and Canada.

Modern Amusement achieved gross retail sales of $1.28million in the second quarter of 2006 compared to $932,000 for the secondquarter of 2005.  These sales generated agross profit of approximately $733,000 and a gross profit margin of 57.3% forthe second quarter of 2006 compared to $237,000 and a gross profit margin of25.2% for the second quarter of 2005.  We experienced a higher profit margin due tobetter buying and a proportionately smaller amount of off price sales comparedto regular priced sales.  This wasaccomplished by negotiating lower prices with new factories.

*Cost of product sales*

Cost of sales in the second quarter of2006 resulted entirely from Modern Amusement product sales.  Cost of sales approximated 42.7% ofsales.  Cost of sales includes all costsand expenses incurred prior to the receipt of finished goods at the Company’sdistribution facilities. These costs include, but are not limited to, productcost, inbound freight charges, purchasing and receiving costs, inspection 

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costs, insurance, duty, and brokers’fees.  We improved cost of sales bynegotiating lower prices with new factories.

*Selling, general and administrative expenses (S, G & A)*

Selling, general and administrative expenses(SG&A) for both the Mossimo segment and the Modern Amusement segmentremained constant at $5.4 million for the second quarter of 2006 and 2005.

Selling, general and administrativeexpenses (SG&A) for the Mossimo segment increased by approximately $187,000or 4% from $4.42 million in the second quarter of 2005 compared to $4.61million in the second quarter of 2006. The increases were due to a number of factors.  First, accrued executive officer bonuses increased $276,000 (executivebonuses were increased to $1.31 million for the second quarter of 2006 from$1.04 million for the second quarter of 2005 consistent with the Company’scomparative performance.) These bonuses which are determined at the discretionof the Compensation Committee, in accordance with a performance criteriaoutlined in respective bonus plans, and are subject to a maximum annual amountbased on a percent of Target license royalty fees in excess of the minimumannual fee, are estimated and accrued on a quarterly basis, with a finaldetermination made by the Compensation Committee at the end of each year.  Second, commissions due to a third party whoassisted the Company in connection with entering into the initial agreementwith Target increased by $134,000. Third, professional fees increased by$60,000.   The increase was offset by, first, a $97,000reduction in travel expense, second, a $72,000 reduction in board of directorsfees and third, a $60,000 reduction in legal fees.

Selling, general and administrativeexpenses for the Modern Amusement segment for the second quarter of 2006 were$832,000 compared to $934,000 for the second quarter of 2005.  The decrease was primarily due to a reductionin salary and related costs of $50,000, and a reduction in consulting fees of$75,000.

*Interest income*

As a result of higher average cash balances of $20.2million for the period ended June 30, 2006 compared to average cash balance of$12.5 million for the same period in 2005, the Company earned $222,000 ininterest income the second quarter of 2006, compared to $79,000 in the secondquarter of 2005. No interest expense was incurred in the second quarter of2006.

*Incometaxes*

The Company recorded a provision for income taxes of $1.82 million inthe second quarter of 2006 compared to a provision for income taxes of $848,000in the second quarter of 2005. Both provisions approximate the Company’seffective tax rate for Federal and California state income taxes.  The effective tax rate is subject to ongoingreview and evaluation by management.  Bothprovisions approximate the Company’s combined effective rate as estimated forthe entire fiscal year, for Federal and California state income taxes.  The income tax rate for the three monthsended June 30, 2006 is 40% compared to 28% for the comparable period of theprior year.  The increase is primarilydue to a reduction in the valuation allowance.

TheCompany has approximately $2.07 million and $1.38 million of federal and stateincome tax net operating loss carry forwards, respectively, available to offsetfuture taxable income which expire in various years through 2022. The Company expects that futuretaxable income will be offset in the near-term, for the most part, by itsnet operating tax loss carry forwards.

*Net earnings*

The Company’s net earnings for the second quarter of2006 were $2.71 million, or $0.17 per diluted share, compared to a net earningsof $2.23 million, or $0.14 per diluted share for the second quarter of 2005 dueto the factors discussed above.

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# *Six Months Ended June 30, 2006 and 2005*

*Revenues*

Total revenue fromlicense royalties and design service fees for the six months ended June 30,2006 decreased to $11.6 million compared to $15.5 million for the six monthsended June 30, 2005.  The decrease wasdue to a one time nonrefundable fee reimbursement of $6.0 million to Targetunder the amended and restated Target agreement dated March 31, 2006 recordedin the first quarter of 2006.  Exclusiveof the impact of this item, total revenues from license royalties and designservice fees for six months ended June 30, 2006 would have been $17.6 millioncompared to $15.5 for the six months ended June 30, 2005.  For the six months ended June 30, 2006, 89%of the Company’s revenue from license royalties and design fees were generatedunder the Target Agreement, compared to 91% for the same period in 2005.  Exclusive of the nonrefundable feereimbursement of $6.0 million to Target under the amended and restated Targetagreement, 93% of the Company’s revenues from license royalties and design feeswould have been generated under the Target agreement compared to 91% for thesame period in 2005.

Design service fees and royalties recognized under theTarget Agreement were $10.2 million for the six months ended June 30, 2006compared to $14.0 million for the same period of 2005. The 37% decrease was dueto a one time nonrefundable fee reimbursement of $6.0 million to Target underthe amended and restated Target agreement. Exclusive of the impact of this item, design service fees and royaltiesrecognized under the Target Agreement would have been $16.2 million for the sixmonths ended June 30, 2006 compared to $14.0 million for the same period of2005.  Royalties and design service feesfrom customers other than Target decreased to $1.3 million for the six monthsended June 30, 2006 compared to $1.5 million for the same period of 2005.  The decrease was due mainly to reducedroyalties received from our women’s swimwear and bodywear licensee, and ourlicensees in Chile and Canada.

Modern Amusement achieved gross retail sales of $3.66million for the six months ended June 30, 2006 compared to $2.24 million forthe same period in 2005.  These salesgenerated a gross profit of approximately $1.81 million and a gross profitmargin of 50.4% for the six months ended June 30,  2006 compared to $508,000 gross profit and agross profit margin of 22.6% for the same period in 2005.  We experienced a higherprofit margin due to better buying and a proportionately smaller amount of offprice sales compared to regular priced sales.

*Cost of product sales*

Cost of sales in the six months ended June30, 2006 resulted entirely from Modern Amusement product sales.  Cost of sales approximated 49.6% ofsales.  Cost of sales includes all costsand expenses incurred prior to the receipt of finished goods at the Company’sdistribution facilities. These costs include, but are not limited to, productcost, inbound freight charges, purchasing and receiving costs, inspectioncosts, insurance, duty, and brokers’ fees. We improved cost of sales by negotiating lower prices with newfactories.

*Selling, general and administrative expenses (S, G & A)*

Selling, general and administrative expenses(SG&A) for both the Mossimo segment and the Modern Amusement segmentincreased to $11.2 million for the six months ended June 30, 2006 compared to$9.9 million for the six months ended June 30, 2005.

Selling, general and administrativeexpenses (SG&A) for the Mossimo segment increased by approximately $1.24million or 15% from $8.04 million for the six months ended June 30, 2005compared to $9.28 million for the six months ended June 30, 2006.  The increases were due to a number offactors.  First, accrued executive officer bonuses increased $389,000 (executivebonuses were increased to $2.05 million for the six months ended June 30, 2006from $1.66 million for the six months ended June 30, 2005

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consistent with the Company’s comparativeperformance.) These bonuses which are determined at the discretion of theCompensation Committee, in accordance with a performance criteria outlined inrespective bonus plans, and are subject to a maximum annual amount based on apercent of Target license royalty fees in excess of the minimum annual fee, areestimated and accrued on a quarterly basis, with a final determination made bythe Compensation Committee at the end of each year.  Second, commissions due to a third party whoassisted the Company in connection with entering into the initial agreementwith Target increased by $326,000. Third, costs of $79,000 were incurred for legal and financial advisorexpenses for the Company and its special committee associated with the reviewand consideration of the transaction proposed by Mossimo Giannulli for theacquisition of all of the companies remaining outstanding shares and pendinglitigation relating to the proposal. Fourth, $459,000 in fees associated with the merger of Mossimo andIconix Brand Group, Inc. were incurred. Fifth, as consideration for investment banking services provided inconnection with Mossimo’s negotiation and evaluation of the proposed merger andany alternative proposals, Mossimo has agreed to pay B. Riley & Co.,Inc. an investment banking fee of $600,000. This fee is not contingent on thecompletion of any transaction. Bryant R. Riley, a director of Mossimo, ischairman and chief executive officer of B. Riley & Co., Inc. and wasaccrued in the first quarter of 2006. These increases were offset by decreases in, first, $75,000  in board of directors fees and second,$129,000 in legal fees.

Selling, general and administrativeexpenses for the Modern Amusement segment for the six months ended June 30,2006 were $1.94 million compared to $1.89 million for the six months ended June30, 2005.  The increase was primarily dueto first, $123,000 of commissions, second, $62,000 in salesmen samples, andthird, $89,000 of outsourcing expenses. These increases were associated with the anticipated growth of theModern Amusement brand.  These increaseswere offset by decreases in, first, reduction in salary and related costs of$75,000, and a reduction in consulting fees of $125,000.

*Interest income*

As a result of higher average cash balances of $21.0million for the six month period ended June 30, 2006 compared to average cashbalance of $12.8 million for the same period in 2005, the Company earned$416,000 in interest income for the six months ended June 30, 2006, compared to$110,000 for the same period in 2005. No interest expense was incurred in thesix months ended June 30, 2006.

*Incometaxes*

The Company recorded a provision for income taxes of $1.1 million forthe six months ended June 30, 2006 compared to a provision for income taxes of$2.1 million for the six months ended June 30, 2005. Both provisionsapproximate the Company’s effective tax rate for Federal and California stateincome taxes.  The effective tax rate issubject to ongoing review and evaluation by management.  Both provisions approximate the Company’scombined effective rate as estimated for the entire fiscal year, for Federaland California state income taxes.  Theincome tax rate for the six months ended June 30, 2006 is 41% compared to 34%for the comparable period of the prior year. The increase is primarily due to a reduction in the valuation allowance.

TheCompany has approximately $2.07million and $1.38 million of federal and stateincome tax net operating loss carry forwards, respectively, available to offsetfuture taxable income which expire in various years through 2022. The Company expects that futuretaxable income will be offset in the near-term, for the most part, by itsnet operating tax loss carry forwards.

*Net earnings*

The Company’s net earnings for the six months endedJune 30, 2006 were $1.5 million, or $0.10 per diluted share, compared to a netearnings of $4.0 million, or $0.26 per diluted share for the six months endedJune 30, 2005 due to the factors discussed above.

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**Liquidity and Capital Resources**

Our sources of liquidity and capitalresources as of June 30, 2006 consisted of $21.5 million of cash and cashequivalents, and $843,000 of short-term restricted cash, as well as potentialfuture cash flows from operations primarily resulting from the Targetagreement.  As of June 30, 2006 we hadworking capital of approximately $27.1 million compared to $24.0 million atDecember 31, 2005.

During the six months ended June 30, 2006,net cash provided by operating activities were $1.0 million.  Cash provided by operating activitiesincludes primarily $1.5 million of net earnings, increases in deferred taxes of$644,000, accrued liabilities of $740,000, and accrued commissions of $1.2million, primarily offset by reductions in accounts receivable of $1.9 million,and accrued bonuses of $1.3 million.

Net cash used by investing activities wasgenerated from capital expenditures of $68,000 for the six months ended June30, 2006.  Capital expenditures are notexpected to be material for the balance of the 2006 year.

Net cash provided by financing activitieswas generated primarily from the exercise of stock options in the amount of$857,000.

The Company established a revolving lineof credit with a bank in the amount of $300,000 in February 2004.  The line of credit was established to openletters of credit with foreign suppliers for finished goods for ModernAmusement.  The line of credit wasincreased to $400,000 in June of 2004, and subsequently increased to $500,000in January of 2005 and increased again to $900,000 in May of 2005.  The line of credit is secured by twocertificates of deposit totaling approximately $843,000, which is recorded asrestricted cash in our consolidated balance sheet.  There is no expiration date for this line ofcredit, and there are no covenants. There is a fee charged per letter of credit opened and closed.  Open letters of credit at June 30, 2006 wereapproximately $738,000.

We have a commission obligation under anagreement with a third party for 15% of fees received from Target for theduration of the Target agreement through January 2010, and for subsequentextensions if they are exercised by Target. Fees incurred under this obligation were $1.25 million in the secondquarter of 2006, compared to $1.11 in the second quarter of 2005 and $2.44million for the six months ended June 30, 2006 compared to $2.10 million forthe six months ended June 30, 2005.

In January 2004 we completed theacquisition of the Modern Amusement and we amended our facility leaseincreasing our space from approximately 6,000 square feet to approximately9,000 square feet, and extending the lease term thru July 2009. The expanded facilityis intended to also accommodate Modern Amusement. The future annual obligationunder the amended lease varies each year, initially at approximately $290,000in 2004, increasing to $334,000 in 2008. The purchase price of the ModernAmusement assets of $375,000 was funded with existing cash.  The expected cash requirements in 2006 forModern Amusement are approximately $600,000, and is comprised primarily ofselling, general, and administrative expenses. Most of this working capital will be satisfied through operating cashflows, and we do not expect to incur any significant capital expenditures.

The Company is approached from time totime by parties seeking to sell their businesses, brands and relatedtrademarks. Should an established viable business and marketable brand becomeavailable on favorable terms, the Company may be interested in pursuing such anacquisition and may elect to fund such acquisition, in whole or in part, withavailable cash as well as different financing alternatives, including theissuance of debt instruments and / or equity securities.

We believe that the Company’s sources ofliquidity and capital will be sufficient to meet our expected operational andcapital needs for the next 12 months and likely will be sufficient to meet ouroperating needs for the foreseeable future and at least through January 2010,which is the most recently extended contract term with Target.

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**CriticalAccounting Policies**

REVENUE RECOGNITION

Revenuefrom license royalties and design service fees are recognized in accordancewith the terms of the underlying agreements, which is generally after thedesign services are performed, and as the licensee achieves sales of theCompany’s products.  Revenue from licenseroyalties and design service fees are generally collected on a quarterly basis,and they range from one percent to five percent of sales as defined in therespective agreements.  During the periodspresented herein, a substantial amount of the Company’s revenue from licenseroyalties and design fees were generated under the Target Agreement under adeclining rate as the year progresses and Target achieves certain levels ofretail sales. Accordingly, the Company’s revenues from Target decrease as theyear progresses. The declining rate is reset each contract year beginning onFebruary 1. Revenue recognized in the first and second quarters of the Company’scalendar year in connection with the Target Agreement is significantly higherthan in the third and fourth quarters of the Company’s calendar year due to thedeclining rates in the Target Agreement. If Target sales of Mossimo branded products increase in the future, as aresult of opening new stores or otherwise, the minimum rate of fees may applyearlier in the Company’s future calendar years, shifting additional revenuerecognition to the first half of the year, and potentially reducing the revenuerecognition in the second half of the year.

ModernAmusement extends credit to customers in the normal course of business, subjectto established credit limits. Accounts receivable, net, in the consolidatedbalance sheets, consists of amounts due from customers net of allowance fordoubtful accounts. The allowance for doubtful accounts is determined byreviewing accounts receivable aging and evaluating individual customerreceivables, considering customers’ financial condition, credit history andcurrent economic conditions.

ModernAmusement recognizes wholesale operations revenue from the sale of merchandisewhen products are shipped, FOB Modern Amusement’s distribution facilities, andthe customer takes title and assumes risk of loss, collection is reasonablyassured, pervasive evidence of an arrangement exists, and the sales price isfixed or determinable. 

INVENTORY

We maintain inventories for the ModernAmusement segment of our business. Inventories are valued at the lower of cost (first-in, first-out) ormarket. The Company continually evaluates its inventories by assessing slowmoving current product as well as prior seasons’ inventory.  Market value of non-current inventory isestimated based on the impact of market trends, an evaluation of economicconditions and the value of current orders relating to the future sales of thistype of inventory.

To the extent that management’s estimatesof price reductions necessary to rapidly sell inventory differ from actualresults, additional price reductions may be required that could reduce ourgross margin, operating income and the carrying value of inventories. Oursuccess is largely dependent upon our ability to anticipate the changingfashion tastes of our customers and to respond to those changing tastes in atimely manner. If we fail to anticipate, identify or react appropriately tochanging styles, trends or brand preferences of our customers, we mayexperience lower sales, excess inventories and more frequent and extensivemarkdowns, which would adversely affect our operating results. 

IMPAIRMENT OF LONG-LIVED ASSETS

We evaluate the recoverability of ouridentifiable intangible assets and other long-lived assets in accordance withSFAS No. 144 that generally requires management to assess these assets forrecoverability when events or circumstances indicate a potential impairment byestimating the undiscounted cash flows to be generated from the use andultimate disposition of these assets.

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The Modern Amusement trade name acquiredduring 2004 and valued at $112,000 is amortized over its estimated useful lifeof 10 years.

DEFERREDTAX ASSET VALUATION

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes” (SFAS 109). Deferred taxes primarily result from the recognitionof the income tax benefit to be derived from the Company’s net operating losscarry forward for income taxes purposes. As of June 30, 2006, the Company hasapproximately $2.07 million, and $1.38 million of federal and state income taxnet operating loss carry-forwards, respectively, available to offset futuretaxable income, which expires in various years through 2022. In accordance withthe provisions of SFAS No. 109 the Company records a valuation allowance toreduce deferred tax assets to the amount expected to “more likely than not” berealized in future tax returns.  TheCompany monitors its profitability and considers the credit and collectionsrisk of future fees under its agreements, particularly in connection with theTarget Agreement.  Should we determinethat we would not be able to realize all or part of our net deferred tax assetsin the future, adjustments to the valuation allowance for deferred tax assetsmay be required.

In addition to theCompany’s taxable income being subject to federal, state and local incometaxes, the Company may be classified as a “personal holding company” from timeto time. Personal holding company status results from more than 50 percent ofthe value of outstanding stock being owned directly or indirectly by five orfewer individuals, and more than 60 percent of the Company’s income, asdefined, being derived from royalties. Personal holding companies are subjectto an additional federal tax at a 15 percent tax rate on undistributed aftertax earnings.

Over 50 percent ofthe value of the Company’s outstanding stock is owned by one stockholder.  In 2005, 2004 and 2003, less than 60 percentof the Company’s income as defined was derived from license royalties,accordingly the Company is not classified as a personal holding company and isnot subject to the personal holding company tax. The Company intends tocontinue to take appropriate measures to avoid being classified as a personalholding company in future years. However, there can be no assurance that theCompany will be successful in its efforts to avoid classification as a personalholding company in the future.

RECENT ACCOUNTING PRONOUNCEMENTS 

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections — areplacement of APB Opinion No. 20 and FASB Statement No. 3.” Thisstatement applies to all voluntary changes in accounting principle and changesrequired by an accounting pronouncement where no specific transition provisionsare included. SFAS No. 154 requires retrospective application toprior periods’ financial statements of changes in accounting principle, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. Retrospective application is limited to thedirect effects of the change; the indirect effects should be recognized in theperiod of the change. This statement carries forward without change theguidance contained in APB Opinion No. 20 for reporting the correction ofan error in previously issued financial statements and a change in accountingestimate. However, SFAS No. 154 redefines restatement as the revisingof previously issued financial statements to reflect the correction of anerror. The provisions of SFAS No. 154 are effective for accountingchanges and corrections of errors made in fiscal periods that begin afterDecember 15, 2005, although early adoption is permitted. Theimplementation of this standard did not have a material impact on its financialcondition and results of operations.

In July 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, *“Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109.”* This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provides guidance on recognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. This Interpretationwill be effective for the Company on January 1, 2007, with

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the cumulative effect of the change inaccounting principle recorded as an adjustment to opening retained earnings.The Company is currently assessing the impact of the adoption of theInterpretation on its financial statements. 

In June 2006, the FASB ratified theEmerging issues Task Force issued Issue 06-3, *“How SalesTaxes Collected From Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement”* (EITF 06-3).  EITF 06-3 requires a company to disclose itsaccounting policy (i.e. gross or net presentation) regarding the presentationof taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of suchtaxes for each period which an income statement is presented.  The guidance is effective for periodsbeginning after December 15, 2006.  Wedon’t expect the adoption of EITF 06-3 will have a material impact on ourfinancial condition and results of operations.

INFLATION

The Company does not believe that therelatively moderate rates of inflation experienced in the United States overthe last three years have had a significant effect on its operations. Since theCompany’s future revenues are based on a percentage of sales of licensedproducts by licensees, the Company does not anticipate that inflation will havea material impact on future operations.

EXCHANGE RATES

The Company receives United States dollarsfor all its revenue from license royalties and design service fees, other thanfrom its business in Canada, which began in 2003 and does not represent asubstantial amount of revenue at this time. During the last three fiscal years,exchange rate fluctuations have not had a material impact on the Company’soperating results. The Company does not engage in hedging activities withrespect to exchange rate risk.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

The Company makes temporary investments ofcash in liquid interest bearing accounts and marketable securities. The Companydoes not use interest rate swaps, futures contracts or options on futures, orother types of derivative financial instruments. The Company does not believethat future market risks arising from holdings of its financial instrumentswill have a material impact on its financial position or results of operations.

**ITEM 4.CONTROLS AND PROCEDURES**

Based on their evaluation as of June 30, 2006, our Co-ChiefExecutive Officers and Chief Financial Officer have concluded that our internalcontrols and disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Securities Act of 1934, as amended) were effective toensure that the information required to be disclosed by us in this quarterlyreport on Form 10-Q was recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and instructions for Form 10-Q.

There are no changes in our internal controls over financialreporting during the three months ended June 30, 2006 that have materially affected, or are reasonably likely tomaterially affect our internal controls over financial reporting.

Our management, including our Co-ChiefExecutive Officers and Chief Financial Officer, does not expect that ourinternal controls and disclosure controls and procedures will prevent all errorand all fraud. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute assurance that the objectives of thecontrol system are met. Further, the design of the control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls 

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can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected.

**PART II – OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

On April 12, 2005, Mossimo Giannulli offered to acquire all of theoutstanding publicly held common stock of Mossimo at a price of $4.00 pershare.  Following the announcement, sixpurported class action lawsuits were filed in the Court of Chancery of theState of Delaware.  Each of thecomplaints asserted that the Mossimo directors breached their fiduciary dutiesto Mossimo’s stockholders, and sought an injunction preventing theacquisition.  On April 19, 2005, theBoard of Directors appointed a Special Committee to consider and evaluate Mr.Giannulli’s proposal.  The SpecialCommittee retained Houlihan Lokey and Gibson Dunn & Crutcher to serve asthe Committee’s independent financial advisor and legal counsel, respectively,with respect to the Committee’s evaluation of Mr. Giannulli’s proposal.  On May 27, 2005, the above referenced caseswere consolidated under the following caption: In re Mossimo, Inc. Shareholder Litigation, Consolidated Civil ActionNo.1246-N (the “Action”).

On October 10, 2005, Mossimo and otherdefendants entered into a Memorandum of Understanding (“MOU”) to settle theAction.  Under the terms of the MOU, Mr.Giannulli agreed that his proposal to acquire all of Mossimo’s outstandingshares would be priced at $5.00 per share and that the tender offer pursuant towhich the acquisition was proposed to be consummated would be conditioned uponno less than 50 percent of all public stockholders of Mossimo unaffiliated withMr. Giannulli accepting or approving the tender offer.  The MOU further provided that plaintiffs’lead counsel would be afforded the opportunity to comment on and suggestinclusions to the disclosures made to the Company’s public stockholders inconjunction with the acquisition.  Inaddition, the Company agreed to negotiate in good faith with the plaintiffs’lead counsel concerning the amount of attorney fees and expenses to be paid,subject to Delaware Chancery Court approval. The Company also agreed to pay whatever fee and expense amount theDelaware Chancery Court might have awarded to plaintiffs’ lead counsel.  In consideration of these terms, the partiesagreed that they would fully and finally release and discharge all claimsagainst each other.

The settlement was conditioned on theconsummation of the acquisition by Mr. Giannulli, the negotiation of adefinitive stipulation of settlement and the entry of a Final Order andJudgment approving the settlement by the Delaware Chancery Court.  On November 14, 2005 Giannulli announced thathe had withdrawn the proposal to acquire the outstanding shares of the Companythat he did not already own.  Theprovisions of the MOU have thus become moot. After the announcement of Mossimo’s proposed merger with Iconix, theplaintiffs filed a first consolidated amended complaint alleging that Mossimoand its board of directors breached their fiduciary duties and engaged inself-dealing in approving the Merger Agreement. Under the Merger Agreement, Mossimo and Mr. Giannulli arerequired to use their best efforts to have the litigation withdrawn andterminated with prejudice or settle it to the reasonable satisfaction ofIconix.  

On April 12, 2006, a purported shareholderclass action lawsuit was filed in the Superior Court of the State of Californiafor the County of Los Angeles entitled Laborers’ Local #231 Pension Fund vs.Mossimo, Inc. et al.  The lawsuit allegesthat Mossimo and its board of directors breached their fiduciary duties andengaged in self-dealing in approving the merger agreement and seeks, amongother relief, to enjoin the proposed merger of the Mossimo with Iconix, therescission of any agreements entered into in connection with the proposed merger,and costs, including attorney’s fees.

Mossimo and its directors believe theallegations in the complaints filed in Delaware and California are withoutmerit and intend to defend the claims vigorously, but are not able at this timeto predict or estimate the outcome of these cases or their effect on theCompany’s financial statements.

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**ITEM 1.A.RISK FACTORS**

A description of the risk factors associated with our business iscontained in Item 1A, “Risk Factors,” of our 2005 Annual Report on Form 10-K/Afiled with the Securities and Exchange Commission on May 1,  2006 andincorporated herein by reference. These cautionary statements are to be used asa reference in connection with any forward-looking statements. The factors,risks and uncertainties identified in these cautionary statements are inaddition to those contained in any other cautionary statements, written ororal, which may be made or otherwise addressed in connection with aforward-looking statement or contained in any of our subsequent filings withthe Securities and Exchange Commission.

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**ITEM 6. EXHIBITS**
| EXHIBIT NO. | ** ** | **DESCRIPTION**                                                                                                                                                      |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                           |
| 2.1              |       | Agreement and  Plan of Merger dated as of March 31, 2006 by and among Mossimo, Inc.,  Mossimo Giannulli, Moss Acquisition Corp. and Iconix Brand Group, Inc.(1) |
|             |       |                                                                                                                                                                 |
| 3.1              |       | Certificate of  Incorporation of Mossimo, Inc. (2)                                                                                                                   |
|             |       |                                                                                                                                                                 |
| 3.2              |       | Bylaws of  Mossimo, Inc. (2)                                                                                                                                         |
|             |       |                                                                                                                                                                 |
| 31.1             |       | Certification of  Principal Executive Officer as required by Rule 13a - 14(a) of the  Securities Exchange Act of 1934                                      |
|             |       |                                                                                                                                                                 |
| 31.2             |       | Certification of  Principal Executive Officer as required by Rule 13a - 14(a) of the  Securities Exchange Act of 1934                                      |
|             |       |                                                                                                                                                                 |
| 31.3             |       | Certification of  Principal Financial Officer as required by Rule 13a - 14(a) of the  Securities Exchange Act of 1934                                      |
|             |       |                                                                                                                                                                 |
| 32.1             |       | Certification of  Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002              |
|             |       |                                                                                                                                                                 |
| 32.2             |       | Certification of  Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002              |
|             |       |                                                                                                                                                                 |
| 32.3             |       | Certification of  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002              |

 

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NOTES:

(1)             Incorporated by reference toExhibit 2.1 to Mossimo’s Current Report on Form 8-K, filed with the Securitiesand Exchange Commission on April 6, 2006.

(2)             Incorporated by reference toMossimo’s Registration Statement on Form S-1 (No. 33-80597),as amended, which became effective February 22, 1996.

(3)             Incorporated by reference toExhibit 10.13 to Mossimo’s Amendment No. 1 to Annual Report onForm 10-K, filed with the Securities and Exchange Commission onMay 1, 2006.

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SIGNATURES

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on the fourteenth day ofAugust 2006.
| MOSSIMO, INC.                                |
|----------------------------------------------|
|                                         |
| /s/ MOSSIMO GIANNULLI                        |   |
| Mossimo Giannulli                            |
| Chairman and Co-Chief Executive Officer      |
| August 14, 2006                              |
|                                         |
| /s/ EDWIN LEWIS                              |   |
| Edwin Lewis                                  |
| Vice-Chairman and Co-Chief Executive Officer |
| August 14, 2006                              |
|                                         |
|                                         |
| /s/ VICKEN FESTEKJIAN                        |   |
| Vicken Festekjian                            |
| Chief Financial Officer                      |
| August 14, 2006                              |

 

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