Attached files
file | filename |
---|---|
8-K - Luvu Brands, Inc. | v209838_8k.htm |
EX-2.1 - Luvu Brands, Inc. | v209838_ex2-1.htm |
EX-10.2 - Luvu Brands, Inc. | v209838_ex10-2.htm |
EX-99.2 - Luvu Brands, Inc. | v209838_ex99-2.htm |
EX-10.3 - Luvu Brands, Inc. | v209838_ex10-3.htm |
EX-23.1 - Luvu Brands, Inc. | v209838_ex23-1.htm |
EX-99.3 - Luvu Brands, Inc. | v209838_ex99-3.htm |
EX-10.1 - Luvu Brands, Inc. | v209838_ex10-1.htm |
EX-10.4 - Luvu Brands, Inc. | v209838_ex10-4.htm |
Exhibit
99.1
WEB
MERCHANTS, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated
Financial Statements:
|
||
Report
of Independent Registered Public Accounting Firm
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2
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
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3
|
|
Consolidated
Statements of Operations for each of the two years in the period ended
December 31, 2009
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4
|
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Consolidated
Statements of Changes In Stockholders' Equity (Deficit) for each of the
two years in the period ended December 31, 2009
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5
|
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Consolidated
Statements of Cash Flows for each of the two years in the period ended
December 31, 2009
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6
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Notes
to Consolidated Financial Statements
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7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Web Merchants, Inc.,
We have
audited the accompanying consolidated balance sheets of Web Merchants, Inc. (the
“Company”) as of December 31, 2009 and December 31, 2008, and the related
consolidated statements of operations, changes in stockholders’ equity (deficit)
and cash flows for the years ended December 31, 2009 and December 31, 2008.
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Web Merchants, Inc. as
of December 31, 2009 and December 31, 2008, and the results of its operations
and its cash flows for the years ended December 31, 2009 and December
31, 2008 in conformity with accounting principles generally accepted in the
United States of America.
Gruber
& Company, LLC
/s/
Gruber & Company, LLC
Lake
Saint Louis, Missouri
September
20, 2010
2
WEB
MERCHANTS, INC.
CONSOLIDATED BALANCE
SHEETS
December 31,
2009
|
December 31,
2008
|
|||||||
Assets:
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 128,663 | $ | 66,531 | ||||
Inventories
|
650,838 | 605,528 | ||||||
Total
current assets
|
779,501 | 672,059 | ||||||
Property
and equipment, net of accumulated depreciation of $156,175 in 2009 and
$123,693 in 2008
|
65,465 | 80,480 | ||||||
Other
assets, net of accumulated amortization of $70,346 in 2009 and $70,058 in
2008
|
2,184 | 2,472 | ||||||
Total
assets
|
$ | 847,150 | $ | 755,011 | ||||
Liabilities
and stockholders’ equity:
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 323,949 | $ | 261,906 | ||||
Credit
cards payable
|
110,356 | 92,508 | ||||||
Revolving
line of credit
|
38,433 | 67,071 | ||||||
Income
taxes payable
|
– | 23,770 | ||||||
Current
portion of note payable - vehicle
|
1,335 | 5,212 | ||||||
Total
current liabilities
|
474,073 | 450,467 | ||||||
Long-term
liabilities:
|
||||||||
Long-term
portion of note payable – vehicle
|
– | 1,335 | ||||||
Notes
payable – related party
|
362,017 | 351,152 | ||||||
Total
long-term liabilities
|
362,017 | 352,487 | ||||||
Total
Liabilities
|
836,090 | 802,955 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity (deficit):
|
||||||||
Common
stock, no par value, 1,000 shares authorized, 616 shares issued and
outstanding in 2009 and 2008
|
200 | 200 | ||||||
Retained
deficit
|
10,860 | (48,144 | ) | |||||
Total
stockholders’ equity (deficit)
|
11,060 | (47,944 | ) | |||||
Total
liabilities and stockholders’ equity
|
$ | 847,150 | $ | 755,011 |
The
accompanying notes are an integral part of these statements.
3
WEB
MERCHANTS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Net
Sales
|
$ | 7,595,202 | $ | 7,283,539 | ||||
Cost
of goods sold
|
4,639,709 | 4,499,661 | ||||||
Gross
profit
|
2,955,493 | 2,783,878 | ||||||
Operating
expenses:
|
||||||||
Advertising
and Promotion
|
1,013,058 | 1,274,397 | ||||||
Other
Selling and Marketing
|
829,182 | 485,132 | ||||||
General
and Administrative
|
991,737 | 800,676 | ||||||
Depreciation
and amortization
|
32,769 | 43,177 | ||||||
Total
operating expenses
|
2,866,746 | 2,603,382 | ||||||
Income
from operations
|
88,747 | 180,496 | ||||||
Other
Income (Expense):
|
||||||||
Interest
income
|
– | – | ||||||
Interest
(expense)
|
(822 | ) | (6,057 | ) | ||||
Total
Other Income (Expense)
|
(822 | ) | (6,057 | ) | ||||
Net
Income Before Income taxes
|
87,925 | 174,439 | ||||||
Provision
for Income Taxes
|
28,921 | 31,442 | ||||||
Net
Income
|
$ | 59,004 | $ | 142,997 | ||||
Income
per share
|
||||||||
Basic
|
$ | 95.79 | $ | 232.14 | ||||
Diluted
|
$ | 95.79 | $ | 232.14 | ||||
Weighted-average
number of common shares outstanding
|
||||||||
Basic
|
616 | 616 | ||||||
Diluted
|
616 | 616 |
The
accompanying notes are an integral part of these consolidated
statements.
4
WEB
MERCHANTS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Total
|
||||||||||||||||
Accumulated
|
Stockholders’
|
|||||||||||||||
|
Common Stock
|
Equity
|
Equity
|
|||||||||||||
|
Shares
|
Amount
|
(Deficit)
|
(Deficit)
|
||||||||||||
Balance,
January 1, 2008
|
616 | $ | 200 | $ | (191,141 | ) | $ | (190,941 | ) | |||||||
Net
income for the year ended December 31, 2008
|
142,997 | 142,997 | ||||||||||||||
Balance,
December 31, 2008
|
616 | 200 | (48,144 | ) | (47,944 | ) | ||||||||||
Net
income for the year ended December 31, 2009
|
59,004 | 59,004 | ||||||||||||||
Balance
December 31, 2009
|
616 | $ | 200 | $ | 10,860 | $ | 11,060 |
The
accompanying notes are an integral part of these consolidated
statements.
5
WEB
MERCHANTS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Operations
|
||||||||
Net
income
|
$ | 59,004 | $ | 142,997 | ||||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
32,769 | 43,177 | ||||||
Net
(increase) decrease in assets:
|
||||||||
Inventory
|
(45,310 | ) | (168,528 | ) | ||||
Net
increase (decrease) in liabilities:
|
||||||||
Accounts
payable
|
79,891 | 153 | ||||||
Taxes
payable
|
(23,770 | ) | 23,770 | |||||
Accrued
compensation
|
– | (41,347 | ) | |||||
Net
cash provided by operating activities
|
102,584 | 222 | ||||||
Investing
|
||||||||
Investments
in equipment
|
(17,466 | ) | (12,044 | ) | ||||
Net
cash used in investing
|
(17,466 | ) | (12,044 | ) | ||||
Financing
|
||||||||
Repayment
of line of credit
|
(28,639 | ) | (12,494 | ) | ||||
Loans
from related party
|
10,865 | 74,066 | ||||||
Principle
payments on equipment note payable
|
(5,212 | ) | (6,248 | ) | ||||
Net
cash provided by (used in) financing
|
(22,986 | ) | 55,324 | |||||
Net
change in cash and cash equivalents
|
62,132 | 43,502 | ||||||
Cash
and cash equivalents, beginning of period
|
66,531 | 23,029 | ||||||
Cash
and cash equivalents, end of period
|
$ | 128,663 | $ | 66,531 | ||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 822 | $ | 6,057 | ||||
Income
Taxes
|
$ | 52,691 | $ | 11,435 |
The
accompanying notes are an integral part of these statements.
6
WEB
MERCHANTS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A—NATURE OF BUSINESS
Web
Merchants Inc. (“WMI” or the “Company”) was incorporated in Delaware on July 12,
2002. The Company is an online retailer offering a full range of
products for the sexual wellness market. The Company sells it
products through an internet website located at www.EdenFantasys.com (the
“Website”). Sales are generated through the internet and print ads
that drive traffic to the internet and the Website. We have a
diversified customer base with no one customer accounting for 10% or more of
consolidated net sales and no particular concentration of credit risk in one
economic sector. Foreign operations and foreign net sales are not
material.
NOTE
B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These consolidated financial statements
include the accounts and operations of Web Merchants Inc. Certain
prior period amounts have been reclassified to conform to the current year
presentation.
Use
of Estimates
The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Significant estimates in these consolidated financial
statements include estimates of: income taxes; tax valuation reserves; loss
contingencies; and useful lives for depreciation and
amortization. Actual results could differ materially from these
estimates.
Revenue
Recognition
The Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition.” (“SAB No. 104”). SAB No. 104
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) title has
transferred; (3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. The Company uses
contracts and customer purchase orders to determine the existence of an
arrangement. The Company uses shipping documents and third-party proof of
delivery to verify that title has transferred. The Company assesses whether the
fee is fixed or determinable based upon the terms of the agreement associated
with the transaction. To determine whether collection is probable, the Company
assesses a number of factors, including past transaction history with the
customer and the creditworthiness of the customer. If the Company determines
that collection is not reasonably assured, then the recognition of revenue is
deferred until collection becomes reasonably assured, which is generally upon
receipt of payment.
The Company records product sales net of
estimated product returns and discounts from the list prices for its products.
The amounts of product returns and the discount amounts have not been material
to date. The Company includes shipping and handling costs in cost of product
sales.
Income Taxes
Income
taxes are accounted for under the asset and liability method. The asset and
liability method requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted income tax rates applicable to
the period that includes the enactment date.
7
As a
result of the implementation of accounting for uncertain tax positions effective
July 1, 2008, the Company did not recognize a liability for unrecognized
tax benefits and, accordingly, was not required to record any cumulative effect
adjustment to beginning of year retained earnings. As of both the date of
adoption and December 31, 2008 and 2009, there was no significant liability
for income tax associated with unrecognized tax benefits.
In
evaluating a tax position for recognition, management evaluates whether it is
more-likely-than-not that a position will be sustained upon examination,
including resolution of related appeals or litigation processes, based on
technical merits of the position. If the tax position meets the
more-likely-than-not recognition threshold, the tax position is measured and
recognized in the Company's financial statements as the largest amount of tax
benefit that, in management's judgment, is greater than 50% likely of being
realized upon settlement.
The
Company recognizes accrued interest related to unrecognized tax benefits as well
as any related penalties in interest expense in its consolidated statements of
operations. As of the date of adoption and during the twelve months ended
December 31, 2009 and 2008, there was no accrual for the payment of interest and
penalties related to uncertain tax positions.
Cash
and Cash Equivalents
For purposes of reporting cash flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
The Company writes down its inventory
for estimated obsolescence and to lower of cost or market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required. Once established, the original cost of
the inventory less the related inventory allowance represents the new cost basis
of such products. Reversal of the allowances is recognized only when the related
inventory has been sold or scrapped.
Concentration
of Credit Risk
Financial instruments that potentially
subject us to significant concentration of credit risk consist primarily of cash
and cash equivalents. As of December 31, 2009, substantially all of
our cash and cash equivalents were managed by a number of financial
institutions. As of December 31, 2009 our cash and cash equivalents
and restricted cash does not exceed FDIC insured limits.
Fair
Value of Financial Instruments
At December 31, 2009, our financial
instruments included cash and cash equivalents, accounts payable, and other
long-term debt.
The fair values of these financial
instruments approximated their carrying values based on either their short
maturity or current terms for similar instruments.
8
Advertising
Costs
The Company expenses the costs of
producing advertisements when the advertising order is
placed. Internet advertising expenses are recognized as incurred
based on the terms of the individual agreements, which are generally: 1) a
commission for traffic driven to the Website that generates a sale or 2) a
referral fee based on the number of clicks on keywords or links to the Company’s
Website generated during a given period. The Company incurred
advertising expenses of $1,013,058 and $1,274,397 for the years ending December
31, 2009 and 2008 respectively.
Shipping
and Handling
Net sales for the years ended December
31, 2009 and 2008 includes amounts charged to customers of $678,403 and
$660,050, respectively, for shipping and handling charges.
Property
and Equipment
Property and equipment are stated at
cost. Depreciation and amortization are computed using the straight-line method
over estimated service lives for financial reporting purposes.
Expenditures for major renewals and
betterments which extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. When properties are disposed of, the related costs and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
recognized currently.
Operating
Leases
The Company leases its facility under a
five year operating lease which was signed in July 1, 2007 and expires March 31,
2011. The Rent expense under this lease for the years ended December
31, 2009 and 2008 was $129,659 and $129,420, respectively.
Segment
Information
During
fiscal 2009 and 2008, the Company only operated in one segment; therefore,
segment information has not been presented.
Recent
Accounting Pronouncements
In February 2010, FASB issued ASU
2010-9 Subsequent Events
(Topic 855) Amendments to Certain Recognition and Disclosure Requirements
("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic
855-10. An entity that is an SEC filer is not required to disclose the date
through which subsequent events have been evaluated. This change alleviates
potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU
2010-9 is effective for interim and annual periods ending after June 15,
2010. The Company does not expect the adoption of ASU 2010-09 to have a material
impact on its consolidated results of operations or financial
position.
In January 2010, FASB issued ASU 2010-6
Improving Disclosures about
Fair Measurements ("ASU 2010-6"). ASU 2010-6 provides amendments to
subtopic 820-10 that require separate disclosure of significant transfers in and
out of Level 1 and Level 2 fair value measurements and the
presentation of separate information regarding purchases, sales, issuances and
settlements for Level 3 fair value measurements. Additionally, ASU 2010-6
provides amendments to subtopic 820-10 that clarify existing disclosures about
the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is
effective for financial statements issued for interim and annual periods ending
after December 15, 2010. The Company does not expect the adoption of ASU
2010-06 to have a material impact on its consolidated results of operations or
financial position.
9
In January 2010, FASB issued ASU 2010-2
Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU
2010-2"). ASU 2010-2 addresses implementation issues related to the changes in
ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards
Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary. An entity is required to deconsolidate a
subsidiary when the entity ceases to have a controlling financial interest in
the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a
gain or loss on the transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or loss associated
with the difference between the fair value of the retained investment in the
subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. ASU 2010-2 is effective for the
Company starting July 1, 2010. The Company does not expect the adoption of ASU
2010-2 to have a material impact on the Company's consolidated results of
operations or financial position.
In December 2009, FASB issued ASU
2009-17 Consolidations (Topic
810) Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity's economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
ASU 2009-17 also requires additional disclosures about an enterprise's
involvement in variable interest entities. ASU 2009-17 is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009. The Company does not expect the adoption of ASU
2009-17 to have a material impact on its consolidated results of operations or
financial position.
In December 2009, FASB issued ASU
2009-16 Transfers and
Servicing (Topic 860) Accounting for Transfers of Financial Assets ("ASU
2009-16"). ASU 2009-16 amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The
amendments in ASU 2009-16 improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. ASU 2009-16 is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009. The Company does not
expect the adoption of ASU 2009-16 to have a material impact on its consolidated
results of operations or financial position.
In August 2009, FASB issued ASU 2009-5
Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value ("ASU
2009-5"). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures-Overall, for the fair value measurement of liabilities. ASU
2009-5 clarifies that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting entity is
required to measure fair value. ASU 2009-5 will be effective for the
Company for interim and annual periods ending after September 30, 2009. The
Company does not expect the adoption of ASU 2009-5 to have a material
impact on the Company's consolidated results of operations or financial
position.
In
August 2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity
Instruments—an Amendment to Section 480-10-S99 ("ASU 2009-4"). ASU
2009-4 represents a Securities and Exchange Commission ("SEC") update to
Section 480-10-S99, Distinguishing Liabilities from
Equity. The Company does not expect the adoption of guidance within ASU
2009-4 to have an impact on the Company's consolidated results of operations or
financial position.
10
In June 2009, FASB issued SFAS
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—A Replacement of FASB Statement No. 162, (now
codified within ASC 105, Generally Accepted Accounting
Principles ("ASC 105")). ASC 105 establishes the Codification as the
single source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. All guidance contained in the Codification carries an
equal level of authority. Following this statement, FASB will not issue new
standards in the form of statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which
will serve only to: (1) update the Codification; (2) provide
background information about the guidance; and (3) provide the bases for
conclusions on the change(s) in the Codification. ASC 105 will be effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Codification supersedes all existing non-SEC
accounting and reporting standards. The adoption of ASC 105 will not have an
impact on the Company's consolidated results of operations or financial
position.
In May 2009, FASB issued SFAS
No. 165, Subsequent
Events, (now codified within ASC 855, Subsequent Events ("ASC
855")). ASC 855 establishes the general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 will be
effective for the Company on April 1, 2009. The Company does not expect the
adoption of ASC 855 will have a material impact on the Company's consolidated
results of operations or financial position.
In April 2009, FASB issued Staff
Position ("FSP") No. 115-2 and FSP 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (now codified within ASC 320, Investments—Debt and Equity
Securities ("ASC 320")). ASC 320 provides greater clarity about the
credit and noncredit component of an other-than-temporary impairment event and
more effectively communicates when an other-than-temporary impairment event has
occurred. ASC 320 amends the other-than-temporary impairment model for debt
securities. The impairment model for equity securities was not affected. Under
ASC 320, an other-than-temporary impairment must be recognized through earnings
if an investor has the intent to sell the debt security or if it is more likely
than not that the investor will be required to sell the debt security before
recovery of its amortized cost basis. This standard will be effective for
interim periods ending after June 15, 2009. The adoption of ASC 320 will
not have a material impact on the Company's consolidated results of operations
or financial position.
In April 2009, FASB issued FSP
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(now codified within ASC 820, Fair Value Measurements and
Disclosures). ASC 820 provides guidelines for making fair value
measurements more consistent and provides additional authoritative guidance in
determining whether a market is active or inactive and whether a transaction is
distressed. ASC 820 is applied to all assets and liabilities
(i.e., financial and non-financial) and requires enhanced disclosures. This
standard will be effective for periods ending after June 15, 2009. The
Company does not expect the adoption of ASC 820 will have a material impact
on the Company's consolidated results of operations or financial
position.
In April 2009, FASB issued FSP
107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value
of Financial Instruments (now codified within ASC 825, Financial Instruments
("ASC 825")). ASC 825 requires disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. ASC 825 will be effective for interim periods ending after
June 15, 2009. The adoption of ASC 825 will not have a material impact on
the Company's consolidated results of operations or financial
position.
In June 2008, FASB issued Staff
Position—Emerging Issues Task Force 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(now codified within ASC 260, Earnings Per Share ("ASC
260")). Under ASC 260, unvested share based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. ASC 260 will be effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years and requires
retrospective application. The adoption of ASC 260 will not have a material
impact on the Company's earnings per share calculations.
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In April 2008, FASB issued FSP 142-3,
Determination of the Useful
Life of Intangible Assets (now codified within ASC 350, Intangibles—Goodwill and
Other ("ASC 350")). ASC 350 provides guidance for determining the useful
life of a recognized intangible asset and requires enhanced disclosures so that
users of financial statements are able to assess the extent to which the
expected future cash flows associated with the asset are affected by our intent
and/or ability to renew or extend the arrangement. ASC 350 was effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The adoption of ASC 350 on July 1, 2009 will not impact
the Company's consolidated results of operations or financial
position.
In March 2008, FASB issued SFAS
No. 161, Disclosures
about Derivative Instruments and Hedging Activities (now codified within
ASC 815, Derivatives and
Hedging ("ASC 815")). ASC 815 requires enhanced disclosures about an
entity's derivative and hedging activities aimed at improving the transparency
of financial reporting. ASC 815 will be effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. The adoption of ASC 815 will not have any impact on the Company's
consolidated results of operations or financial position.
In
December 2007, FASB issued SFAS No. 141(R), Business Combinations (now
codified within ASC 805, Business Combinations ("ASC
805")). ASC 805 establishes principles and requirements for how the acquirer in
a business combination recognizes and measures in its financial statements the
fair value of identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at the acquisition date. ASC 805
significantly changes the accounting for business combinations in a number of
areas, including the treatment of contingent consideration, preacquisition
contingencies, transaction costs and restructuring costs. In addition, under ASC
805, changes in an acquired entity's deferred tax assets and uncertain tax
positions after the measurement period will impact income tax expense. The
provisions of this standard will apply to any acquisitions we complete on or
after December 15, 2008.
In December 2007, FASB issued SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB
No. 51 (now codified within ASC 810, Consolidation ("ASC 810")).
ASC 810 changes the accounting and reporting for minority interests, which is
recharacterized as noncontrolling interests and classified as a component of
equity. This new consolidation method significantly changes the accounting for
transactions with minority interest holders. The provisions of ASC 810 were
applied to all noncontrolling interests prospectively, except for the
presentation and disclosure requirements, which were applied retrospectively to
all periods presented and have been disclosed as such in our consolidated
financial statements herein. ASC 810 became effective for fiscal years beginning
on or after December 15, 2008. The Company will adopt ASC 810 effective
July 1, 2009. The adoption of ASC 810 is not expected to have an initial
material impact on the Company’s consolidated results of operations or financial
position.
In September 2006, FASB issued SFAS
No. 157, Fair Value
Measurements (now codified within ASC 820). ASC 820 provides
guidance for using fair value to measure assets and liabilities. Under
ASC 820, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. The guidance within ASC 820 became
effective for financial statements issued for fiscal years beginning after
November 15, 2007; however, the FASB provided a one year deferral for
implementation of the standard for non-recurring, non-financial assets and
liabilities. The Company will adopt ASC 820 for non-financial assets and
non-financial liabilities effective July 1, 2009, the Company does not expect
any effect on its consolidated results of operations or financial
position.
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NOTE
D—IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of
its equipment or leasehold improvements in accordance with Financial Accounting
Standards Board Accounting Standards Codification (“ASC”) 360. Pursuant
to ASC 360, long-lived assets, such as property, plant and equipment and
purchased intangibles subject to amortization shall be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent that the carrying amount exceeds
the asset's fair value. Assets to be disposed of and related liabilities would
be separately presented in the consolidated balance sheet. Assets to be disposed
of would be reported at the lower of the carrying value or fair value less costs
to sell and would not be depreciated. There was no impairment as of
December 31, 2008 or 2009.
NOTE
E—INVENTORY
All inventories are stated at the lower
of cost or market using the first-in, first-out method of
valuation.
The Company's inventories at December
31, 2009 and 2008 consists entirely of finished goods.
NOTE
F—PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2009 and 2008 consisted of the
following:
2009
|
2008
|
Estimated
Useful Life
|
|||||||
Equipment
|
$ | 181,424 | $ | 163,957 |
5 years
|
||||
Automobiles
|
40,216 | 40,216 |
5 years
|
||||||
Subtotal
|
221,640 | 204,173 | |||||||
Accumulated
Depreciation
|
(156,175 | ) | (123,693 | ) | |||||
$ | 65,465 | $ | 80,480 | ||||||
Depreciation
expense was $32,769 and $43,177 for the years ended December 31, 2009 and 2008,
respectively.
NOTE
G— OTHER ASSETS
The
intangible assets total $72,530 and consist of $4,320 in capitalized trademark
costs and $68,210 related to the contribution of the e-commerce platform
contributed by a former shareholder. Accumulated amortization is $70,346 and
$70,058 for the years ended December 31, 2009 and 2008,
respectively.
NOTE H—
LINE OF CREDIT
On May 19, 2006, the Company entered
into a loan agreement for a line of credit with a commercial bank with a limit
of $50,000. Borrowings under the agreement bear interest at 3% above
prime rate and was 6.25% at December 31, 2008 and 2009. The line of credit is
payable monthly, fully amortized over three years. On May 31, 2007,
the line of credit was increased to $100,000 and the due date was extended to
May 31, 2010. The line of credit is personally guaranteed by the
President and CEO of the Company. At December 31, 2009 and 2008, the
balance owed under the line of credit was $38,433 and $67,071,
respectively.
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Management believes cash flows
generated from operations, along with current cash and investments as well as
borrowing capacity under the line of credit and other credit facilities should
be sufficient to finance capital requirements required by operations. If new
business opportunities do arise, additional outside funding may be
required.
NOTE
I – NOTES PAYABLE – RELATED PARTIES
On
October 25, 2006, a director and minority shareholder, Dmitrii Spetetchii,
loaned the Company $120,000. The loan was to repaid in 14 monthly installments
of $10,000 each, beginning November 30, 2006. The agreed monthly payments were
not made and $41,000 was repaid on the first anniversary. The balance as of
December 31, 2008 and 2009 was $79,000.
The
President, director and majority shareholder, Fyodor Petrenko has made multiple
loans to the Company since January 11, 2005 totaling $283,017. The
balance on these loans as of December 31, 2008 was $272,152 and $283,017 as of
December 31, 2009.
NOTE
J—COMMITMENTS AND CONTINGENCIES
Operating
Leases
The Company leases its facility under a
five year operating lease which was signed in July 2007 and expires March 31,
2011. The monthly rent expense is $10,699, and includes a common area
maintenance charge of $3,400. The common area maintenance charge is
subject to a yearly adjustment based on inflation in the tri-state area of New
York, New Jersey and Connecticut. The rent expense under this lease
for the years ended December 31, 2009 and 2008 was $129,659 and $129,420,
respectively.
Future minimum lease payments under
non-cancelable operating leases at December 31, 2009 are as
follows:
Year
ending December 31,
|
||||
2010
|
$ | 128,388 | ||
2011
|
32,097 | |||
Total
minimum lease payments
|
$ | 160,485 |
NOTE
K – INCOME TAXES
The
Company applies the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” As of December 31, 2008
and 2009, there was no significant liability for income tax associated with
unrecognized tax benefits.
With few
exceptions, the Company is no longer subject to U.S. federal, state, and local,
and non-U.S. income tax examination by tax authorities for tax years before
2003.
NOTE
K— SUBSEQUENT EVENTS
None.
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