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-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-99.1 - Luvu Brands, Inc. | v209838_ex99-1.htm |
EX-10.1 - Luvu Brands, Inc. | v209838_ex10-1.htm |
EX-10.4 - Luvu Brands, Inc. | v209838_ex10-4.htm |
EXHIBIT
99.2
INDEX
TO FINANCIAL STATEMENTS
Balance
Sheets as of December 31, 2009 and September 30, 2010
|
2
|
|
Statements
of Operations for each of the three and nine months in the periods ended
September 30, 2009 and 2010
|
3
|
|
Statements
of Cash Flows for each of the nine month period ended September 30, 2009
and 2010
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4
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Notes
to Financial Statements
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5
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WEB
MERCHANTS, INC.
Balance
Sheets
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 111,988 | $ | 128,663 | ||||
Inventories
|
721,089 | 650,838 | ||||||
Total
current assets
|
833,077 | 779,501 | ||||||
Property
and equipment, net
|
53,426 | 65,465 | ||||||
Other
assets, net
|
1,968 | 2,184 | ||||||
Total
assets
|
$ | 888,471 | $ | 847,150 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 362,115 | $ | 323,949 | ||||
Credit
cards payable
|
55,707 | 110,356 | ||||||
Line
of credit
|
57,011 | 38,433 | ||||||
Current
portion of note payable - vehicle
|
– | 1,335 | ||||||
Total
current liabilities
|
474,833 | 474,073 | ||||||
Long-term
liabilities:
|
||||||||
Notes
payable
|
362,018 | 362,017 | ||||||
Total
long-term liabilities
|
362,018 | 362,017 | ||||||
Total
liabilities
|
836,851 | 836,090 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
Equity (deficit):
|
||||||||
Common
stock of $0.01 par value, shares authorized 1,000; 616 shares issued and
outstanding at September 30, 2010 and December 31, 2009
|
200 | 200 | ||||||
Accumulated
deficit
|
51,420 | 10,860 | ||||||
Total
stockholders’ equity (deficit)
|
51,620 | 11,060 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 888,471 | $ | 847,150 |
See
accompanying notes to the interim financial statements.
2
WEB
MERCHANTS, INC.
Statements
of Operations (unaudited)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
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|||||||||||||
NET
SALES
|
$ | 2,035,951 | $ | 1,869,860 | $ | 6,212,333 | $ | 5,619,897 | ||||||||
COST
OF GOODS SOLD
|
1,335,979 | 1,217,947 | 3,715,318 | 3,503,790 | ||||||||||||
Gross
profit
|
699,972 | 651,913 | 2,497,015 | 2,116,107 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Advertising
and promotion
|
302,830 | 259,838 | 875,568 | 764,706 | ||||||||||||
Other
selling and marketing
|
233,122 | 233,224 | 731,345 | 578,301 | ||||||||||||
General
and administrative
|
269,530 | 230,912 | 811,836 | 708,640 | ||||||||||||
Depreciation
and amortization
|
8,185 | 8,192 | 25,875 | 24,576 | ||||||||||||
Total
operating expenses
|
813,667 | 732,166 | 2,444,624 | 2,076,223 | ||||||||||||
Operating
income (loss)
|
(113,695 | ) | (80,253 | ) | 52,391 | 39,884 | ||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
expense
|
693 | 205 | 1,610 | 1,640 | ||||||||||||
Total
other expense, net
|
693 | 205 | 1,610 | 1,640 | ||||||||||||
Income
(loss) from continuing operations before income taxes
|
(114,388 | ) | (80,458 | ) | 50,781 | 38,244 | ||||||||||
PROVISION
FOR INCOME TAXES
|
6,780 | 7,100 | 10,221 | 21,300 | ||||||||||||
NET
INCOME (LOSS)
|
$ | (121,168 | ) | $ | (87,558 | ) | $ | 40,560 | $ | 16,944 | ||||||
NET
INCOME (LOSS) PER SHARE:
|
||||||||||||||||
Basic
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$ | (196.70 | ) | $ | (142.14 | ) | $ | 65.84 | $ | 27.51 | ||||||
Diluted
|
$ | (196.70 | ) | $ | (142.14 | ) | $ | 65.84 | $ | 27.51 | ||||||
SHARES
USED IN CALCULATION OF NET LOSS PER SHARE:
|
||||||||||||||||
Basic
|
616 | 616 | 616 | 616 | ||||||||||||
Diluted
|
616 | 616 | 616 | 616 |
See
accompanying notes to the interim financial statements.
3
WEB
MERCHANTS, INC.
Statements
of Cash Flows (unaudited)
Nine Months Ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
Operations
|
||||||||
Net
income
|
$ | 40,560 | $ | 17,969 | ||||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
25,875 | 24,576 | ||||||
Net
(increase) decrease in assets:
|
||||||||
Inventory
|
(70,251 | ) | 84,933 | |||||
Net
increase (decrease) in liabilities:
|
||||||||
Accounts
and credit cards payable
|
(16,483 | ) | (48,253 | ) | ||||
Taxes
payable
|
– | 9,225 | ||||||
Accrued
compensation
|
— | 95,711 | ||||||
Net
cash provided by (used in) operating activities
|
(60,859 | ) | 166,192 | |||||
Investing
|
||||||||
Investments
in equipment
|
(13,620 | ) | (13,499 | ) | ||||
Net
cash used in investing
|
(13,620 | ) | (13,499 | ) | ||||
Financing
|
||||||||
Repayment
of line of credit
|
(15,422 | ) | (19,373 | ) | ||||
Borrowings
of line of credit
|
34,000 | |||||||
Loans
from related party
|
– | 10,865 | ||||||
Principle
payments on equipment note payable
|
(1,335 | ) | (4,031 | ) | ||||
Net
cash used in financing
|
17,243 | (12,539 | ) | |||||
Net
change in cash and cash equivalents
|
(16,675 | ) | 158,123 | |||||
Cash
and cash equivalents, beginning of period
|
128,663 | 66,531 | ||||||
Cash
and cash equivalents, end of period
|
$ | 111,988 | $ | 224,654 | ||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 1,610 | $ | 1,640 | ||||
Income
Taxes
|
$ | 10,462 | $ | 45,591 |
See
accompanying notes to the interim financial statements.
4
WEB
MERCHANTS, INC.
NOTES
TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
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 its 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: asset impairment; income taxes; tax valuation reserves;
restructuring reserve; loss contingencies; allowances for doubtful accounts;
share-based compensation; 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.
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.
5
Concentration
of Credit Risk
Financial instruments that potentially
subject us to significant concentration of credit risk consist primarily of
cash, cash equivalents, and accounts receivable. 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 September 30, 2010, our financial
instruments included cash and cash equivalents, accounts and credit cards
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.
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.
Shipping
and Handling
Net sales for the nine months ended
September 30, 2010 and 2009 includes amounts charged to customers of $532,203
and $499,691, respectively, for shipping and handling charges. For the three
months ended September 30, 2010 and 2009, net sales included amounts charged to
customers of $171,233 and $164,697, 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 nine months ended
September 30, 2010 and 2009 was $97,720 and $97,561, respectively.
Segment
Information
During
the nine months ended September 30, 2010 and 2009, the Company only operated in
one segment; therefore, segment information has not been presented.
Recently
Issued Accounting Pronouncements
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.
6
In
October 2009, the FASB issued ASU 2009-13, “Multiple Deliverable Revenue
Arrangements.” ASU 2009-13 amends ASC 605-10, “Revenue Recognition,” and
addresses accounting for multiple-deliverable arrangements to enable vendors to
account for products or services (deliverables) separately rather than as a
combined unit, and provides guidance regarding how to measure and allocate
arrangement consideration to one or more units of accounting. ASU 2009-13
is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is
permitted, but certain requirements must be met. The Company is in the
process of evaluating ASU 2009-13 and does not expect that it will have a
significant impact on its consolidated financial statements.
NOTE
C—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 September 30, 2010.
NOTE
D—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 September 30, 2010 consists entirely of finished
goods.
NOTE
E—PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2009 and September 30, 2010 consisted of the
following:
September 30, 2010
|
December 31, 2009
|
Estimated
Useful Life
|
||||||||
Equipment
|
$ | 195,045 | $ | 181,424 |
5 years
|
|||||
Automobiles
|
40,216 | 40,216 |
5 years
|
|||||||
Subtotal
|
235,261 | 221,640 | ||||||||
Accumulated
Depreciation
|
(181,834 | ) | (156,175 | ) | ||||||
$ | 53,426 | $ | 65,465 |
Depreciation
expense was $25,659 and $24,360 for the nine months ended September 30, 2010 and
2009, respectively.
NOTE
F— 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 $70,562 for the
nine months ended September 30, 2010 and $70,058 for the years ended December
31, 2009.
7
NOTE G—
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 September 30, 2010 and
December 31, 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
September 30, 2010, the balance owed under the line of credit was
$21,401.
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
H – 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
September 30, 2010 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 September 30, 2010 was $283,017.
NOTE
I—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 nine months ended September 30, 2010 was $97,720.
NOTE
J — INCOME TAXES
The provision for income taxes is based
on the current estimate of the annual effective tax rate and is adjusted as
necessary for discrete events occurring in a particular period. The effective
income tax rate for the nine months ended September 30, 2010 was 12% as compared
to 56% for the nine months ended September 30, 2009. The lower effective
income tax rate for 2010 was primarily due to a lower forecasted annual
effective state income tax rate for fiscal year 2010 as compared to fiscal year
2009.
The Company recognizes income tax
liabilities related to unrecognized tax benefits in accordance with the FASB’s
authoritative guidance related to uncertain tax positions and adjusts these
liabilities when its judgment changes as the result of the evaluation of new
information. The Company does not anticipate any significant changes to the
unrecognized tax benefits recorded at the balance sheet date within the next
12 months.
NOTE
K— SUBSEQUENT EVENTS
None.
8