Attached files
| file | filename |
|---|---|
| 8-K/A - CITY LANGUAGE EXCHANGE INC | v176712_8ka.htm |
| EX-99.2 - CITY LANGUAGE EXCHANGE INC | v176712_ex99-2.htm |
GAMERS
FACTORY, INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance
Sheets
|
F-3
|
|
Statements
of Operations
|
F-4
|
|
Statements
of Cash Flows
|
F-5
|
|
Statements
of Stockholders’ Equity
|
F-6
|
|
Notes
to the Financial Statements
|
F-7
to
F-25
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM
Board of
Directors and Stockholders
Gamers
Factory, Inc.
We have
audited the balance sheet of Gamers Factory, Inc. as of December 31, 2009 and
2008, and the related statements of operations, stockholders’ equity (deficit),
and cash flows for the years ending December 31, 2009 and 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 audit.
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 audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 Gamers Factory, Inc. as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the two year period ended December 31, 2009 and 2008, in
conformity with accounting principles generally accepted in the United States of
America.
/s/
Lake & Associates CPA’s LLC
Lake
& Associates CPA’s LLC
Boca
Raton, Florida
February
5, 2010
|
1905
Wright Boulevard
|
20283
State Road 7, Suite 300
|
|
Schaumburg,
IL 60193
|
Boca
Raton, Florida 33498
|
|
Phone:
847.524.0800
|
Phone:
561.982.9874
|
|
Fax:
847.524.1655
|
Fax:
561.982.7985
|
F-2
GAMERS
FACTORY, INC.
Balance
Sheets
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 641,088 | $ | 301,397 | ||||
|
Accounts
receivable, net of allowance of $100,000 and $0 as of December 31, 2009
and 2008
|
2,383,688 | 1,734,334 | ||||||
|
Inventory
|
2,897,432 | 3,609,383 | ||||||
|
Prepaid
Expenses
|
- | 142,465 | ||||||
|
Total
Current Assets
|
5,922,208 | 5,787,579 | ||||||
|
Property
and Equipment, net
|
109,984 | 113,318 | ||||||
|
Deferred
Financing Costs
|
258,325 | 15,990 | ||||||
|
Total
Assets
|
$ | 6,290,517 | $ | 5,916,887 | ||||
|
Liabilities
and Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Line
of credit
|
$ | - | $ | 4,901,052 | ||||
|
Accounts
payable
|
4,253,396 | 656,153 | ||||||
|
Accrued
expenses and other
|
60,534 | 45,387 | ||||||
|
Advance
from Officer
|
- | 25,000 | ||||||
|
Note
Payable-Bridge City Language
|
250,000 | - | ||||||
|
Note
Payable-St. Cloud
|
- | 1,000,000 | ||||||
|
Note
payable Stockholder - current portion
|
- | 40,000 | ||||||
|
Note
payble-Subordinated payable-current portion
|
263,046 | 225,000 | ||||||
|
Note
payable-TW Development LLC-related party
|
408,424 | 533,813 | ||||||
|
Liabilities
of Discontinued Operation
|
88,921 | 204,191 | ||||||
|
Total
Current Liabilities
|
5,324,321 | 7,630,596 | ||||||
|
Long
Term Liabilities
|
||||||||
|
Note
Payable-Columbia Bank
|
1,800,000 | - | ||||||
|
Subordinated
note payable
|
700,000 | 907,738 | ||||||
|
Warrant
redemption liability
|
281,935 | 33,410 | ||||||
|
Note
payable - stockholder
|
- | 903,334 | ||||||
|
Less:
Current maturities of long term debt
|
(263,046 | ) | (265,000 | ) | ||||
|
Total
Long-Term Liabilities
|
2,518,889 | 1,579,482 | ||||||
|
Total
Liabilities
|
7,843,210 | 9,210,078 | ||||||
|
Stockholders'
Equity (Deficit)
|
||||||||
|
Common
stock, $0.01 par value; 10,000,000 shares authorized 3,145,000 shares
issued and outstanding
|
31,450 | 31,450 | ||||||
|
Additional
paid-in capital
|
58,918 | 58,918 | ||||||
|
Accumulated
deficit
|
(1,643,061 | ) | (3,383,559 | ) | ||||
|
Total
Stockholders' Equity (Deficit)
|
(1,552,693 | ) | (3,293,191 | ) | ||||
|
Total
Liabilities and Stockholders' Equity (Deficit)
|
$ | 6,290,517 | $ | 5,916,886 | ||||
See
accompanying notes to financial statements
F-3
GAMERS
FACTORY, INC.
Statements
of Operations
|
For
the years ended December 31,
|
2009
|
2008
|
||||||
|
Net
Sales
|
$ | 36,700,731 | $ | 17,122,540 | ||||
|
Cost
of Sales
|
(30,684,084 | ) | (13,388,536 | ) | ||||
|
Gross
Profit
|
6,016,647 | 3,734,004 | ||||||
|
General
and Administrative Expenses
|
(4,290,550 | ) | (3,253,423 | ) | ||||
|
Operating
Income
|
1,726,097 | 480,581 | ||||||
|
Other
Expense
|
||||||||
|
Other
Income
|
14,401 | - | ||||||
|
Total
Other Expense
|
14,401 | - | ||||||
|
Income
from continuing operations before income taxes
|
1,740,498 | 480,581 | ||||||
|
Income
Tax (Provision) Benefit
|
- | (10,254 | ) | |||||
|
Income
from continuing operations
|
1,740,498 | 470,327 | ||||||
|
Discontinued
Operations:
|
||||||||
|
Loss
from discontinued operation of Planet Replay LLC
|
- | (144,828 | ) | |||||
|
Income
tax benefit
|
- | - | ||||||
|
Loss
from discontinued operation
|
- | (144,828 | ) | |||||
|
Net
Income
|
$ | 1,740,498 | $ | 325,499 | ||||
|
Earnings
per share-Basic and Fully Diluted:
|
||||||||
|
Net
Income Per Common Share from Continuing Operations
|
$ | 0.55 | $ | 0.15 | ||||
|
Discontinued
operations
|
- | (0.05 | ) | |||||
|
Net
Income
|
$ | 0.55 | $ | 0.10 | ||||
|
Weighted
Average Common
|
||||||||
|
Shares
Outstanding
|
3,145,000 | 3,145,000 | ||||||
See
accompanying notes to financial statements
F-4
GAMERS
FACTORY, INC.
Statements
of Cash Flows
|
For
the Years Ended December 31,
|
2009
|
2008
|
||||||
|
Cash
Flows from Operating Activities
|
||||||||
|
Net
income
|
$ | 1,740,498 | $ | 325,499 | ||||
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||
|
Depreciation
and amortization of property and equipment
|
72,790 | 77,090 | ||||||
|
Amortization
of deferred financing costs
|
6,190 | 6,190 | ||||||
|
Amortization
of discount on subordinated note payable
|
17,262 | 6,682 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(749,354 | ) | (602,106 | ) | ||||
|
Allowance
for Bad Debts
|
100,000 | - | ||||||
|
Prepaid
Expense
|
142,465 | (142,464 | ) | |||||
|
Refundable
Income Taxes
|
- | 237,000 | ||||||
|
Inventory
|
711,952 | (1,454,236 | ) | |||||
|
Accounts
payable
|
3,597,242 | 511,779 | ||||||
|
Deferred
financing-stock warrant liability
|
(248,525 | ) | - | |||||
|
Accrued
expenses and other
|
15,147 | 1,859 | ||||||
|
Liabilities
of discontinued operation
|
(115,270 | ) | - | |||||
|
Net
Cash (Used in) Provided by Operating Activities
|
5,290,397 | (1,032,707 | ) | |||||
|
Cash
Flows from Investing Activities
|
||||||||
|
Purchases
of property and equipment
|
(69,456 | ) | (82,425 | ) | ||||
|
Net
Cash Used in Investing Activities
|
(69,456 | ) | (82,425 | ) | ||||
|
Cash
Flows from Financing Activities
|
||||||||
|
(Payments)/Borrowings
under line of credit, net
|
(4,901,052 | ) | 63,599 | |||||
|
Payments
on subordinated note payable
|
(225,000 | ) | (68,318 | ) | ||||
|
Increase
in deferred financing costs
|
248,525 | - | ||||||
|
Advance
(Repayment) of due to stockholder
|
(25,000 | ) | (25,000 | ) | ||||
|
Issuance
(Repayment) of note payable-TW development-related party
|
(125,389 | ) | 33,813 | |||||
|
Issuance
(Repayment) of note payable
|
(1,000,000 | ) | 1,000,000 | |||||
|
Issuance
of note payable
|
250,000 | - | ||||||
|
Issuance
of note payable
|
1,800,000 | - | ||||||
|
Repayments
of note payable - stockholder
|
(903,334 | ) | (27,422 | ) | ||||
|
Net
Cash Provided by Financing Activities
|
(4,881,250 | ) | 976,672 | |||||
|
Net
(Decrease) Increase in Cash
|
339,691 | (138,460 | ) | |||||
|
Cash,
beginning of year
|
301,397 | 439,857 | ||||||
|
Cash,
end of year
|
$ | 641,088 | $ | 301,397 | ||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
|
Cash
paid for interest
|
$ | 555,955 | $ | 601,353 | ||||
|
Cash
paid for income taxes
|
$ | - | $ | - | ||||
See
accompanying notes to financial statements
F-5
GAMERS
FACTORY, INC.
Statements
of Changes in Equity
|
Additional
|
||||||||||||||||||||
|
Paid-in
|
Accumulated
|
Total
|
||||||||||||||||||
|
Common Stock
|
Capital
|
Deficit
|
Equity
|
|||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||
|
Balance
at December 31, 2007
|
3,145,000 | $ | 31,450 | $ | 58,918 | $ | (3,709,058 | ) | $ | (3,618,690 | ) | |||||||||
|
Net
Income
|
- | - | - | 325,499 | 325,499 | |||||||||||||||
|
Balance
at December 31, 2008
|
3,145,000 | $ | 31,450 | $ | 58,918 | $ | (3,383,559 | ) | $ | (3,293,191 | ) | |||||||||
|
Net Income
|
- | - | - | 1,740,498 | 1,740,498 | |||||||||||||||
|
Balance
at December 31, 2009
|
3,145,000 | $ | 31,450 | $ | 58,918 | $ | (1,643,061 | ) | $ | (1,552,693 | ) | |||||||||
See
accompanying notes to financial statements
F-6
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
1. DESCRIPTION
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Gamers
Factory, Inc. (the Company) was incorporated on October 16, 2003 and is a
wholesaler of used video games, movies, music and books.
Planet
Replay, LLC (the Affiliate) (a Maryland limited liability company) was formed on
May 2, 2005 and is a retailer of used video games, movies, music and books.
(Discontinued Operation). Planet Replay has not had any operations since
2006.
Basis
of Presentation
The
accompanying financial statements have been prepared on the accrual
basis of accounting.
The
accompanying financial statements and notes are prepared in accordance with
accounting principles generally accepted in the United States of
America.
Cash
and Cash Equivalents
The
Company periodically maintains cash balances in financial institutions in
amounts greater than the federally insured limit of $100,000. Management
considers this to be an acceptable business risk.
For the
purposes of the Statement of Cash Flows, the Company considers liquid
investments with an original maturity of three months or less to be cash
equivalents.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Fair
value of Financial Instruments
The
Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” (ASC
820), formerly SFAS No. 157 “Fair Value Measurements,” effective January 1,
2009. ASC 820 defines “fair value” as the price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement
date. There was no impact relating to the adoption of ASC 820 to the
Company’s financial statements.
F-7
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
ASC 820
also describes three levels of inputs that may be used to measure fair
value:
|
|
•
|
Level
1: Observable inputs that reflect unadjusted quoted prices for identical
assets or liabilities traded in active
markets.
|
|
•
|
Level
2: Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly.
|
|
•
|
Level
3: Inputs that are generally unobservable. These inputs may be used with
internally developed methodologies that result in management’s best
estimate of fair value.
|
Financial
instruments consist principally of cash, prepaid expenses, accounts payable, and
accrued liabilities. The carrying amounts of such financial instruments in the
accompanying balance sheets approximate their fair values due to their
relatively short-term nature. It is management’s opinion that the
Company is not exposed to any significant currency or credit risks arising from
these financial instruments.
Accounts
Receivable
The
Company extends credit to customers without requiring collateral. The
Company uses the allowances method to provide for doubtful accounts based on
management’s evaluations of the collectability of accounts
receivable. Management’s evaluation is based on the Company’s
historical collection experience and a review of past-due
amounts. Based on management’s evaluation of collectability, there is
a $100,000 allowance for doubtful accounts as of December 31, 2009 and no
allowance at December 31, 2008. During the years ended December 31,
2009 and 2008 the Company wrote off $148,957 and $535,096 respectively as
uncollectible accounts receivables. The Company determines accounts receivable
to be delinquent when greater than 30 days past due. Accounts
receivable are written off when it is determined that amounts are
uncollectible.
Inventory
Inventory,
consisting of goods held for resale, is stated at the lower of cost or
market. Cost is determined using the weighted-average
method. At December 31, 2009 and 2008, no allowance for the obsolete
inventory was deemed necessary based on management’s estimate of the
realizability of the inventory.
F-8
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Property
and Equipment
Property
and equipment is stated at cost. Depreciation and amortization
expense is computed using principally accelerated methods over the estimated
useful life of the related assets ranging from 3 to 7 years. When assets are
sold or retired, their costs and accumulated depreciation are eliminated from
the accounts and any gain or loss resulting from their disposal is included in
the statement of operations.
The
Company recognizes an impairment loss on property and equipment when evidence,
such as the sum of expected future cash flows (undiscounted and without interest
charges), indicates that future operations will not produce sufficient revenue
to cover the related future costs, including depreciation, and when the carrying
amount of the asset cannot be realized through sale. Measurement of the
impairment loss is based on the fair value of the assets.
Goodwill
Goodwill
represents the excess of the purchase price of certain retail locations in
Tennessee over the fair market value of the net assets acquired. The Company has
adopted Statement of Financial Accounting Standards (SFAS) No. 141 and 142.
These standards changed the accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of-interests accounting and
requiring companies to discontinue the amortization of goodwill and certain
intangible assets with the indefinite useful life created by business
combinations accounted for using the purchase method of accounting. Instead,
goodwill and intangible assets deemed to have an indefinite useful life are
subject to at least an annual review for impairment. The impairment test for
intangible assets consists of comparing the fair value of the intangible assets
to its carrying amount. If the carrying amount of the intangible asset exceeds
its fair value, an impairment loss is recognized. Fair value for goodwill and
intangible assets are determined based on discounted cash flows and appraised
values.
Impairment
of Long-Lived Assets
The
Company assesses long-lived assets, such as property and equipment and
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
group may not be fully recoverable. Recoverability of asset groups to be held
and used in measured by a comparison of the carrying amount of an asset group to
estimated undiscounted future cash flows expected to be generated by the asset
group. If the carrying amount exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of an asset group exceeds the fair value of the asset group. The Company
evaluated its long-lived assets and no impairment charges were recorded for any
of the periods presented.
F-9
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Common
Stock
On
October 27, 2008, the Company filed with the Maryland State Department of
Assessments and Taxation (the “SDAT”) Articles of Amendment and Restatement
(these “Articles”). Pursuant to these Articles, the Company’s charter is amended
to increase the authorized stock of the Company. Immediately before such
amendment the total number of shares of stock which the Company had the
authority to issue was 1,000, which shares were divided into 500 shares of Class
A Common Stock with no par value and 500 shares of Class B Common Stock with no
par value. Pursuant to these Articles, the Company currently has the authority
to issue 10,000,000 shares of Common Stock with $0.01 par value, all of one
class.
Automatically
and immediately upon acceptance of the Articles by the SDAT, all of the
currently issued and outstanding shares of Class A Common Stock (37 shares) and
Class B Common Stock (63 shares) are converted into shares of the Corporation’s
single class of common stock, on a one-for-one basis. In addition, the Company
also declared a 31,450 to 1 stock split for all converted single class common
stock.
As of
December 31, 2009 and 2008, the Company has 3,145,000 shares issued and
outstanding, which has incorporated the stock split and is retrospectively
restated.
Revenue
Recognition
The
Company will recognize revenue when:
- Persuasive evidence of an arrangement
exists;
- Shipment has occurred;
- Price is fixed or determinable;
and
- Collectability is reasonably
assured
The
Company closely follows the provisions of Staff Accounting Bulletin No. 104 as
described above. The Company had $36,700,731, and $17,122,540 in revenue for the
years ended December 31, 2009 and 2008, respectively.
Shipping
and Handling Costs
The
Company includes its shipping and handling costs in selling, general and
administrative expenses. Those costs were $573,660 and $369,663 for
the years ended December 31, 2009 and 2008, respectively.
F-10
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Income
Taxes
Under the
asset and liability method prescribed under ASC 740, Income Taxes, The Company
uses the liability method of accounting for income taxes. The
liability method measures deferred income taxes by
applying enacted statutory rates in effect at
the balance sheet date to
the differences between the tax basis of assets
and liabilities and
their reported amounts on the financial
statements. The resulting deferred tax assets or liabilities are
adjusted to reflect changes in tax laws as they occur. A valuation
allowance is provided when it is more likely than not that a deferred tax asset
will not be realized.
The
Company recognizes the financial statement benefit of an uncertain tax position
only after considering the probability that a tax authority would sustain the
position in an examination. For tax positions meeting a "more-likely-than-not"
threshold, the amount recognized in the financial statements is the benefit
expected to be realized upon settlement with the tax authority. For tax
positions not meeting the threshold, no financial statement benefit is
recognized. As of December 31, 2009, the Company has had no uncertain tax
positions. The Company recognizes interest and penalties, if any, related to
uncertain tax positions as general and administrative expenses. The Company
currently has no federal or state tax examinations nor has it had any federal or
state examinations since its inception. All of the Company's tax years are
subject to federal and state tax examination.
Reclassifications
Certain
amounts in the prior period financial statements have been reclassified to
conform to the current year presentation.
Discontinued
Operations
Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company classifies a business that has
been disposed as a discontinued operation if the cash flow of the business has
been eliminated from the ongoing operations and will no longer have any
significant continuing involvement in the Company. The results of
operations of discontinued operations through the date of sale, including any
gains or losses on disposition, are aggregated and presented as one line in the
consolidated statements of operations. ASC 360-10-05, formerly SFAS
No. 144 requires the classification of amounts presented for prior years as
discontinued operations. The amounts presented in the statements of
operations for the year ended December 31, 2009 and 2008 were classified to
comply with ASC 360-10-05.
F-11
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
During
the year ended December 31, 2006, the Company decided to discontinue operations
of Planet Replay, LLC, a retail affiliate of the Company, and sell or liquidate
the assets of the discontinued operations. The decision to
discontinue the operations of Planet Replay, LLC was based upon the historical
and continuing losses of Planet Replay, LLC. All assets were disposed
during 2007 and liabilities of $88,921 and $204,191 existed at December 31, 2009
and 2008. The Company recognized a loss from discontinued operations totaling $0
and $144,828 for the years ended December 31, 2009 and 2008, respectively. The
assets and liabilities of the discontinued operation are presented separately
under captions “Assets of discontinued operation” and “Liabilities of
discontinued operation,” respectively, in the accompanying consolidated balance
sheets and consist of the following as of:
|
2009
|
2008
|
|||||||
|
Assets
of Discontinued Operation
|
||||||||
|
Cash
|
$ | - | $ | - | ||||
|
Notes
Receivable
|
- | - | ||||||
|
Inventories
|
- | - | ||||||
|
Property
and equipment, net
|
- | - | ||||||
|
Goodwill
|
- | - | ||||||
|
Total
Assets
|
$ | -0- | $ | -0- | ||||
|
Liabilities
of discontinued operation:
|
||||||||
|
Accounts
payable
|
$ | - | $ | - | ||||
|
Accrued
expenses
|
88,921 | 204,191 | ||||||
|
Total
liabilities
|
$ | 88,921 | $ | 204,191 | ||||
F-12
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
The
following table illustrates the reporting of the discontinued operation in the
statements of operations for year ended December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Net
Sales
|
$ | - | $ | - | ||||
|
Cost
of Sales
|
- | - | ||||||
|
General
& Administrative
|
(-0- | ) | (144,828 | ) | ||||
|
Impairment
of assets and other
|
- | - | ||||||
|
Loss
on discontinued operations
|
$ | (-0- | ) | $ | (144,828 | ) | ||
Abandoned
Leased Facilities
In
December 2006, the Company’s affiliate abandoned its retail locations in
Tennessee and Maryland. Although the Company remains obligated under the terms
of these leases for the rent and other costs associated with these leases, the
Company made the decision to cease using these spaces on December 31, 2006, and
has no foreseeable plans to occupy them in the future (see commitment
footnote). Therefore, in accordance with ASC 420, Exist or Disposal Cost Obligations,
formerly FASB Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, the Company recorded a charge to earnings of
approximately $297,274 to recognize the costs of exiting the space. The
liability is equal to the total amount of rent and other direct costs for the
period of time space is expected to remain unoccupied. The Company
also recorded a charge to earnings of $100,000 for estimated general and
administrative costs related to exiting the retail locations. Total exit costs
expected to be incurred of $397,274 were recorded as a liability of discontinued
operations and included in loss from discontinued operations as of December 31,
2006. As of December 31, 2009 and 2008 a liability has been recorded
of $88,921 and 204,191.
To
determine the lease cost, which is the Company’s loss after its cost recovery
efforts from subleasing a building, certain estimates were made related to the
(1) time period over which the relevant building would remain vacant, (2)
sublease terms, and (3) sublease rates, including common area charges. If market
rates continue to decrease in these markets or if it takes longer than expected
to sublease these facilities, the actual loss could exceed this
estimate.
F-13
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Income
(loss) Per Common Share
Basic
income (loss) per share is calculated using the weighted-average number of
common shares outstanding during each reporting period. Diluted loss
per share includes potentially dilutive securities such as outstanding options
and warrants, using various methods such as the treasury stock or modified
treasury stock method in the determination of dilutive shares outstanding during
each reporting period. Common equivalent
shares are excluded from the computation of net loss per share since their
effect is anti-dilutive.
Comprehensive
Income (Loss)
The
Company adopted ASC 220, formerly Financial Accounting Board Statement of
Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”,
which establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. There were no items of
comprehensive income (loss) applicable to the Company during periods covered in
the financial statements.
Subsequent
Events
We
evaluated subsequent events through the date and time our financial statements
were issued on February 5, 2010.
Recent Authoritative Accounting
Pronouncements
FASB
Accounting Standards Codification
(Accounting
Standards Update (“ASU”) 2009-01)
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s financial statements
or disclosures as a result of implementing the Codification during the year
ended December 31, 2009.
F-14
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
As a
result of the Company’s implementation of the Codification during the quarter
ended September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current year financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
Subsequent
Events
(Included
in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously
SFAS No. 165 “Subsequent Events”)
SFAS
No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the financial
statements are issued or available to be issued (“subsequent events”). An entity
is required to disclose the date through which subsequent events have been
evaluated and the basis for that date. For public entities, this is the date the
financial statements are issued. SFAS No. 165 does not apply to subsequent
events or transactions that are within the scope of other GAAP and did not
result in significant changes in the subsequent events reported by the Company.
SFAS No. 165 became effective for interim or annual periods ending after
June 15, 2009 and did not impact the Company’s financial statements. The
Company evaluated for subsequent events through the issuance date of the
Company’s financial statements. No recognized or non-recognized subsequent
events were noted.
2. PROPERTY
AND EQUIPMENT
Property
and equipment consists of the following at December 31,:
|
2009
|
2008
|
|||||||
|
Machinery
and equipment
|
$ | 251,347 | $ | 189,977 | ||||
|
Leasehold
improvements
|
19,483 | 16,653 | ||||||
|
Computer
equipment and software
|
142,223 | 136,967 | ||||||
| $ | 413,053 | $ | 343,597 | |||||
|
Less
accumulated depreciation and amortization
|
303,069 | 230,279 | ||||||
|
Property
and Equipment, net
|
$ | 109,984 | $ | 113,318 | ||||
F-15
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Depreciation
and amortization expense for the years ended December 31, 2009 and 2008 totaled
$72,790 and $77,090, respectively.
3. LINE
OF CREDIT AND NOTES PAYABLE
Line
of Credit
Effective
May 11, 2004, the Company entered into a loan and security agreement to
establish a revolving line of credit with a bank. The revolving line
of credit bears interest at 10%, and is collateralized by substantially all
assets of the Company and personal assets of the majority
shareholder. Total maximum available borrowings under the revolving
line of credit was $5,000,000. Effective December 29, 2009, the
Company closed the line of credit facility. The balance as of
December 31, 2009 and 2008 was $-0- and 4,901,052.
Subordinated
Note Payable
Effective
July 25, 2006, the Company entered into a financing agreement issuing a
debenture to Allegiance Capital Limited Partnership in the amount of
$1,000,000. The net proceeds from the debenture totaled $969,052,
after deducting Allegiance fees of $20,000 and legal fees of
$10,949. Interest accrues daily on unpaid balances at an annual rate
of 12% with interest payable on the first day of the month commencing August 1,
2006. Beginning August 1, 2008, the Company is required to make
monthly principal payments totaling $18,750. The note payable is
subordinate to the line of credit to the bank. The note is subject to
certain financial covenants. The Company was in compliance or
obtained waivers for all financial convents. The note matures on July
1, 2011.
In
consideration of the purchase by Allegiance of the Company’s Subordinated
Debenture, the Company has offered a warrant allowing Allegiance to purchase
4.5% of the total number of outstanding shares of the Company’s Common Stock for
a total purchase price of $10. The warrant has a term of 10 years and
expires on July 25, 2016. Allegiance has the option to require the
Company to purchase the entire warrant or all of the warrant shares upon the
exercise of the put option embedded in the Investment
Agreement. Based on the value outlined in the Investment Agreement,
the Company has valued the warrant at $281,935 and recorded a discount amortized
through interest expense over the term of the note. The balance as of
December 31, 2009 and 2008 was $700,000 and $907,738
respectively.
F-16
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Under ASC
815-40, Derivatives and
Hedging, Contracts in Entity’s Own Equity, formerly EITF No. 00–19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock. Accordingly, the initial fair value of the Warrants of $33,410 was
recorded as an accrued warrant liability in the balance sheet, and is marked to
market at the end of each reporting period
The value
of the warrant redemption liability has been “marked-to-market” as of December
31, 2009 with a corresponding increase to deferred financing cost of
$248,525.
Note
Payable-Columbia Bank
On
December 29, 2009 the Company issued a note payable of $1,800,000 to Columbia
Bank. The note bears interest at 8.0% and matures on December 29,
2014. The note requires consecutive monthly payments of principal and
interest of $15,055.92 with a balloon payment due on December 29,
2014. The borrower may repay this note at any time, in whole or in
part, without penalty or additional interest The note collateralized
by substantially all assets of the Company and personal assets of the majority
shareholder
Note
Payable-City Language Exchange Incorporated
On
December 22, 2009 the Company issued a note payable of $250,000. The note bears
interest at 8.0% and matures on June 30, 2010. The note requires a
payment of principal and interest due on June 30, 2010. The borrower
may repay this note at any time, in whole or in part, without penalty or
additional interest. The note not collateralized.
Note
Payable – Stockholder
On July
7, 2006 the Company issued a note payable of $1,000,000 to its majority
stockholder. The note bears interest at 8.08% and matures July 1,
2013. The note requires consecutive monthly payments of principal of
$3,333.33 plus interest, with a balloon payment of $897,698, plus any other
outstanding balances due, on the maturity date. The borrower may
repay this note at any time, in whole or in part, without penalty or additional
interest. The balance as of December 31, 2009 was $-0- and 903,334 as of
December 31, 2008.
Note
Payable – TW Development LLC
On
December 6, 2007 the Company issued a note payable of $500,000 to TW Development
LLC a related parted. The note bears interest at 6% and matured on
April 4, 2008. The note requires no monthly
payments. The borrower may repay this note at any time, in
whole or in part, without penalty or additional interest. During 2008 additional
funds were advanced by the related party and the note was extended to December
31, 2009. The balance as of December 31, 2009 was $408,424.
F-17
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
4. INCOME
TAXES
Company’s
Disclosure of the Provision for Income Taxes, Reconciliation of Statutory Rate
to Effective Rate, and Significant Components of Deferred Tax Assets and
Liabilities:
|
As of December 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Current:
|
||||||||
|
Federal
|
-0- | -0- | ||||||
|
State
|
-0- | -0- | ||||||
| -0- | -0- | |||||||
|
Deferred:
|
||||||||
|
Federal
|
-0- | 10,254 | ||||||
|
Total
provision (benefit) for income taxes
|
$ | -0- | $ | 10,254 | ||||
F-18
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Income Taxes –
cont’d
The
federal and state income tax provision (benefit) is summarized as
follows:
A
reconciliation of the provision (benefit) for income taxes with amounts
determined by applying the statutory U.S. federal income tax rate to income
before income taxes is as follows:
|
2009
|
2008
|
|||||||
|
Computed
tax at the federal statutory rate of 34%
|
$ | 591,700 | $ | 86,530 | ||||
|
State
taxes, net of federal benefit
|
104,000 | 17,815 | ||||||
|
Bad
Debt not deductible
|
-0- | -0- | ||||||
|
Operating
loss carryforwards
|
(695,700 | ) | (104,345 | ) | ||||
|
Valuation
Allowance
|
-0- | -0- | ||||||
|
Other
|
-0- | 10,254 | ||||||
|
Loss
on Affiliate-not deductible
|
-0- | -0- | ||||||
|
Provision
(benefit) for income taxes
|
-0- | -0- | ||||||
|
Effective
income tax rate
|
-0- | -0- | ||||||
The
company has a net operating loss carry forward of approximately $143,000, that
expires in 2027.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities are as follows:
F-19
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Income Taxes –
cont’d
|
As
of December 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating losses carryforwards
|
$ | 57,583 | $ | 670,463 | ||||
|
Difference
between book and tax depreciation
|
-0- | -0- | ||||||
|
Total
deferred tax assets
|
57,583 | 670,463 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Difference
between book and tax depreciation
|
11,000 | 17,857 | ||||||
|
Total
deferred tax liabilities
|
11,000 | 17,857 | ||||||
|
Net
deferred tax assets before valuation allowance
|
46,583 | 652,606 | ||||||
|
Valuation
allowance
|
(46,583 | ) | (652,606 | ) | ||||
|
Net
deferred tax assets
|
$ | -0- | $ | -0- | ||||
F-20
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
5.
COMMITMENTS
Effective
March 1, 2007, the Company has entered into an operating lease agreement for its
corporate office. The Company was released from its lease at its
prior location on November 2, 2006 due to the Company relocating to a new
facility owned by the same landlord. The Company relocated to the new
facility in February 2007.
Future
minimum payments required under operating leases are as follows:
|
Year
Ending December 31:
|
||||
|
2010
|
175,322 | |||
|
2011
|
178,826 | |||
|
2012
and thereafter
|
29,902 | |||
| $ | 384,050 | |||
Rent
expense for the years ended December 31, 2009 and 2008 totaled $270,342 and
$168,716, respectively.
Effective
August 15, 2005, the Company guaranteed payments on an operating lease agreement
for retail space. For the benefit of its affiliate Planet Replay
LLC. The operation has been discontinued. The lease
requires monthly payments of $6,170 plus Common Area Maintenance and taxes. The
term is for 50 months. The location has been vacated as a result of
the discontinued operations (see discontinued operations footnote). The total
amount of the future payments are included in the liabilities of the
discontinued operations.
Future
minimum payments required under operating leases are as follows:
|
Year
Ending December 31:
|
||||
|
2010
|
57,200 | |||
| $ | 57,200 | |||
F-21
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Rent
expense for the years ended December 31, 2009 and 2008 totaled $57,200 and
$60,571, respectively.
Effective
November 1, 2005, the Company guaranteed payments on an operating lease
agreement for retail space. For the benefit of its affiliate Planet
Replay LLC. The operation has been discontinued. The lease
requires monthly payments of $5,720 plus Common Area Maintenance and taxes with
annual increases of 2.5% the term is for 10 years. The location has been vacated
as a result of the discontinued operations (see discontinued operations
footnote). The 2010 amount of the future payments are included in the
liabilities of the discontinued operations.
F-22
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
Commitments
- cont’d
Future
minimum payments required under operating leases are as follows:
|
Year
Ending December 31:
|
||||
|
2010
|
82,413 | |||
|
2011
|
84,476 | |||
|
2012
|
84,476 | |||
|
2013
|
84,476 | |||
|
2014
and thereafter
|
159,012 | |||
| $ | 494,853 | |||
Rent
expense for the years ended December 31, 2009 and 2008 totaled $63,872 and
$85,692, respectively.
6. RELATED
PARTY TRANSACTIONS
As of
September 30, 2009 the Company issued a note payable to TW Development LLC a
company owned by the shareholders of Gamers Factory, Inc. The note
bears interest at 6% and matures December 31, 2009. The note requires
no monthly payments. The borrower may repay this note at any
time, in whole or in part, without penalty or additional interest.
As of
December 31, 2008 the Company received advances from a
shareholder. The advance is payable on demand. These advances have
been repaid in full as of December 31, 2009.
7.
CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash deposits. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At
December 31, 2009, The Company periodically maintains cash balances in financial
institutions in amounts greater than the federally insured limit of
$250,000. Management considers this to be an acceptable business
risk.
F-23
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
8. WARRANTS
On
November 24, 2008, the Company issued warrants to purchase 240,000 shares of
common stock to a third-party. The warrants are exercisable at $1.25 per share
and will expire in 10 years.
On
November 24, 2008, the Company issued warrants to purchase 60,000 shares of
common stock to a third-party. The warrants are exercisable at $2.50 per share
and will expire in 10 years.
On
January 26, 2009, the Company issued warrants to purchase 405,000 shares of
common stock to a third-party. The warrants are exercisable at $2.50 per share
and will expire in 5 years.
As of
December 31, 2009, the Company had outstanding warrants to purchase up to
705,000 shares of common stock. These securities give the holder the right to
purchase shares of the Company’s common stock in accordance with the terms of
the instrument.
|
Warrants
|
2009
|
|||
|
Balance,
January 1
|
300,000 | |||
|
Issued
|
405,000 | |||
|
Balance,
December 31
|
705,000 | |||
The
following table provides certain information with respect to the above
referenced warrants outstanding at December 31, 2009:
|
Exercise Price
|
Number
Outstanding
|
Weighted
Average
Exercise Price
|
Weighted Average
Life Years
|
|||||||||||||
|
Warrants
|
$ | 1.25-2.50 | 705,000 | $ | 2.07 | 7.13 | ||||||||||
F-24
GAMERS
FACTORY, INC.
Notes
to Financial Statements
For
the Years ended December 31, 2009 and 2008
9. COMPENSATED
ABSENCES
The
Company has not accrued a liability for compensated absences because the amount
cannot be reasonably estimated. Employees of the Company are entitled
to paid vacation and paid sick days depending on job classification, length of
service, and other factors. At December 31, 2009 the Company had approximately
60 employees. Of this total, approximately 50 are hourly employees and 10 are
salaried employees. Approximately 44% of the Company’s hourly employees and 56%
of its salaried employees are have paid vacation and sick days. It is not
practicable for the Company to estimate the amount of compensation for future
absences; accordingly, no liability for compensated absences has been recorded
in the accompanying financial statements. The Company’s policy is to recognize
the costs of compensated absences when actually paid to
employees.
F-25