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FILED: NEW YORK COUNTY CLERK 02/11/2015 05:37 PM INDEX NO.

159045/2012
NYSCEF DOC. NO. 187 RECEIVED NYSCEF: 02/11/2015

EXHIBIT WW
Madison Avenue Diamonds LLC

Financial Statements

December 31 2012

EXHIBIT

CONFIDENTIAL MAD001269
MADISON AVENUE DIAMONDS LLC

Table of Contents

Page

Independent Auditors Report 1

Balance Sheet 2-3

Statement of Income 4

of Cash Flows 5
Statement

Notes to Financial Statements 6-10

CONFIDENTIAL MAD001270
STETZ BELGIOVINE MANWARREN WALLIS P.C.
CERTIFIED PUBLIC ACCOUNTANTS
155 POMPTON AVENUE SUITE 204
VERONA NJ 07044

Tel 973/433-1 100 Fax 973/433-1 1 1 1

www.sbcpas.com

Independent Auditors Report

To the Members

Madison Avenue Diamonds LLC

We have audited the accompanying financial statements of Madison Avenue Diamonds LLC A Limited Liability

which comprise balance of December 31 2012 and the related statements of income and cash
Company the sheet as

flows for the year then ended and the related notes to the financial statements

for the and fair presentation of these financial statements in accordance with
Management is responsible preparation

generally accepted in the United States of America this includes the design implementation
accounting principles

and maintenance of internal control relevant to the preparation and fair


presentation
of financial statements that are

free from material misstatement whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit

in accordance with auditing standards generally accepted in the United States of America. Those standards require

and audit to obtain reasonable assurance about whether the financial statements
that we plan perform the

are free of material misstatement.

evidence about amounts and in the financial


An audit involves performing procedures to obtain audit the disclosures

statements. The procedures selected on the auditors judgment including the assessment of the risks of
depend

material misstatement of the financial statements whether due to fraud or error. In making those risk assessments

the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial

the but not for the purpose of


statements in order to design audit procedures that are appropriate in circumstances

the effectiveness of the entitys internal control. Accordingly we express no such opinion.
expressing an opinion on

An audit also includes the appropriateness of accounting policies used and the reasonableness of
evaluating

significant accounting estimates made by management as well as evaluating the overall presentation of the financial

We believe that our audit evidence we have obtained is sufficient and appropriate to provide a basis for
statements

our audit opinion.

In the financial statements referred to above present fairly in all material respects the financial position of
our opinion

Madison Avenue Diamonds LLC as of December 31 2012 and the results of its operations and its cash flows for the year

then ended accordance with accounting in the United States of America.


in principles generally accepted

Stetz Belgiovine Manwarren Wallis P.C.

Verona

May 172013
New Jersey

ark

CONFIDENTIAL MAD001271
MADISON AVENUE DIAMONDS LLC
BALANCE SHEET
DECEMBER 31 2012

ASSETS

Current Assets

Cash $ 157097

Accounts Receivable 843310

Inventory 5152110

Prepaid Expenses 20139

Total Current Assets 6172656

Property and Equipment

Improvements 528411

Equipment 49561

Furniture and Fixtures 118186

Accumulated Depreciation 502793

Net Property and Equipment 193365

Other Assets

Security Deposits 34326

Intangible - Net 125000

Restricted Cash 420507

Total Other Assets 579833

Total Assets $ 6945854

See Accountants Report and Notes to Financial Statements. 2


Accompanying

CONFIDENTIAL MAD001272
MADISON AVENUE DIAMONDS LLC
BALANCE SHEET
DECEMBER 31 2012
LIABILITIES AND MEMBERS CAPITAL

Current Liabilities

Accounts Payable $ 3216838


Accrued Expenses 335577

Deferred Rent 73469


Customer Deposits 180979

Total Current Liabilities 3806863

Members Capital

Class A Contributions 12028406


Class B Contributions 9984891

Accumulated Deficit 17064348


Current Year Loss 1809958

Total Equity 3138991

Total Liabilities and Equity $ 6945854

See Accompanying Accountants Report and Notes to Financial Statements. 3

CONFIDENTIAL MAD001273
MADISON AVENUE DIAMONDS LLC
STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31 2012

Sales $ 5460643

Cost of Sales 3234679

Gross Profit 2225964

Selling General and Administrative Expenses 4256958

Income From Operations 2030994

Other Income and Expense 221036

Net Loss $ 1809958

See Accompanying Accountants Report and Notes to Financial Statements. 4

CONFIDENTIAL MAD001274
MADISON AVENUE DIAMONDS LLC
STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31 20X2

Cash Flows from Operating Activities

Net Income Loss $ 1809958


Adjustments to reconcile net income

to net cash provided by operating activities

Depreciation and Amortization 229204

Changes in operating assets and liabilities

Accounts Receivable 402073

Inventory 444526

Prepaid Expenses 291361


Accounts Payable 1460394
Accrued Expenses 315319
Customer Deposits 180979

Deferred Rent 45 l 54

Total Adjustments 272724


Net Cash Used by Operating Activities 2082682

Cash Flow from Activities


Investing

Additions to Restricted Cash 11629


Acquisition of Property and Equipment 24693

Net Cash Used by Investing Activities 36322

Cash Flow from Financing Activities

Contribution of Member Capital 2337042

Payments of Long Term Debt 135499

Net Cash Provided by Financing Activities 2201543

Net Increase in Cash and Cash Equivalents 82539


Cash and Cash Equivalents Beginning of Period 74558
Cash and Cash Equivalents End of Period $ 157097

Supplemental Disclosure For Cash Flows

Cash Paid During the Year For


Interest $ 9474

See Accompanying Accountants Statements.


Report and Notes to Financial 5

CONFIDENTIAL MAD001275
MADISON AVENUE DIAMONDS LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 2012

Note 1 Business

Madison Avenue Diamonds LLC the Company located in New York City

was established on September 15 2005. The Company is engaged in the design


distribution and sales of a cutting edge high quality luxury brand of
promotion
diamonds and jewelry primarily through its New York City based wholesale office

and retail store.

Note 2 Summary of significant accounting policies

Concentrations of credit risk

Financial instruments which potentially subject the Company to concentrations of

credit risk consist of cash and accounts receivable. The Company


primarily

maintains its cash with a high-credit quality financial institution. At times such

exceed limits.
amounts may federally insured

The customers connection with wholesale


Company extends credit to in its

be affected by economic or other


activities. This credit risk may changes in

conditions and may accordingly the Companys overall credit risk. The
impact

of wholesale customers. The


Company closely monitors the extension credit to its

policy for determining the past due status of receivables is based on how recently

have been received. Based on the Companys evaluation no allowance


payments
for uncollectible accounts receivable is deemed necessary as of December 31
2012.

Use of estimates

The preparation of financial statements in conformity with accounting principles

generally accepted in the United States of America requires management to make

estimates and assumptions that affect certain reported amounts and disclosures.

Accordingly actual results could differ from those estimates.

Revenue recognition

Sales are recognized when revenue is realized or becomes realizable and has been

earned. In general revenue is recognized at the point of sale in the retail store and

of merchandise to wholesale customers. For online sales the


upon shipment

Company defers revenue and their related product cost for shipments that are in

transit to the customer and recognizes revenue at the time the customer receives

the product.

The Company accounts for taxes collected from retail customers on a net basis

excluded from revenues.

CONFIDENTIAL MAD001276
MADISON AVENUE DIAMONDS LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 2012

Note 2 Summary of Significant Accounting Policies continued

Inventory
is stated at the lower of cost weighted average or market and consists
Inventory

of finished goods.

Furniture equipment and improvements


of accumulated
Furniture equipment and improvements are stated at cost net

depreciation. Depreciation is provided using the straight-line method over the

estimated useful lives of the related assets. Leasehold improvements are

of the estimated useful life of


amortized on a straight-line basis over the shorter

the asset or the lease term.

Intangible assets

standards address the recognition and measurement of intangible


Accounting
For
group of other indefinite-lived
assets acquired individually or with a assets.

their useful lives. These


intangible assets the Company amortizes the assets over

intangible assets are reviewed for potential impairment whenever events or

circumstances indicate that their carrying amount may not be recoverable. No


in 2012.
impairment of was identified
indefinite-lived intangible assets

Income taxes

Madison Avenue Diamonds LLC is a limited liability company therefore the

taxable income or loss is allocated to its members in accordance with their

ownership or as otherwise indicated in the Companys


respective percentage

Therefore no provision or liability for income taxes has been


operating agreement.

included in the financial statements.

The Company has no unrecognized tax benefits at December 31 2012.

Advertising costs

The Company expenses advertising costs as incurred. Advertising expense

amounted to $425617 in 2012

Deferred rent

Deferred rent represents the excess of recognized rent expense over scheduled

lease payments resulting from the application of straight line lease accounting.

Subsequent events

The Company has evaluated subsequent events through May 17 2013 which is

the date the financial statement was available to be issued.

CONFIDENTIAL MAD001277
MADISON AVENUE DIAMONDS LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 2012

Note 3 Restricted Cash

The Company has an outstanding letter of credit LOC in the amount of

$384000 that expires in October 2013 with automatic one year renewals for the

benefit of the landlord of its storefront. Cash in the amount of $384000 was

a market account as for the LOC. There is an


deposited in money collateral

annual fee of 2% per year


in connection with the LOC charged on a quarterly

basis.

In March 2012 the Company deposited $36000 into a certificate of deposit with

one of its banks as a pledge on the Companys credit card. This balance matures

in March 2014 and bears interest at 1.15%.

Note 4 Royalty and Trademark Agreement

The Company entered into a trademark and use of name agreement with an

individual on July 25 2006. Under terms of that


agreement and the related LLC

operating agreement the Company is allowed use of the individuals name


signature and likeness in connection with the promotion of the Companys
business. In exchange for the use of the individuals name signature and likeness

an share in the Company was issued to an which is controlled by


ownership entity

this individual. The Company recorded an intangible asset of $500000 in

connection with the use of this royalty and trademark based on the fair value of

the membership contribution issued at the execution of this agreement see Note

6. On June 29 2011 a new license agreement was entered into restating the

terms of the original agreement. The restated license agreement has an initial term

of five years with automatic renewals for successive periods of one year. Under

the agreement the Company agrees to


pay a minimum annual in the licensing fee

amount of $300000 in twelve monthly installments of $25000 plus a royalty fee


based on the Companys net revenue as defined in the agreement.

Note 5 Contributed Capital

In 2012 a member of the Company converted amounts owed to them by the


Company of approximately $2667548 into additional Class A contributions of
capital. In addition the member contributed additional capital of $2556694.

The Class B membership interest is entitled to a 6% yield to which priority rights

are granted and has a liquidation preference of the unpaid investment amount and

any dividends in arrears. At December 31 2012 the Class B membership interest

had approximately $900000 of preferred payments in arrears.

CONFIDENTIAL MAD001278
MADISON AVENUE DIAMONDS LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 2012

Note 6 Intangible Asset

The intangible asset at December 31 2012 consisted of a royalty and trademark

agreement totaling $125000 which is net of accumulated amortization of

$375000. Phis asset is


being amortized over its estimated useful life of ten years.

Estimated aggregate amortization expense for each of the next three fiscal years is

$50000 for 2013 and 2014 and $25000 in 2015.

Note 7 Commitments

Leases

The Company is
obligated under non-cancelable operating leases for its storefront

and office space through November 2016. See Note 10 regarding assignment of

store front lease.

The approximate minimum rental payments are as follows

Year ending December 31 Amount

2013 $500662

2014 515683

2015 531145

2016 360163

Total $1907653

Note 8 Risk Concentrations

Customers

For the ended December 31 2012 no one customer accounted for more than
year

8% of the Companys sales.

Sulliers
For the year ended December 31 2012 one vendor accounted for approximately

75% of the Companys purchases. This vendor accounted for approximately 15%
of accounts payable at December 31 2012.

CONFIDENTIAL MAD001279
MADISON AVENUE DIAMONDS LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 2012

Note 9 Litigation

On June 28 2012 the Company entered into a settlement agreement with one of

its
major suppliers. The Company initially agreed to settle its
outstanding

accounts payable balance of approximately $3200000 due to the vendor for

$3000000. The settlement would be paid in four quarterly payments of $625000

November 2013 with the remaining $500000 to be paid in ten equal


through

monthly installments of $50000 each from January to November 2014. The

Company made its initial payment of $625000.

On December 19 2012 amended on December 21 2012 the Company filed a

the vendor. The complaint asserts claims that the vendor was in
complaint against

material breach of its obligations under the settlement agreement and as a result of

this breach the Company is relieved of its performance obligations. The vendor

filed a complaint alleging they complied with the settlement obligations and are
entitled to the amounts due in the agreement. The Company intends to pursue its

actions against the vendor and defend the complaint filed against it. The amount

due to the vendor pursuant to the settlement agreement of $2375000 has been

included in accounts payable as of December 31 2012.

Note 10 Subsequent Events

In February 2013 the Company separated its retail and wholesale operations. A
entity was formed for the retail operations. The operating lease for the
separate

storefront location was assigned to the new entity and notification was made to the

landlord. The collateral for the Letter of Credit for the benefit of the landlord of

the storefront mentioned in Note 3 has been transferred to an account in the name

of the new entity. The obligation under this lease is included in minimum future
rental in Note 7. The 2013 financial statements will include the
payments
combined operations of the Company and this new entity.

Note 11 Financial Condition

The Company has experienced a history of losses. As described in Note 5 these

losses have been funded to date through capital contributions from its members.

The future of the Company is predicated on managements ongoing plan to

increase retail and wholesale sales while containing operating expenses.

10

CONFIDENTIAL MAD001280