Attached files
file | filename |
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8-K - Luvu Brands, Inc. | v163418_8k.htm |
EX-2.1 - Luvu Brands, Inc. | v163418_ex2-1.htm |
EX-3.4 - Luvu Brands, Inc. | v163418_ex3-4.htm |
EX-3.3 - Luvu Brands, Inc. | v163418_ex3-3.htm |
EX-99.4 - Luvu Brands, Inc. | v163418_ex99-4.htm |
EX-99.2 - Luvu Brands, Inc. | v163418_ex99-2.htm |
EX-16.1 - Luvu Brands, Inc. | v163418_ex16-1.htm |
EX-99.3 - Luvu Brands, Inc. | v163418_ex99-3.htm |
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
Consolidated
Financial Statements:
|
|
Report
of Independent Registered Public Accounting Firm
|
2
|
|
|
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
3
|
Consolidated
Statements of Operations for each of the two years in the period ended
June 30, 2009
|
4
|
Consolidated
Statements of Stockholders' Equity (Deficit) for each of the two years in
the period ended June 30,2009
|
5
|
Consolidated
Statements of Cash Flows for each of the two years in the period ended
June 30, 2009
|
6
|
Notes
to Consolidated Financial Statements
|
7
|
1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Liberator, Inc.
We have
audited the accompanying consolidated balance sheets of Liberator, Inc. (f/k/a
Remark Enterprises, Inc.) as of June 30, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity
(deficit), and cash flows for each of the years in the two year period ended
June 30, 2009. Liberator, Inc.’s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audit 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 audit provide a reasonable
basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Liberator, Inc. as of
June 30, 2009 and 2008, and the results of its consolidated operations and
its consolidated cash flows for each of the years in the two year period ended
June 30, 2009, in conformity with accounting principles generally accepted in
the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B to the
financial statements, conditions exist which raise substantial doubt about the
Company’s ability to continue as a going concern unless it is able to generate
sufficient cash flows to meet its financing requirements and attaint profitable
operations. Management’s plans in regard to these matters are also described in
Note B. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
//Gruber
& Company, LLC
Lake
Saint Louis, Missouri
October
8, 2009
2
PART
1. FINANCIAL INFORMATION
ITEM
1. Financial Statements
LIBERATOR,
INC.
(f/k/a
Remark Enterprises, Inc.)
CONSOLIDATED BALANCE
SHEETS
June 30,
2009
|
June 30,
2008
|
|||||||
Assets:
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,815,633 | $ | 89,519 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $5,740 in 2009 and
2008
|
346,430 | 329,720 | ||||||
Inventories
|
700,403 | 1,252,803 | ||||||
Prepaid
expenses
|
95,891 | 112,998 | ||||||
Total
current assets
|
2,958,357 | 1,785,040 | ||||||
Property
and equipment, net of accumulated depreciation of $1,515,194 in
2009 and $1,244,976 in 2008
|
1,135,517 | 1,053,343 | ||||||
Total
assets
|
$ | 4,093,874 | $ | 2,838,383 | ||||
Liabilities
and stockholders’ equity:
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 2,247,845 | $ | 1,614,171 | ||||
Accrued
compensation
|
154,994 | 138,078 | ||||||
Accrued
expenses and interest
|
145,793 | 204,966 | ||||||
Revolving
line of credit
|
171,433 | 278,140 | ||||||
Short-term
note payable
|
– | 100,000 | ||||||
Current
portion of long-term debt
|
145,481 | 139,159 | ||||||
Credit
card advance
|
198,935 | – | ||||||
Total
current liabilities
|
3,064,481 | 2,474,514 | ||||||
Long-term
liabilities:
|
||||||||
Note
payable – equipment
|
72,812 | 128,787 | ||||||
Leases
payable
|
225,032 | 141,129 | ||||||
Notes
payable – related party
|
125,948 | 705,000 | ||||||
Convertible
note payable – shareholder (net of $89,250 in unamortized
discount)
|
285,750 | – | ||||||
Unsecured
lines of credit
|
124,989 | 139,149 | ||||||
Deferred
rent payable
|
356,308 | 337,155 | ||||||
Less:
current portion of long-term debt
|
(145,481 | ) | (139,159 | ) | ||||
Total
long-term liabilities
|
1,045,358 | 1,312,061 | ||||||
Total
Liabilities
|
4,109,839 | 3,786,575 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Series
A Convertible Preferred stock, $0.0001 par value, 10,000,000 shares
authorized, 4,300,000 shares issued and outstanding in 2009, zero shares
outstanding in 2008, liquidation preference of $1,000,000
|
430 | – | ||||||
Common
stock, $0.0001 par value, 250,000,000 shares authorized, 60,932,981 shares
issued and outstanding in 2009; 45,000,001 shares in 2008
|
6,093 | 4,500 | ||||||
Additional
paid-in capital
|
5,286,970 | 601,784 | ||||||
Retained
deficit
|
(5,309,458 | ) | (1,554,476 | ) | ||||
Total
stockholders’ deficit
|
(15,965 | ) | (948,192 | ) | ||||
Total
liabilities and stockholders’ equity
|
$ | 4,093,874 | $ | 2,838,383 |
The
accompanying notes are an integral part of these statements.
3
LIBERATOR,
INC.
(f/k/a
Remark Enterprises, Inc.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended June 30, 2009 and 2008
2009
|
2008
|
|||||||
Net
Sales
|
$ | 10,260,552 | $ | 11,750,832 | ||||
Cost
of goods sold
|
7,144,108 | 7,516,733 | ||||||
Gross
profit
|
3,116,444 | 4,234,099 | ||||||
Operating
expenses
|
||||||||
Advertising
and Promotion
|
864,690 | 1,054,959 | ||||||
Other
Selling and Marketing
|
1,201,054 | 1,019,689 | ||||||
General
and Administrative
|
1,781,352 | 1,776,628 | ||||||
Depreciation
|
270,217 | 309,198 | ||||||
Total
operating expenses
|
4,117,313 | 4,160,474 | ||||||
Income
(Loss) from Operations
|
(1,000,869 | ) | 73,625 | |||||
Other
Income (Expense):
|
||||||||
Interest
income
|
1,980 | 780 | ||||||
Interest
(expense) and financing costs
|
(482,598 | ) | (227,518 | ) | ||||
Expenses
related to reverse acquisition
|
(2,273,495 | ) | – | |||||
Total
Other Income (Expense)
|
(2,754,113 | ) | (226,738 | ) | ||||
Net
Loss Before Income taxes
|
(3,754,982 | ) | (153,113 | ) | ||||
Provision
for Income Taxes
|
– | – | ||||||
Net
Loss
|
(3,754,982 | ) | (153,113 | ) | ||||
Loss
per share
|
||||||||
Basic
|
$ | (0.08 | ) | $ | (0.00 | ) | ||
Diluted
|
$ | (0.08 | ) | $ | (0.00 | ) | ||
Weighted-average
number of common shares outstanding
|
||||||||
Basic
|
48,341,549 | 45,000,001 | ||||||
Diluted
|
48,341,549 | 45,000,001 |
The
accompanying notes are an integral part of these consolidated
statements.
4
Liberator,
Inc.
(f/k/a/
Remark Enterprises, Inc.)
Statement of Changes in
Stockholders’ Equity (Deficit)
From July 1, 2007 to June
30, 2009
Total
|
||||||||||||||||||||||||||
Series
A Preferred
|
Additional
|
Stockholders'
|
||||||||||||||||||||||||
Stock
|
Common
Stock
|
Paid-in
|
Accumulated
|
Equity
|
||||||||||||||||||||||
Shares
|
$
|
Shares
|
$
|
Capital
|
Deficit
|
(Deficit)
|
||||||||||||||||||||
Balance,
July 1, 2007
|
-
|
-
|
45,000,000
|
$
|
4,500
|
$
|
595,284
|
$
|
(1,401,363
|
)
|
$
|
(801,579
|
)
|
|||||||||||||
Stock
issued for cash and contribution
|
-
|
-
|
1
|
6,500
|
-
|
6,500
|
||||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(153,113
|
)
|
(153,113
|
)
|
|||||||||||||||||
Ending
balance, June
30, 2008
|
45,000,001
|
4,500
|
601,784
|
(1,554,476
|
)
|
(948,192
|
)
|
|||||||||||||||||||
Stock
issued for cash
|
-
|
-
|
5,000,000
|
500
|
2,500
|
-
|
3,000
|
|||||||||||||||||||
Related
party debt and interest exchanged for convertible preferred
stock
|
4,300,000
|
$
|
430
|
-
|
-
|
831,690
|
-
|
832,120
|
||||||||||||||||||
Common
stock issued in private placement, net of $303,535 in issuance costs, fees
and expenses
|
-
|
-
|
8,000,000
|
800
|
1,695,665
|
-
|
1,696,465
|
|||||||||||||||||||
Shares
issued for services in connection with the private
placement
|
-
|
-
|
2,932,980
|
293
|
(293
|
)
|
-
|
-
|
||||||||||||||||||
Fair
market value of shares issued for services in connection with the private
placement
|
733,245
|
733,245
|
||||||||||||||||||||||||
Fair
market value of shares issued in reverse merger
|
-
|
-
|
-
|
-
|
1,250,000
|
-
|
1,250,000
|
|||||||||||||||||||
Fair
market value of warrant issued to Hope Capital
|
-
|
-
|
-
|
-
|
4,500
|
-
|
4,500
|
|||||||||||||||||||
Additional
interest expense recorded on value of Series A Convertible Preferred
Shares
|
167,879
|
167,879
|
||||||||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,754,982
|
)
|
(3,754,982
|
)
|
|||||||||||||||||
Ending
balance, June
30, 2009
|
4,300,000
|
$
|
430
|
60,932,981
|
$
|
6,093
|
$
|
5,286,970
|
$
|
(5,309,458
|
)
|
$
|
(15,965
|
)
|
The
accompanying notes are an integral part of these consolidated
statements.
5
LIBERATOR,
INC.
(f/k/a
Remark Enterprises, Inc.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended June 30, 2009 and 2008
2009
|
2008
|
|||||||
Operations
|
||||||||
Net
loss
|
$ | (3,754,982 | ) | $ | (153,113 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
|
270,217 | 309,198 | ||||||
Additional
interest expense on issuance of preferred shares
|
167,880 | |||||||
Expenses
related to reverse acquisition
|
2,273,495 | |||||||
Net
(increase) decrease in assets:
|
||||||||
Accounts
Receivable
|
(16,710 | ) | (110,227 | ) | ||||
Inventory
|
552,400 | (62,535 | ) | |||||
Prepaid
expenses
|
17,107 | (14,851 | ) | |||||
Net
increase (decrease) in liabilities:
|
||||||||
Accounts
payable
|
633,674 | (9,058 | ) | |||||
Accrued
expenses
|
72,947 | 72,312 | ||||||
Accrued
compensation
|
16,916 | 32,711 | ||||||
Deferred
rent payable
|
19,153 | 88,933 | ||||||
Net
cash provided by operating activities
|
252,097 | 153,370 | ||||||
Investing
|
||||||||
Investments
in equipment
|
(352,392 | ) | (85,342 | ) | ||||
Net
cash used in investing
|
(352,392 | ) | (85,342 | ) | ||||
Financing
|
||||||||
Net
proceeds from sale of common stock
|
1,699,465 | 6,500 | ||||||
Borrowings
under revolving line of credit
|
2,710,368 | 734,968 | ||||||
Repayment
of revolving line of credit
|
(2,817,075 | ) | (965,179 | ) | ||||
Loans
from related party
|
120,948 | – | ||||||
Proceeds
from credit card advance
|
550,000 | – | ||||||
Repayment
of credit card advance
|
(351,065 | ) | – | |||||
Proceeds
from short term note and unsecured notes
|
100,000 | 247,500 | ||||||
Repayment
of short term note and unsecured notes
|
(214,160 | ) | – | |||||
Principle
payments on note payable and capital leases
|
(83,260 | ) | (175,545 | ) | ||||
Additions
to capital leases
|
111,188 | 37,556 | ||||||
Net
cash provided by (used in) financing
|
1,826,409 | (114,200 | ) | |||||
Net
change in cash and cash equivalents
|
1,726,114 | (46,172 | ) | |||||
Cash
and cash equivalents, beginning of period
|
89,519 | 135,691 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,815,633 | $ | 89,519 | ||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
Non
cash items:
|
||||||||
Additional
equipment acquired with direct financing
|
– | $ | 218,500 | |||||
Common
stock issued in acquisition of subsidiary
|
$ | 1,987,745 | – | |||||
Additional
interest expense on issuance of preferred shares
|
$ | 167,880 | – | |||||
Note
payable issued in acquisition of subsidiary
|
$ | 285,750 | – | |||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 245,256 | $ | 209,528 | ||||
Income
Taxes
|
– | – |
The
accompanying notes are an integral part of these statements.
6
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A—NATURE OF BUSINESS
Remark
Enterprises Inc. (“Remark”) was incorporated in Nevada on November 1, 2007. On
April 3, 2009, we entered into a Stock Purchase and Recapitalization Agreement
(the “Merger Agreement”) with One Up Innovations, Inc., a privately held Georgia
corporation (“Liberator”), and One Up Acquisition, Inc. (“Subsidiary”), our
newly formed wholly-owned Georgia subsidiary. On June 26, 2009, the
Company consummated the transactions contemplated by the Merger Agreement, as
amended. Pursuant to the Merger Agreement, the Subsidiary and
Liberator merged and all of the issued and outstanding common stock of Liberator
was exchanged for an aggregate of 45,000,000 shares of the Company’s common
stock (90% of the total issued and outstanding shares of common stock of the
Company). In addition, all of the issued and outstanding shares of
Series A convertible preferred stock of Liberator was exchanged for 4,300,000
shares of Series A convertible preferred stock of the
Company. Liberator is the surviving corporation and is a wholly owned
by the Company; all business operations of the Company are now the business
operations of Liberator. Effective with the consummation of the merger, we
changed our name to Liberator, Inc. Prior to the Merger, the
Company’s fiscal year end was December 31, and the fiscal year end of Liberator
was June 30. On August 10, 2009, the Board of Directors of the
Company acted by unanimous written consent to change the Company’s fiscal year
end from December 31 to June 30.
Prior to
the merger, the Company was a non-operating “shell” corporation. For financial
statement purposes, the merger has been reflected in the financial statements as
though it occurred on June 30, 2007. The historical statements prior to the date
of merger are those of Remark. Since the merger is a recapitalization and not a
business combination, pro-forma information is not presented.
The
Company is a designer and manufacturer of various specialty furnishings for the
sexual wellness market. The Company's sales and manufacturing
operation are located in the same facility in Doraville, Georgia (a suburb of
Atlanta.) Sales are generated through the internet and print ads. 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—GOING CONCERN
The
accompanying financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. The Company incurred a net loss of $3,754,982 and
$153,113 for the years ended June 30, 2009 and 2008, respectively, and as of
June 30, 2009 the Company has an accumulated deficit of $15,965 and a working
capital deficit of $106,124.
In view
of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future
operations. Management believes that actions presently being taken to
revise the Company's operating and financial requirements provide the
opportunity for the Company to continue as a going concern.
These
actions include initiatives to increase gross profit margins through improved
production controls and reporting. To that end, the Company recently implemented
a new Enterprise Resource Planning (ERP) software system. We also plan to reduce
discretionary expense levels to be better in line with current revenue
levels. Furthermore, our plan of operation in the next twelve months
continues a strategy for growth within our existing lines of business with an
on-going focus on growing domestic sales. We estimate that the operational and
strategic development plans we have identified will require approximately
$2,300,000 of funding. We expect to invest approximately $500,000 for additional
inventory of sexual wellness products and $1,800,000 on sales and marketing
programs, primarily sexual wellness advertising in magazines and on cable
television. We will also be exploring the opportunity to acquire other
compatible businesses.
We plan
to finance the required $2,300,000 with a combination of cash flow from
operations as well as cash on hand and cash raised through equity and debt
financings.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. However, management cannot provide any assurances that
the Company will be successful in accomplishing these plans. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
7
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
C—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
consolidated financial statements include the accounts and operations of
Liberator, Inc. and our wholly-owned domestic and international operating
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation. 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.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects management's best estimate of probable
credit losses inherent in the accounts receivable balance. The
Company determines the allowance based on historical experience, specifically
identified nonpaying accounts and other currently available
evidence. The Company reviews its allowance for doubtful accounts
monthly with a focus on significant individual past due balances over 90
days. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance sheet credit
exposure related to its customers. At June 30, 2009, accounts
receivable totaled $346,430 net of $5,740 in the allowance for doubtful
accounts.
Inventories
Inventories are stated at the lower of
cost or market. Cost is determined using the first-in, first-out (FIFO) method.
Market is defined as sales price less cost to dispose and a normal profit
margin. Inventory costs include materials, labor, depreciation and
overhead.
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 June 30, 2009,
substantially all of our cash and cash equivalents were managed by a number of
financial institutions. As of June 30, 2009 our cash and cash
equivalents and restricted cash with certain of these financial institutions
exceed FDIC insured limits. Accounts receivable are typically
unsecured and are derived from revenue earned from customers primarily located
in the United States and Europe.
8
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Fair
Value of Financial Instruments
At June 30, 2009, our financial
instruments included cash and cash equivalents, accounts receivable, 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.
Advertising
Costs
Advertising costs are expensed in the
period when the advertisements are first aired or distributed to the public.
Prepaid advertising (included in prepaid expenses) was $63,020 at June 30, 2008
and $57,625 at June 30, 2009. Advertising expense for the years ended June 30,
2008 and 2009 was $1,054,959 and $864,690, respectively.
Research
and Development
Research and development expenses for
new products are expensed as they are incurred. Expenses for new
product development totaled $12,119 for the year ended June 30, 2008 and
$173,583 for the year ended June 30, 2009.
Shipping and
Handling
Net sales for the year ended June 30,
2009 and 2008 includes amounts charged to customers of $1,071,978 and
$1,465,262, 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
ten year operating lease which was signed in September 2005 and expires December
31, 2015. The lease is on an escalating schedule with the final year
on the lease at $34,358 per month. The liability for this difference
in the monthly payments is accounted for as a deferred rent liability and the
balance in this account at June 30, 2009 is $356,308. The Rent
expense under this lease for the years ended June 30, 2009 and 2008 was
$323,723.
Segment
Information
During
fiscal 2009 and 2008, the Company only operated in one segment; therefore,
segment information has not been presented.
Recent
Accounting Pronouncements
(Recently
adopted)
In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). The standard defines
fair value, outlines a framework for measuring fair value, and details the
required disclosures about fair value measurements. The standard was effective
for fiscal years beginning after November 15, 2007 (our fiscal 2009). In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13 (“FSP 157-1”) and 157-2,
Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP157-1 amends
SFAS No. 157 to exclude FASB Statement No. 13, Accounting for Leases, and other
accounting pronouncements that address fair value measurements of leases from
the provisions of SFAS No. 157. FSP 157-2 delays the effective date of SFAS No.
157 for most nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008 (our fiscal 2010). As a result, the
application of the definition of fair value and related disclosures of SFAS
No. 157 (as impacted by these FSPs) was effective for our Company beginning
with the first quarter of fiscal 2009. This adoption did not have a
material impact on our consolidated results of operations or financial condition
for the first quarter of our fiscal 2009. We have not completed our
evaluation of the potential impact, if any, from the remaining aspects of SFAS
No. 157 for which the effective date was deferred under FSP 157-2, on our
consolidated financial position, results of operations and cash flows. On
October 10, 2008, the FASB issued FSP 157-3, Fair Value Measurements (“FSP
157-3”), which clarifies the application of SFAS No. 157 in an inactive
market and provides an example to demonstrate how the fair value of a financial
asset is determined when the market for that financial asset is inactive. FSP
157-3 was effective upon issuance, including prior periods for which financial
statements had not been issued. The adoption of this standard as of
October 25, 2008 did not have a material impact on our results of
operations, cash flows or financial positions.
9
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recent
Accounting Pronouncements (continued)
(Recently
adopted)
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS
No. 159 permits an entity to choose, at specified election dates, to
measure eligible financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. An entity reports
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. Upfront costs and
fees related to items for which the fair value option is elected are recognized
in earnings as incurred and not deferred. SFAS No. 159 also
established presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. As a result, the application of
the fair value option for financial assets and financial liabilities of SFAS No.
159 was effective for our Company beginning with the first quarter of fiscal
2009. At the effective date, an entity could elect the fair value option
for eligible items that existed at that date and is required to report the
effect of the first remeasurement to fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. We chose not to elect
the fair value option for our financial assets and liabilities existing on July
30, 2008, and did not elect the fair value option for any financial assets and
liabilities transacted during the twelve months ended July 30,
2009.
In April
2009, the FASB issued FSP No. FAS 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 (“FSP
FAS 157-4”). This FSP clarifies the application of SFAS No. 157
when there is no active market or where the price inputs being used represent
distressed sales. Additional guidance is provided regarding estimating the
fair value of an asset or liability (financial and nonfinancial) when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. FSP FAS 157-4 is effective
for interim and annual periods ending after June 15, 2009. The
adoption of SFAS 157-4 did not impact our results of operations, cash flows or
financial positions.
In April
2009, the FASB issued FSP No. FAS 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP FAS 115-2”). This FSP provides additional
guidance to provide greater clarity about the credit and noncredit component of
an other-than-temporary impairment event and to more effectively communicate
when an other-than-temporary impairment event has occurred. This FSP
applies to debt securities. FSP FAS 115-2 will be effective for interim
and annual periods ending after June 15, 2009. The adoption of FSP
FAS 115-2 did not impact our results of operations, cash flows or financial
positions.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB
28-1”). This FSP amends FASB Statement No. 107, Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments in interim as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in all interim financial
statements. FSP FAS 107-1 and APB 28-1 is effective for interim and
annual periods ending after June 15, 2009. The adoption of FSP
FAS 107-1 and APB 28-1 did not impact our results of operations, cash
flows or financial positions.
In
May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No.
165”). SFAS No. 165 was issued in order to establish principles and
requirements for reviewing and reporting subsequent events and requires
disclosure of the date through which subsequent events are evaluated and whether
the date corresponds with the time at which the financial statements were
available for issue (as defined) or were issued. SFAS No. 165 is effective
for interim reporting periods ending after June 15, 2009. The adoption of
SFAS No. 165 did not impact our results of operations, cash flows or
financial positions. We have evaluated events and transactions that occurred
after July 30, 2009 through October 8, 2009, the date we issued these financial
statements. See further discussion in Note O.
10
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations
(“SFAS No. 141R”), which replaces SFAS No. 141, Business Combinations.
SFAS No. 141R was issued to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its
effects. In April 2009, the FASB issued FSP No. 141R-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies (“FSP 141 R-1”). FSP 141 R-1 was issued to deal with the initial
recognition and measurement of an asset acquired or a liability assumed in a
business combination that arises from a contingency provided the asset or
liability’s fair value on the date of acquisition can be determined. This
Statement is effective as of the beginning of an entity’s fiscal year that
begins after December 15, 2008 (our fiscal 2010) and will be applied to the
pending merger with WES Consulting, Inc.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51 (“SFAS No. 160”), which establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
No.160 is effective as of the beginning of an entity’s fiscal year that begins
after December 15, 2008 (our fiscal 2010). The adoption of SFAS No. 160 will not
have a material impact on our consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No.
161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS
No. 133 with the intent to provide users of financial statements with an
enhanced understanding of: (i) how and why an entity uses derivative
instruments; (ii) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations and (iii) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 (our fiscal 2010), with early application
encouraged. The adoption of SFAS No. 161 will not have a material impact
on our consolidated financial statements.
In April
2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible
Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS No. 142”). The objective of FSP 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141R, and other generally accepted accounting
principles in the United States (“GAAP”). FSP 142-3 applies to all
intangible assets, whether acquired in a business combination or otherwise, and
shall be effective for financial statements issued for fiscal years beginning
after December 15, 2008 (our fiscal 2010), and interim periods within those
fiscal years and should be applied prospectively to intangible assets acquired
after the effective date. Early adoption is prohibited. We are in the process of
evaluating FSP 142-3 and do not expect it to have a significant impact on our
consolidated financial statements.
In
June 2009, the FASB issued SFAS No. 166, Accounting for
Transfers of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS
No. 166”) .
SFAS No. 166 improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets, the
effects of a transfer on its financial position, financial performance, and cash
flows, and a transferor’s continuing involvement, if any, in transferred
financial assets. Additionally, SFAS No. 166 removes the concept of a
qualifying special-purpose entity from Statement 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”, and
removes the exception from applying FASB Interpretation No. 46 (revised
December 2003), “Consolidation of
Variable Interest Entities”, to qualifying special-purpose entities.
SFAS No. 166 is effective for financial statements issued for interim and
annual periods beginning after November 15, 2009 (our fiscal
2011). We have not completed our evaluation of the potential impact, if
any, of the adoption of SFAS No. 166 on our consolidated financial
statements.
11
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recently
Issued Accounting Pronouncements (continued)
In
June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (“SFAS
No. 167”). This
statement amends Interpretation 46(R) to require an enterprise to perform
an analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity.
SFAS No. 167 is effective for financial statements issued for interim and
annual periods beginning after November 15, 2009 (our fiscal 2011).
Earlier application is prohibited. We have not completed our evaluation of
the potential impact, if any, of the adoption of SFAS No. 167 on our
consolidated financial statements.
In
June 2009, the 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 (“SFAS
No. 168”). SFAS
No. 168 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP.
The FASB
Accounting Standards Codification (the “Codification”) will become the
source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. With
limited exceptions, non-SEC accounting literature not included in the
Codification will become nonauthoritative. SFAS No. 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of SFAS No. 168 will be effective in
the first quarter of fiscal 2010.
NOTE
D—IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of
its equipment or leasehold improvements in accordance with SFAS
No. 144. Pursuant to SFAS No. 144, 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 June 30, 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 consist of the following components at June 30, 2009 and
2008:
2009
|
2008
|
|||||||
Raw
materials
|
$ | 366,355 | $ | 561,124 | ||||
Work
in Process
|
176,637 | 152,363 | ||||||
Finished
Goods
|
157,411 | 539,316 | ||||||
$ | 700,403 | $ | 1,252,803 |
12
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
F—PROPERTY AND EQUIPMENT
Property
and equipment at June 30, 2009 and 2008 consisted of the following:
2009
|
2008
|
Estimated
Useful Life
|
|||||||
Factory
Equipment
|
$ | 1,506,147 | $ | 1,451,158 |
7-10 years
|
||||
Computer
Equipment and Software
|
665,135 | 389,688 |
5-7 years
|
||||||
Office
Equipment and Furniture
|
166,996 | 164,746 |
5-7 years
|
||||||
Leasehold
Improvements
|
312,433 | 292,727 |
15
years
|
||||||
Subtotal
|
2,650,711 | 2,298,319 | |||||||
Accumulated
Depreciation & Amortization
|
(1,515,194 | ) | (1,244,976 | ) | |||||
$ | 1,135,517 | $ | 1,053,343 |
Depreciation
expense was $270,217 and $309,198 for the years ended June 30, 2009 and 2008,
respectively.
NOTE
G—NOTE PAYABLE - EQUIPMENT
Note
payable – equipment, at June 30, 2009 and 2008 consisted of the
following:
June 30,
|
||||||||
2009
|
2008
|
|||||||
Note
payable to Fidelity Bank in monthly
installments of $5,364 including
|
|
|
||||||
Interest
at 8%, maturing October 25, 2010, secured by equipment
|
$ | 72,812 | $ | 128,787 | ||||
Less:
Current Portion
|
(61,244 | ) | (56,550 | ) | ||||
Long
term debt
|
$ | 11,568 | $ | 72,237 |
The schedule of minimum maturities of
the note payable for fiscal years subsequent to June 30, 2009 is as
follows:
Year
ending June 30,
|
|
|||
2010
|
$ | 61,244 | ||
2011
|
11,568 | |||
Total
note payments
|
$ | 72,812 |
13
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H—REVOLVING
LINE OF CREDIT
On
March 19, 2008, the company entered into a loan agreement for a revolving line
of credit with a commercial finance company which provides credit to 85% of
accounts receivable aged less than 90 days up to $500,000 and eligible inventory
(as defined in the agreement) up to a sub-limit of $220,000, such inventory loan
not to exceed 30% of the accounts receivable loan. Borrowings under the
agreement bear interest at the Prime rate plus two percent (5.25 percent at June
30, 2009 and 7 percent at June 30, 2008), payable monthly. At June
30, 2008 and 2009, the balance owed under the revolving line of credit was
$278,140 and $171,433, respectively.
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—CREDIT CARD ADVANCE
On July
2, 2008 the Company received $350,000 from a finance company under the
terms of a credit facility that is secured by the Company's future credit
card receivables. Terms of the credit facility require repayment on
each business day of principal and interest at a daily rate of $1,507 over a
twelve month period. The credit facility has a financing fee of 12% (equal to
$42,000) on the principal amount, which equates to an effective annual
interest rate of 21.1%. The credit facility is personally guaranteed
by the Company's CEO and majority shareholder, Louis
Friedman. On June 3, 2009, the Company borrowed an additional
$200,000 under this credit facility. Terms of the current loan require repayment
on each business day of principal and interest at a daily rate of $1,723.08 over
a six month period. The current loan has a financing fee of 12% (equal to
$24,000) on the principal amount, which equates to an effective annual interest
rate of 43.2%. On June 30, 2009, the balance due on the credit card
advance was $198,935.
NOTE
J – UNSECURED LINES OF CREDIT
The
Company has drawn cash advances on three unsecured lines of credit that are
personally guaranteed by Louis S. Friedman. The terms of these unsecured lines
of credit call for monthly payments of principal and interest, with interest
rates ranging from 12% to 18%. The aggregate amount owed on the three unsecured
lines of credit was $139,149 at June 30, 2008 and $124,989 at June 30,
2009.
NOTE
K—COMMITMENTS AND CONTINGENCIES
Operating
Leases
The Company leases its facility under a
ten year operating lease which was signed in September 2005 and expires December
31, 2015. The lease is on an escalating schedule with the final year on the
lease at $34,358 per month. The liability for this difference in the monthly
payments is accounted for as a deferred rent liability and the balance in this
account at June 30, 2008 and 2009 is $356,308 and $337,155. The rent expense
under this lease for the years ended June 30, 2009 and 2008 was
$323,723.
The lease for the facility requires the
Company to provide a standby letter of credit payable to the lessor in the
amount of $225,000 until December 31, 2010. The majority shareholder agreed to
provide this standby letter of credit on the Company's behalf. Upon
expiration of the initial letter of credit, a letter of credit in the amount of
$25,000 in lieu of a security deposit is required to be provided.
The Company leases certain material
handling equipment under an operating lease. The monthly lease amount
is $4,082 per month and expires September 2012.
The Company also leases certain
warehouse equipment under an operating lease. The monthly lease is
$508 per month and expires February 2011.
The Company also leases certain postage
equipment under an operating lease. The monthly lease is $144 per
month and expires January 2013.
14
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Operating
Leases (continued)
Future
minimum lease payments under non-cancelable operating leases at June 30,
2009 are as follows:
Year
ending June 30,
|
|
|||
2010
|
$ | 405,265 | ||
2011
|
412,858 | |||
2012
|
413,940 | |||
2013
|
392,028 | |||
2014
|
391,685 | |||
Thereafter
through 2016
|
1,002,816 | |||
Total
minimum lease payments
|
$ | 3,018,592 |
Capital
Leases
The Company has acquired equipment
under the provisions of long-term leases. For financial reporting purposes,
minimum lease payments relating to the equipment have been capitalized. The
leased properties under these capital leases have a total cost of $349,205.
These assets are included in the fixed assets listed in Note 1 and include
computers, software, furniture, and equipment. The capital leases have stated or
imputed interest rates ranging from 7% to 21%.
The
following is an analysis of the minimum future lease payments subsequent to the
year ended June 30, 2009:
Year
ending June 30
|
|
|||
2010
|
$ | 84,237 | ||
2011
|
76,956 | |||
2012
|
34,074 | |||
2013
|
22,930 | |||
2014
|
6,835 | |||
Present
value of capital lease obligations
|
$ | 225,032 | ||
Imputed
interest
|
46,397 | |||
Future
minimum lease payments
|
$ | 271,429 |
NOTE
L—RELATED PARTY TRANSACTIONS
On June 30, 2008, the Company had a
subordinated note payable to the majority shareholder and CEO in the amount of
$310,000 and the majority shareholder's wife in the amount of $395,000. During
fiscal 2009, the majority shareholder loaned the Company an additional $91,000
and a director loaned the Company $29,948. On June 26, 2009, in
connection with the merger into Remark Enterprises, Inc., the majority
shareholder and his wife agreed to convert $700,000 of principal balance and
$132,120 of accrued but unpaid interest to Series A Convertible Preferred
Stock. Interest during fiscal 2009 was accrued by the Company at the
prevailing prime rate (which is currently at 3.25%) and totaled $34,647. The
interest accrued on these notes for the year ended June 30, 2008 was $47,576.
The accrued interest balance on these notes, as of June 30, 2009, is $8,210. The
notes are subordinate to all other credit facilities currently in place.
The Company issued a 3% convertible
note payable to Hope Capital with a face amount of $375,000. Hope Capital is a
shareholder of the Company and was the majority shareholder of the Company
before the reverse merger with OneUp Innovations. The note is
convertible, at the holders option, into common stock at $.25 per share and may
be converted at any time prior to the maturity date of August 15, 2012. Upon
maturity, the Company has the option to either repay the note plus accrued
interest in cash or issue the equivalent number of shares of common stock at
$.25 per share. The 3% convertible note payable is carried net of the fair
market value of the embedded conversion feature of $89,250. This
amount will be amortized over the life of the note as additional
interest.
15
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
M—STOCK OPTIONS, WARRANTS AND COMMON STOCK ISSUANCES
Stock
Options
On October 1, 2007, the Company granted
a five-year option to purchase 438,456 shares at an exercise price of $.228 per
share to its non-employee Chief Financial Officer. The option became 100% vested
on October 1, 2008.
Stock-based compensation expense
related to stock options granted to non-employees is recognized as the stock
options are earned in accordance with SFAS 123 and Emerging Issues Task
Force No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. We believe that the fair value of the stock
options is more reliably measurable than the fair value of the services
received. The estimated fair value of the stock options granted is calculated
using the Black-Scholes option pricing model, as prescribed by SFAS 123,
using a fair value of common stock of $.067 per share
We
recognized $0 and $866 during the years ended June 30, 2009 and 2008,
respectively, of stock-based compensation expense for stock options granted to a
non-employee. These options were valued
using a volatility rate of 25% and a risk-free interest rate of 4.5% and an
expected life of 5 years. There were no grants made during the fiscal
year ended June 30, 2009.
Changes
for the years ending June 30, 2009 and 2008, with respect to options
outstanding, is detailed in the following table:
For the Year Ended
June 30, 2009
|
For the Year Ended
June 30, 2008
|
|||||||||||||||
Shares
|
Weighted
Average
Exercise Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
Outstanding
at beginning of period
|
438,456 | $ | 0.228 | — | $ | — | ||||||||||
Issued
|
— | — | 438,456 | .228 | ||||||||||||
Exercised
|
— | — | — | — | ||||||||||||
Expired
|
— | — | — | — | ||||||||||||
Outstanding
at end of period
|
438,456 | $ | 0.228 | 438,456 | $ | 0.228 | ||||||||||
Exercisable
at end of period
|
438,456 | $ | 0.228 | 0 | $ | 0 | ||||||||||
Weighted-average
fair value of options granted during the period
|
$ | $ | .002 |
Information
about stock options outstanding at June 30, 2009 is summarized as
follows:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||
Exercise Price
|
Shares
Outstanding
|
Weighted Average
Remaining
Contract Life
|
Weighted
Average
Exercise Price
|
Shares
Exercisable
|
Weighted
Average
Exercise Price
|
|||||||||||||
$ |
0.228
|
438,456 |
3.3
Years
|
$ | 0.228 | 438,456 | $ | 0.228 |
Warrants
The
Company issued 2,462,393 warrants during fiscal 2009 in conjunction with the
reverse merger with OneUp Innovations. All of these warrants are exercisable
immediately and expire five years from the date of issuance, June 26, 2014.
These warrants were valued using a volatility rate of 25% and a risk-free
interest rate of 4.5%.
A total
of 1,462,393 warrants were issued for services rendered by the placement agent
in the private placement that closed on June 26, 2009. These warrants have
exercise prices of $.50 per share (292,479 warrants), $.75 per share (292,479
warrants) and $1.00 per share (877,435 warrants.)
16
LIBERATOR, INC.
(f/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
(continued)
A total
of 1,000,000 warrants were issued to Hope Capital (the former majority
shareholder of the Company prior to the reverse merger) at an exercise price of
$.75.
A summary
of the status of warrants granted at June 30, 2009 and June 30, 2008 and changes
during the periods then ended is presented below:
|
For the Twelve Months
|
For the Twelve Months
|
||||||||||||||
|
Ended June 30, 2009
|
Ended June 30, 2008
|
||||||||||||||
|
Shares
|
Weighted
Average Exercise
Price
|
Shares
|
Weighted Average
Exercise Price
|
||||||||||||
Outstanding
at beginning of period
|
— | $ | — | — | $ | — | ||||||||||
Granted
|
2,462,393 | 0.809 | — | — | ||||||||||||
Exercised
|
— | — | — | — | ||||||||||||
Forfeited
|
— | — | — | — | ||||||||||||
Expired
|
— | — | — | — | ||||||||||||
Outstanding
at end of period
|
2,462,393 | $ | 0.809 | — | $ | — | ||||||||||
Weighted
average fair value of warrants granted during the period
|
— | $ | 0.0057 | — | $ | — |
A summary
of the warrants outstanding at June 30, 2009 is presented below:
Warrants Outstanding
|
Warrants Exercisable
|
||||||||||||||||||||
Exercise
Prices
|
Number
Outstanding
|
Weighted-Average
Remaining
Contractual Life
|
Weighted
Average
Exercise Price
|
Number
Exercisable
|
Weighted-
Average
Exercise Price
|
||||||||||||||||
$ |
0.50
|
292,479
|
5.00
|
$
|
0.50
|
292,479
|
$
|
0.50
|
|||||||||||||
$ |
0.75
|
1,292,479
|
5.00
|
$
|
0.75
|
1,292,479
|
$
|
0.75
|
|||||||||||||
$ |
1.00
|
877,435
|
5.00
|
$
|
1.00
|
877,435
|
$
|
1.00
|
Common
Stock Issued
On June
26, 2009, we issued 8,000,000 shares of our Common Stock to individuals and
entities pursuant to a private placement memorandum and subscription agreement
in the aggregate amount of $2,000,000. Such securities were not registered under
the Securities Act of 1933. The issuance of these shares was exempt from
registration, pursuant to Regulation D under the Securities Act of 1933 and
in part pursuant to Section 4(2) of the Securities Act of
1933. The net proceeds to the Company, after deducting placement
agent fees and expenses was $1,696,465.
Pursuant
to the engagement letter with New Castle Financial Services, on June 26, 2009,
we issued 2,732,980 shares of our Common Stock to New Castle Financial Services
with respect to services performed by New Castle Financial Services in
connection with the Offering. Such securities were not registered under the
Securities Act of 1933. The issuance of these shares was exempt from
registration, pursuant to Regulation D under the Securities Act of 1933 and
in part pursuant to Section 4(2) of the Securities Act of
1933. The fair market value of these shares totaled $683,245 and was
charged to expense during fiscal 2009.
In
addition, in connection with a consulting agreement, we issued 200,000 shares of
our Common Stock to Downshire Capital with respect to services performed by
Downshire Capital in connection with the Merger. Such securities were not
registered under the Securities Act of 1933. The issuance of these shares was
exempt from registration, pursuant to Regulation D under the Securities Act
of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933.
The fair market value of these shares totaled $50,000 and was charged to expense
during fiscal 2009.
In
connection with the reverse merger of Remark and Liberator, the shares issued to
former Remark shareholders were deemed to have a value equal to the value of the
shares issued pursuant to the private placement memorandum. As a result, the
value of the 5,000,001 shares issued to former Remark shareholders was equal to
$1,250,000 and was charged to expense during fiscal 2009.
17
LIBERATOR, INC.
(F/k/a
Remark Enterprises, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
N—INCOME TAXES
The Company provides for income taxes
under Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities and the tax rates in effect when these differences are expected
to reverse
SFAS No. 109 requires the reduction of
deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. At this time, Management believes that it is
more likely than not that the deferred tax assets will not be
utilized.
As of June 30, 2009
|
As of June 30, 2008
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carry-forwards
|
$ | 3,161,019 | $ | 1,850,412 | ||||
Gross
deferred tax assets
|
1,194,871 | 605,098 | ||||||
Valuation
allowance
|
(1,194,871 | ) | (605,098 | ) | ||||
Net
deferred tax assets
|
$ | -0- | $ | -0- |
The income tax provision differs from
the amount of income tax determined by applying the U.S. federal and state
income tax rates of 45% to pretax income (loss) from continuing operations for
the year ended June 30, 2008 due to the following:
Year
ended
|
Year
ended
|
|||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Book
loss from operations
|
$ | 589,773 | $ | 65,976 | ||||
Valuation
(allowance)
|
(589,773 | ) | (65,976 | ) | ||||
Net
tax benefit
|
$ | -0- | $ | -0- |
At June
30, 2009, the Company had net operating loss carry forwards of approximately
$3,161,019 that may be offset against future taxable income. The net operating
loss carry forwards expire in the year 2024 through 2028. A tax benefit of $0
was recognized in the year ended June 30, 2009, as management believes that it
is more likely than not that the deferred tax assets will not be
utilized.
Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carry forwards for Federal income tax reporting purposes are subject to
annual limitations. Should a change in ownership occur, net operating loss carry
forwards may be limited as to use in future years.
NOTE
O— SUBSEQUENT EVENTS
On
September 2, 2009 (“Closing Date”) the Company acquired the majority of the
issued and outstanding common stock of WES Consulting, Inc., a Florida
corporation (“WES”) in accordance with a common stock purchase agreement
(the “Stock Purchase Agreement”) by and among the Company and Belmont Partners,
LLC, a Virginia limited liability company (the “Seller”). On the
Closing Date, pursuant to the terms of the Stock Purchase Agreement, the Company
acquired 972,000 shares ( 81%) of the Company from the Seller for a
total of two hundred forty thousand five hundred dollars
($240,500). Funds for the purchase came from a convertible note in
the amount of $250,000, payable to Hope Capital Inc., a shareholder of the
Company. The note bears interest at 3% annually and is due September 2, 2012.
The note is convertible at any time prior to maturity, at the holders’ option,
into common stock at a conversion price of $.25 per share, subject to
adjustment. On the Closing Date, all of the officers and directors of
WES resigned and were succeeded by the directors and officers of the
Company.
18