Attached files
file | filename |
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EX-4.1 - LIBERATOR, INC. | v174981_ex4-1.htm |
EX-31.1 - LIBERATOR, INC. | v174981_ex31-1.htm |
EX-32.1 - LIBERATOR, INC. | v174981_ex32-1.htm |
EX-32.2 - LIBERATOR, INC. | v174981_ex32-2.htm |
EX-31.2 - LIBERATOR, INC. | v174981_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|
For
Quarterly Period Ended September 30, 2009
Or
¨
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|
For
the Transition Period From __________to ____________
Commission
File Number 000-53514
LIBERATOR,
INC.
(Exact
name of registrant as specified in its charter)
NEVADA
|
26-3213475
|
|
(State
or other jurisdiction
|
(IRS
Employer
|
|
of
incorporation or organization)
|
Identification
Number)
|
2745
Bankers Industrial Drive, Atlanta, GA 30360
(Address
of principal executive offices)
(770)
246-6400
(Registrant’s
telephone number)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o
|
|
Accelerated filer o
|
|
|
|
Non-accelerated filer o
|
|
Smaller reporting company x
|
(Do not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No x
As of
February 18, 2010, there were 63,015, 981 shares outstanding of the registrant’s
common stock.
LIBERATOR,
INC.
FORM 10-Q
INDEX
Page
|
||
PART I. FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements (unaudited)
|
3
|
Consolidated
Condensed Balance Sheets as of September 30, 2009 and
June 30, 2009
|
3
|
|
Consolidated
Condensed Statements of Operations for the three month periods ended
September 30, 2009 and 2008
|
4
|
|
Consolidated
Condensed Statements of Cash Flows for the three month periods ended
September 30, 2009 and 2008
|
5
|
|
Notes
to Consolidated Condensed Financial Statements
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
Item
4.
|
Controls
and Procedures
|
17
|
PART II. OTHER
INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
18
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
Item
3.
|
Defaults
upon Senior Securities
|
18
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
Item
5.
|
Other
Information
|
18
|
Item
6.
|
Exhibits
|
18
|
SIGNATURES
|
19
|
2
PART 1.
FINANCIAL INFORMATION
ITEM
1. Financial Statements (Unaudited)
LIBERATOR,
INC.
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited)
September
30,
2009
|
June 30,
2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
229,355
|
$
|
1,815,633
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $15,178 at
September 30, 2009 and $5,740 at June 30, 2009
|
431,303
|
346,430
|
||||||
Inventories
|
774,544
|
700,403
|
||||||
Prepaid
expenses
|
146,777
|
95,891
|
||||||
Total
current assets
|
1,581,979
|
2,958,357
|
||||||
Equipment
and leasehold improvements, net
|
1,174,456
|
1,135,517
|
||||||
Other
assets
|
—
|
—
|
||||||
Total
assets
|
$
|
2,756,435
|
$
|
4,093,874
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
Payable
|
$
|
1,666,213
|
$
|
2,247,845
|
||||
Accrued
compensation
|
121,502
|
154,994
|
||||||
Accrued
expenses and interest
|
76,162
|
145,793
|
||||||
Revolving
line of credit
|
—
|
171,433
|
||||||
Current
portion of long-term debt
|
152,318
|
145,481
|
||||||
Credit
card advance
|
102,610
|
198,935
|
||||||
Total
current liabilities
|
2,118,805
|
3,064,481
|
||||||
Long-term
liabilities:
|
||||||||
Note
payable – equipment
|
58,110
|
72,812
|
||||||
Leases
payable
|
202,816
|
225,032
|
||||||
Notes
payable – related party
|
105,948
|
125,948
|
||||||
Convertible
note payable – shareholder, net of discount of $141,729
|
483,271
|
285,750
|
||||||
Unsecured
lines of credit
|
119,071
|
124,989
|
||||||
Deferred
rent payable
|
351,454
|
356,308
|
||||||
Less:
current portion of long-term debt
|
(152,318
|
)
|
(145,481
|
)
|
||||
Total
long-term liabilities
|
1,168,352
|
1,045,358
|
||||||
Total
liabilities
|
3,287,157
|
4,109,839
|
||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Preferred
Stock, $.0001 par value, 10,000,000 shares Authorized, 4,300,000
shares issued and outstanding on September 30 and June 30, 2009,
liquidation preference of $1,000,000
|
430
|
430
|
||||||
Common
stock of $0.0001 par value, shares authorized 250,000,000; 60,932,981
shares issued and outstanding at September 30, 2009 and June 30,
2009
|
6,093
|
6,093
|
||||||
Additional
paid-in capital
|
5,286,969
|
5,286,970
|
||||||
Accumulated
deficit
|
(5,824,214
|
)
|
(5,309,458
|
)
|
||||
Total
stockholders’ equity (deficit)
|
(530,722
|
)
|
(15,965
|
)
|
||||
Total
liabilities and stockholders’ equity
|
$
|
2,756,435
|
$
|
4,093,874
|
See
accompanying Notes to Consolidated Condensed Financial
Statements.
3
LIBERATOR,
INC.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
NET
SALES
|
$
|
2,034,992
|
$
|
2,645,823
|
||||
COST
OF GOODS SOLD
|
1,376,815
|
1,828,988
|
||||||
Gross
Profit
|
658,177
|
816,835
|
||||||
OPERATING
EXPENSES:
|
||||||||
Advertising
and Promotion
|
178,132
|
260,780
|
||||||
Other
Selling and Marketing
|
251,558
|
305,061
|
||||||
General
and Administrative
|
435,747
|
460,404
|
||||||
Depreciation
|
58,749
|
75,930
|
||||||
Total
operating expenses
|
924,186
|
1,102,175
|
||||||
Operating
loss
|
(266,009
|
)
|
(285,340
|
)
|
||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
3,388
|
1,122
|
||||||
Interest
(expense) and financing costs
|
(59,968
|
)
|
(62,888
|
)
|
||||
Cost
to acquire majority control of WES Consulting
|
(192,167
|
)
|
—
|
|||||
Total
other expense, net
|
(248,747
|
)
|
(61,766
|
)
|
||||
Loss
from continuing operations before income taxes
|
(514,756
|
)
|
(347,106
|
)
|
||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
—
|
—
|
||||||
NET
LOSS
|
$
|
(514,756
|
)
|
$
|
(347,106
|
)
|
||
NET
LOSS PER SHARE:
|
||||||||
Basic
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
||
Diluted
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
||
SHARES
USED IN CALCULATION OF NET LOSS PER SHARE:
|
||||||||
Basic
|
60,932,981
|
45,000,000
|
||||||
Diluted
|
60,932,981
|
45,000,000
|
See
accompanying Notes to Consolidated Condensed Financial
Statements.
4
LIBERATOR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(514,756
|
)
|
$
|
(347,106
|
)
|
||
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
58,749
|
75,930
|
||||||
Amortization
of debt discount
|
5,354
|
—
|
||||||
Cost
to acquire majority control of WES Consulting, Inc.
|
192,167
|
—
|
||||||
Deferred
rent payable
|
(4,854
|
)
|
14,431
|
|||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(84,873
|
)
|
(74,082
|
)
|
||||
Inventories
|
(74,141
|
)
|
(20,890
|
)
|
||||
Prepaid
expenses and other assets
|
(50,886
|
)
|
(12,497
|
)
|
||||
Accounts
payable
|
(581,633
|
)
|
160,578
|
|||||
Accrued
compensation
|
(33,492
|
)
|
(56,274
|
)
|
||||
Accrued
expenses and interest
|
(69,631
|
)
|
18,776
|
|||||
Net
cash used in operating activities
|
(1,157,996
|
)
|
(241,134
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Investment
in equipment and leasehold improvements
|
(97,688
|
)
|
(14,783
|
)
|
||||
Cash
used in investing activities
|
(97,688
|
)
|
(14,783
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayments
under revolving line of credit
|
(171,433
|
)
|
(567,907
|
)
|
||||
Borrowings
under revolving line of credit
|
—
|
579,357
|
||||||
Proceeds
from credit card cash advance
|
—
|
350,000
|
||||||
Repayment
of credit card cash advance
|
(96,326
|
)
|
(76,293
|
)
|
||||
Repayment
of unsecured line of credit
|
(5,918
|
)
|
(5,193
|
)
|
||||
Repayment
of loans from related parties
|
(20,000
|
)
|
—
|
|||||
Borrowings
from related party loans
|
—
|
53,948
|
||||||
Principal
payments on notes payable and capital leases
|
(36,917
|
)
|
(48,856
|
)
|
||||
Cash
(used in) provided by financing activities
|
(330,594
|
)
|
285,056
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
(1,586,278
|
)
|
29,139
|
|||||
Cash
and cash equivalents at beginning of period
|
1,815,633
|
89,519
|
||||||
Cash
and cash equivalents at end of period
|
$
|
229,355
|
$
|
118,658
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$
|
57,358
|
$
|
49,387
|
||||
Income
taxes
|
$
|
—
|
$
|
—
|
See
accompanying Notes to Consolidated Condensed Financial
Statements.
5
LIBERATOR,
INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
As
of September 30, 2009
(Unaudited)
NOTE
1 – ORGANIZATION AND NATURE OF BUSINESS
Overview – We were incorporated
in the State of Nevada on October 31, 2007 under the name Remark Enterprises,
Inc. On April 3, 2009, we entered into a Stock Purchase and
Recapitalization Agreement with OneUp Innovations, Inc., a privately held
Georgia corporation (“OneUp”), and One Up Acquisition, Inc. (“Subsidiary”),
our wholly owned Georgia subsidiary. On June 26, 2009, we consummated
the transactions contemplated by the agreement. Pursuant to the
agreement, the Subsidiary and OneUp merged, and all of the issued and
outstanding common stock of OneUp 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 preferred stock of OneUp was exchanged for
4,300,000 shares of preferred stock of the Company. After the merger,
OneUp became our wholly owned subsidiary, and our business operations were
conducted through OneUp. On July 2, 2009, we changed our name to
“Liberator, Inc.”
The
Agreement has been accounted for as a reverse merger, and as such the historical
financial statements of Liberator are being presented herein with those of the
Company. Also, the capital structure of the Company for all periods
presented herein is different from that appearing in the historical financial
statements of the Company due to the recapitalization accounting.
On
September 2, 2009, we 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 by and
among the Company and Belmont Partners, LLC, a Virginia limited liability
company (“Belmont”) and WES. Pursuant to the terms of the purchase
agreement, the Company acquired 972,000 shares (81%) of WES from Belmont for a
total of two hundred forty thousand five hundred dollars ($240,500) in addition
to the issuance by WES of two hundred fifty thousand (250,000) warrants to
Belmont to purchase an equal number of shares of WES’ common stock with an
exercise price of twenty five cents ($0.25), and the issuance by WES of a total
of one million five hundred thousand (1,500,000) shares of WES’ common
stock with seven hundred fifty thousand (750,000) shares delivered on September
2, 2009 and the balance of seven hundred fifty thousand (750,000) shares to be
delivered on September 2, 2010.
The
Company’s executive offices are located at 2745 Bankers Industrial Drive,
Atlanta, Georgia 30360. The Company is a Georgia-based sexual wellness
retailer, providing goods and information to customers who believe that sensual
pleasure and fulfillment are essential to a well-lived and healthy
life.
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 $514,756 and $347,106 for the three months ended September 30, 2009 and 2008,
respectively, and as of September 30, 2009 the Company has an accumulated
deficit of $530,722 and a working capital deficit of $536,826.
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 aligned 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 anticipated cash flow
from operations over the next twelve months 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.
6
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
consolidated financial statements include the accounts and operations of
Liberator, Inc. and our wholly owned operating subsidiaries, OneUp
Innovations, Inc. and Foam Labs, Inc. Intercompany accounts and
transactions have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform to the current year presentation.
The
accompanying consolidated condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to
Form 10-Q and Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles (“GAAP”) for complete financial statements.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the
balance sheet date and the reported amounts of revenues and expenses during the
period reported. Management reviews these estimates and assumptions
periodically and reflects the effect of revisions in the period that they are
determined to be necessary. Actual results could differ from those
estimates and assumptions.
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) collectability 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 September 30, 2009, accounts
receivable totaled $431,303 net of $15,178 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 September 30, 2009, substantially all of our cash
and cash equivalents were managed by a number of financial
institutions. As of September 30, 2009 our cash and cash equivalents
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
Canada.
7
Fair
Value of Financial and Derivative Instruments
The
Company values its financial instruments in accordance with new accounting
guidance on fair value measurements which, for certain financial assets and
liabilities, requires that assets and liabilities carried at fair value be
classified and disclosed in one of the following three categories:
|
•
|
Level
1 — Quoted prices in active markets for identical assets or
liabilities.
|
|
•
|
Level
2 — Inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
•
|
Level
3 — Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
This includes certain pricing models, discounted cash flow methodologies
and similar techniques that use significant unobservable
inputs.
|
At
September 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 $52,658 at September 30, 2009 and $57,625 at June 30, 2009. Advertising
expense for the three months ended September 30, 2009 and 2008 was $178,132 and
$260,780, respectively.
Research
and Development
Research
and development expenses for new products are expensed as they are
incurred. Expenses for new product development totaled $51,522 for
the three months ended September 30, 2008 and $31,120 for the three months ended
September 30, 2009. Research and development costs are included in general and
administrative expense.
Shipping
and Handling
Net sales
for the three months ended September 30, 2009 and 2008 includes amounts charged
to customers of $162,938 and $301,803, 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 that 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 that 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
September 30, 2009 is $351,454. The Rent expense under this lease for
the three months ended September 30, 2009 and 2008 was
$80,931.
8
Income
Taxes
The
Company accounts for income taxes using an asset and liability approach.
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, and operating loss and
tax credit carryforwards measured by applying currently enacted tax laws. A
valuation allowance is provided to reduce net deferred tax assets to an amount
that is more likely than not to be realized. The amount of the valuation
allowance is based on the Company’s best estimate of the recoverability of its
deferred tax assets. On January 1, 2007, the Company adopted new accounting
guidance for the accounting for uncertainty in income tax positions. This
guidance seeks to reduce the diversity in practice associated with certain
aspects of measurement and recognition in accounting for income taxes and
provide guidance on de-recognition, classification, interest and penalties, and
accounting in interim periods and requires expanded disclosure with respect to
the uncertainty in income taxes. The accounting guidance requires that the
Company recognize in its financial statements the impact of a tax position if
that position is more likely than not to be sustained on audit, based on the
technical merits of the position.
Segment
Information
During
the three months ended September 30, 2009 and 2008, the Company only operated in
one segment; therefore, segment information has not been presented.
New
Accounting Pronouncements
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued new
guidance on accounting for transfers of financial assets. The new guidance
removes the concept of a qualifying special-purpose entity and removes a certain
exception from applying previous FASB interpretations on the consolidation of
variable interest entities to qualifying special-purpose entities. The new
guidance is effective for annual and interim reporting periods beginning after
November 15, 2009. The Company has not yet adopted the new guidance and
does not expect that the new guidance will have any impact on the Company’s
financial statements.
In
June 2009, the FASB issued new accounting guidance on accounting for the
consolidation of variable interest entities. The guidance amends certain
previously existing guidance for determining whether an entity is a variable
interest entity, requires an enterprise to perform an analysis to determine
whether an enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity, and requires ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. An identified primary beneficiary of a variable interest entity
is an enterprise that has both the power to direct the activities of significant
impact on a variable interest entity and the obligation to absorb losses or
receive benefits from the variable interest entity that could potentially be
significant to the variable interest entity. The new guidance is effective for
annual and interim reporting periods beginning after November 15, 2009. The
Company has not yet adopted the new guidance and does not expect that the new
guidance will have any impact on the Company’s financial
statements.
Recently
Adopted Accounting Pronouncements
In June 2009, the
FASB issued the FASB accounting standards codification and the hierarchy of
generally accepted accounting principles. The primary purpose of this new
accounting guidance is to improve clarity and use of existing standards by
grouping authoritative literature under common topics. The new guidance does not
change or alter existing GAAP. The new guidance is effective for annual and
interim periods ending after September 15, 2009. The Company adopted the new
guidance on July 1, 2009 and determined it did not have a material impact
on the Company’s financial statements.
Earnings (Loss) Per Share of Common
Stock
Basic
earnings per share is computed on the basis of the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
potentially dilutive effect of outstanding stock options and warrants using the
“treasury stock” method and convertible securities using the “if-converted”
method.
Reconciliations
between the numerator and the denominator of the basic and diluted earnings per
share computations for the three months ended September 30, 2009 and
September 30, 2008 are as follows:
Three Months Ended September 30, 2009
|
||||||||||||
Net Loss
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
Basic
loss per share
|
$
|
514,756
|
60,932,981
|
$
|
0.01
|
|||||||
Dilutive
effect of common stock equivalents
|
—
|
—
|
—
|
|||||||||
Diluted
loss per share
|
$
|
514,756
|
60,932,981
|
$
|
0.01
|
Three Months Ended September 30, 2008
|
||||||||||||
Net Loss
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
Basic
loss per share
|
$
|
347,106
|
45,000,000
|
$
|
0.01
|
|||||||
Dilutive
effect of common stock equivalents
|
—
|
—
|
—
|
|||||||||
Diluted
loss per share
|
$
|
347,106
|
45,000,000
|
$
|
0.01
|
9
Basic and
diluted earnings per share are the same in periods of a net loss, thus there is
no effect of dilutive securities when a net loss is recorded. There were
approximately 5,400,849 and 438,456 securities excluded from the calculation of
diluted loss per share because their effect was anti-dilutive for the three
months ended September 30, 2009 and 2008, respectively.
NOTE
3 – INVENTORIES
Inventories
are stated at the lower of cost (which approximates first-in, first-out) or
market. Market is defined as sales price less cost to dispose and a normal
profit margin. Inventories consisted of the following:
September
30, 2009
|
June 30,
2009
|
|||||||
Raw
materials
|
$
|
358,611
|
$
|
366,355
|
||||
Work
in process
|
156,886
|
176,637
|
||||||
Finished
goods
|
259,047
|
157,411
|
||||||
$
|
774,544
|
$
|
700,403
|
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 151, fixed production related costs of approximately $5,279 and $0 were
charged to cost of sales for the quarters ended September 30, 2009 and
2008, respectively, due to below normal production capacity in the most recent
quarter.
NOTE
4 – EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment
and leasehold improvements are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives for
equipment and furniture and fixtures, or the shorter of the remaining lease term
or estimated useful lives for leasehold improvements.
Factory
Equipment
|
7
to 10 years
|
|
Furniture
and fixtures, computer equipment and software
|
5
to 7 years
|
|
Leasehold
improvements
|
7
to 10 years
|
Equipment
and leasehold improvements consist of the following:
September
30, 2009
|
June 30,
2009
|
|||||||
Factory
Equipment
|
$
|
1,507,821
|
$
|
1,506,147
|
||||
Computer
Equipment and Software
|
757,249
|
665,135
|
||||||
Office
Equipment and Furniture
|
166,996
|
166,996
|
||||||
Leasehold
Improvements
|
316,333
|
312,433
|
||||||
2,748,399
|
2,650,711
|
|||||||
Less
accumulated depreciation and amortization
|
(1,573,943
|
)
|
(1,515,194
|
)
|
||||
Construction-in-progress
|
-
|
-
|
||||||
Equipment
and leasehold improvements, net
|
$
|
1,174,456
|
$
|
1,135,517
|
Management
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. Recoverability of these assets is measured by a comparison of the
carrying amount to forecasted undiscounted future cash flows expected to be
generated by the asset. If the carrying amount exceeds its estimated future cash
flows, then an impairment charge is recognized to the extent that the carrying
amount exceeds the asset’s fair value. Management has determined no asset
impairment occurred during the three months ended September 30,
2009.
NOTE
5 – NOTE PAYABLE - EQUIPMENT
Note
payable – equipment, at September 30 and June 30, 2009 consisted of the
following:
September
30, 2009
|
June 30,
2009
|
|||||||
Note
payable to Fidelity Bank in monthly installments of $5,364 including
interest at 8%, maturing October 25, 2010, secured by
equipment
|
$
|
58,110
|
$
|
72,812
|
||||
Less:
Current Portion
|
(58,110
|
)
|
(61,244
|
)
|
||||
Long-term
Note Payable
|
$
|
–
|
$
|
11,568
|
10
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
(nine months)
|
$
|
51,866
|
||
2011
|
6,244
|
|||
Total
note payments
|
$
|
58,110
|
NOTE 6 – 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 that 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), payable monthly, plus a monthly service charge of 1.25% to 1.5%,
depending on the underlying collateral. At September 30, 2009 and
June 30, 2009, the balance owed under the revolving line of credit was $0 and
$171,433, respectively.
On
November 10, 2009, the Company entered into a loan agreement for a revolving
line of credit with a different commercial finance company that provides credit
to 80% of domestic accounts receivable aged less than 90 days up to $250,000.
Borrowings under the agreement bear interest at Prime rate plus six percent
(9.25 percent as of November 10, 2009) plus a 2% annual facility fee and a .25%
monthly collateral monitoring fee, as defined in the agreement.
Management
believes cash flows generated from operations, along with current cash and
investments as well as borrowing capacity under the line of credit should be
sufficient to finance capital requirements required by operations. If new
business opportunities do arise, additional outside funding may be
required.
NOTE
7 – 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 had 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%. The amount owed on the credit card advance was
$102,609 at September 30, 2009 and $198,935 at June 30, 2009.
NOTE
8 – UNSECURED LINES OF CREDIT
The
Company has drawn cash advances on three unsecured lines of credit that are in
the name of the Company and 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 $119,071 at September 30, 2009 and $124,989 at
June 30, 2009.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases its facility under a ten year operating lease that 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 September 30, 2009 was $351,454 and
$337,155 at June 30, 2009. The rent expense under this lease for the three
months ended September 30, 2009 and 2008 was $80,931.
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.
11
The
Company also leases certain postage equipment under an operating
lease. The monthly lease is $144 per month and expires January
2013.
Future minimum lease
payments under non-cancelable operating leases at September 30, 2009 are as
follows:
Year
ending June 30,
|
||||
2010
(nine months)
|
$
|
245,202
|
||
2011
|
413,263
|
|||
2012
|
420,348
|
|||
2013
|
395,798
|
|||
2014
|
391,685
|
|||
Thereafter
through 2016
|
1,002,816
|
|||
Total
minimum lease payments
|
$
|
2,869,112
|
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 5 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
(nine months)
|
$
|
62,215
|
||
2011
|
77,010
|
|||
2012
|
33,974
|
|||
2013
|
22,930
|
|||
2014
|
6,687
|
|||
Present
value of capital lease obligations
|
$
|
202,816
|
||
Imputed
interest
|
40,631
|
|||
Future
minimum lease payments
|
$
|
243,447
|
NOTE
10– INCOME
TAXES
There is
no income tax provision (benefit) for federal or state income taxes as the
Company has incurred operating losses since inception. Deferred income taxes
reflect the net tax effects of net operating loss and tax credit carryovers and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Utilization
of the net operating loss and tax credit carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The Company may have experienced a change of control which could result in a
substantial reduction to the previously reported net operating losses at June
30, 2009; however, the Company has not performed a change of control study and
therefore has not determined if such change has taken place and if such a change
has occurred the related reduction to the net operating loss
carryforwards. As of September 30, 2009, the net operating loss
carryforwards continue to be fully reserved and any reduction in such amounts as
a result of this study would also reduce the related valuation allowances
resulting in no net impact to the financial results of the Company.
The
Company applies the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” As of September 30,
2009, there was no significant liability for income tax associated with
unrecognized tax benefits.
With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
and non-U.S. income tax examination by tax authorities for tax years before
2003.
NOTE
11 – EQUITY
Common
Stock– The Company’s authorized common stock was 250,000,000 shares at
September 30, 2009 and June 30, 2009. Common stockholders are
entitled to dividends if and when declared by the Company’s Board of Directors,
subject to preferred stockholder dividend rights. At September 30, 2009 and
June 30, 2009, the Company had reserved the following shares of common
stock for issuance:
12
September
30,
|
June
30,
|
|||||||
(in
shares)
|
2009
|
2009
|
||||||
Non-qualified
stock options
|
438,456
|
438,456
|
||||||
Shares
of common stock subject to outstanding warrants
|
2,462,393
|
2,462,393
|
||||||
Share
of common stock issuance upon conversion of Series A Convertible Preferred
Stock (convertible after July 1, 2011)
|
4,300,000
|
4,300,000
|
||||||
Shares
of common stock issuable upon conversion of Convertible
Notes
|
2,500,000
|
1,500,000
|
||||||
Total
shares of common stock equivalents
|
9,700,849
|
8,700,849
|
Preferred Stock
– The Company has 10,000,000 million shares of Preferred Stock, par
value $.0001 with 4,300,000 shares of preferred stock outstanding as of
September 30, 2009 and June 30, 2009.
Warrants –
As of September 30, 2009, outstanding warrants to purchase approximately
2,462,393 shares of common stock at exercise prices of $.50 to $1.00 will expire
at various dates within five years of September 30, 2009.
The
Company issued 2,462,393 warrants during fiscal 2009 in conjunction with the
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%, as more fully described below:
|
1.
|
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 fixed exercise prices of $.50 per share (292,479
warrants), $.75 per share (292,479 warrants) and $1.00 per share (877,435
warrants.) The Company valued these warrants at $8,716 using the above
assumptions and the expense was fully recognized during fiscal
2009.
|
2.
|
A
total of 1,000,000 warrants were issued to Hope Capital at a fixed
exercise price of $.75. The Company valued the warrants at $4,500 using
the above assumptions and the expense was fully recognized during fiscal
2009.
|
On
September 2, 2009, the Company issued a 3% convertible note payable to Hope
Capital with a face amount of $250,000. Hope Capital is a shareholder of the
Company and was the majority shareholder of the Company before the merger with
OneUp Innovations. The note is convertible, at the holder’s option,
into common stock at $.25 per share and may be converted at any time prior to
the maturity date of September 2, 2012. As of September 30, 2009, the 3%
Convertible Note Payable is carried net of the fair market value of the embedded
conversion feature of $57,833. This amount will be amortized over the
life of the note as additional interest expense. The Company
recognized $192,167 in cost during the three months ended September 30, 2009 for
the value of the note, which is net of the value of the embedded
derivative.
NOTE
12 – RELATED PARTIES
On June
30, 2008, the Company had a subordinated note payable to its majority
shareholder and CEO in the amount of $310,000 and its 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 the
Company, the majority shareholder of OneUp and his wife agreed to convert
$700,000 of principal balance of unsecured debt and $132,120 of accrued but
unpaid interest to preferred stock. Interest during fiscal 2009 was
accrued 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,
was $8,210. The notes are subordinate to all other credit facilities currently
in place. As of September, 2009, the Company owes a director $29,948 and owes
the majority shareholder’s wife (who is also a Company officer)
$76,000.
On June
24, 2009, 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 its merger with OneUp
Innovations. The note is convertible, at the holder’s 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. As of September 30, 2009,
the 3% Convertible Note Payable is carried net of the fair market value of the
embedded conversion feature of $83,896. This amount will be amortized
over the remaining life of the note as additional interest expense.
On
September 2, 2009, the Company issued a 3% convertible note payable to Hope
Capital with a face amount of $250,000. Hope Capital is a shareholder of the
Company and was the majority shareholder of the Company before its merger with
OneUp Innovations. The note is convertible, at the holder’s option,
into common stock at $.25 per share and may be converted at any time prior to
the maturity date of September 2, 2012. As of September 30, 2009, the 3%
Convertible Note Payable is carried net of the fair market value of the embedded
conversion feature of $57,833. This amount will be amortized over the
life of the note as additional interest expense.
13
NOTE
13 – COST TO ACQUIRE MAJORITY CONTROL OF WES CONSULTING, INC.
On
September 2, 2009, the Company issued a 3% convertible note payable to Hope
Capital with a face amount of $250,000. Hope Capital is a shareholder of the
Company and was the majority shareholder of the Company before its merger with
OneUp Innovations. The note is convertible, at the holder’s option,
into common stock at $.25 per share and may be converted at any time prior to
the maturity date of September 2, 2012. As of September 30, 2009, the 3%
Convertible Note Payable is carried net of the fair market value of the embedded
conversion feature of $57,833. This amount will be amortized over the
life of the note as additional interest expense. The Company recognized $192,167
in cost during the three months ended September 30, 2009 for the value of the
note, which is net of the value of the embedded derivative.
NOTE
14 – SUBSEQUENT EVENTS
On
October 19, 2009, the Company entered into a Merger and Recapitalization
Agreement with WES Consulting, Inc. Pursuant to the agreement, the
Company agreed to merge with and into WES, with WES surviving as the sole
remaining entity. Each issued and outstanding share of the common
stock of the Company were converted into one share of WES’ common stock, $0.01
par value, which, after giving effect to the merger, equaled, in the aggregate,
98.4% of the total issued and outstanding common stock of
WES. Pursuant to the agreement, each preferred share of the Company
were to be converted into one share of WES’ preferred stock with the provisions,
rights, and designations set forth in the agreement. The shares of
WES common stock owned by us prior to execution of the agreement were
cancelled. As of the date of this report, the Company and WES have
not satisfied the information statement rules of the Securities and Exchange
Commission.
On
November 10, 2009, the Company entered into a loan agreement for a revolving
line of credit with a commercial finance company which provides credit to 80% of
domestic accounts receivable aged less than 90 days up to $250,000. Borrowings
under the agreement bear interest at Prime rate plus six percent (9.25 percent
as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly
collateral monitoring fee, as defined in the agreement.
ITEM
2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD
LOOKING STATEMENTS
Certain
statements in this Management’s Discussion and Analysis section, other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements
generally are identified by the words “believe,” “project,” “expect,”
“anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar
expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties that
may cause actual results to differ materially from the forward-looking
statements. A detailed discussion of risks and uncertainties that could cause
actual results and events to differ materially from such forward-looking
statements is included in the “Risk Factors” section of our most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission. We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
As
used in this report, unless the context requires otherwise, “we” or “us” or the
“Company” or “Liberator” means Liberator, Inc., a Nevada corporation, and its
subsidiaries.
Overview
Comparisons
of selected consolidated statements of operations data as reported herein follow
for the periods indicated:
Total:
|
Three
Months Ended
September
30, 2009
|
Three
Months Ended
September
30, 2008
|
Change
|
|||||||||
Net
sales:
|
$
|
2,034,992
|
$
|
2,645,823
|
(23
|
)%
|
||||||
Gross profit
|
$
|
658,177
|
$
|
816,835
|
(19
|
)%
|
||||||
Loss
from operations
|
$
|
(266,009
|
)
|
$
|
(285,340
|
)
|
7
|
%
|
||||
Diluted
(loss) per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
—
|
14
Net
Sales by Channel:
|
Three
Months Ended
September
30, 2009
|
Three
Months Ended
September
30, 2008
|
Change
|
|||||||||
Direct
|
$
|
1,169,788
|
$
|
1,387,227
|
(16
|
)%
|
||||||
Wholesale
|
$
|
685,363
|
$
|
950,723
|
(28
|
)%
|
||||||
Other
|
$
|
179,841
|
$
|
307,873
|
(42
|
)%
|
||||||
Total
Net Sales
|
$
|
2,034,992
|
$
|
2,645,823
|
(23
|
)%
|
Other
revenues consist principally of shipping and handling fees derived from our
Direct business.
Gross
Profit by Channel:
|
Three
Months Ended
September
30, 2009
|
%
|
Three
Months Ended
September
30, 2008
|
%
|
Change
|
|||||||||||||||
Direct
|
$
|
501,884
|
43
|
%
|
$
|
565,234
|
41
|
%
|
(11
|
)%
|
||||||||||
Wholesale
|
$
|
183,715
|
27
|
%
|
$
|
193,627
|
20
|
%
|
(5
|
)%
|
||||||||||
Other
|
$
|
(27,422
|
)
|
(15
|
)%
|
$
|
57,974
|
19
|
%
|
(147
|
)%
|
|||||||||
Total
Gross Profit
|
$
|
658,177
|
32
|
%
|
$
|
816,835
|
31
|
%
|
(19
|
)%
|
Comparison of Three Months
Ended September 30, 2009 and Three Months Ended September 30, 2008
Net sales
for the three months ended September 30, 2009 decreased from the comparable
prior year period by $610,831, or 23%. The decrease in sales was
experienced in all sales channels. Direct sales (which includes product sales
through our three e-commerce sites and through our retail store) decreased from
$1,387,227 in the first quarter of fiscal 2009 to $1,169,788 in the first
quarter of fiscal 2010, a decrease of approximately 16%, or
$217,439. One of the most frequent consumer discount offers during
the three months ended September 30, 2009 was “free” or significantly reduced
shipping and handling, which accounts for the decrease in the Other category
revenue and gross profit from the prior year comparable period. The
Other category of revenue and gross profit consists primarily of shipping and
handling fees and costs derived from our Direct business. Sales to
Wholesale customers had the largest decrease during the first quarter from the
prior year first quarter, both in dollars and as a percentage, decreasing 28% or
$265,360. Sales to wholesale customers is expected to increase during the second
quarter of fiscal 2010 (the three months ended December 31, 2009) as a result of
new accounts being added and as wholesale customers increase their inventory
levels prior to the Christmas holiday. We attribute the overall decrease in
sales to the current economic uncertainty and overall decreases in domestic
consumer spending, as our products are typically a discretionary
purchase. Wholesale customers include Liberator products sold to
distributors and retailers and private label items sold to other resellers. The
Wholesale category also includes contract manufacturing services, which consists
of specialty items that are manufactured in small quantities for certain
customer, and which, to date, has not been a material part of our
business.
Gross
profit, derived from net sales less the cost of product sales, includes the cost
of materials, direct labor, manufacturing overhead and
depreciation. Gross margin as a percentage of sales increased
slightly to 32% for the three months ended September 30, 2009 from 31% in the
comparable prior year period. This is primarily the result of an increase
in the proportion of higher margin Direct to consumer sales to total net sales
during the quarter from the comparable prior year period. Direct to consumer
sales accounted for 57% of total net sales, compared to 52% in the prior year
first quarter. In addition, the gross profit margin on Direct to consumer sales
increased to 43% during the three months ended September 30, 2009 from 41% in
the comparable prior year period. Gross profit on the Wholesale sales
increased as a result of a price increase that was implemented during the third
quarter of fiscal 2009. The Gross profit on the Other category
decreased from a positive $78,223 to a negative margin of $23,123 as a result of
the “free” or reduced shipping and handling charge promotions that were offered
during the first quarter of fiscal 2010. In the current economic
environment, we anticipate the need to continue to offer “free” or reduced
shipping and handling to consumers as a promotional tool.
Total
operating expenses for the three months ended September 30, 2009 were 45% of net
sales, or $924,186, compared to 42% of net sales, or $1,102,175, for the same
period in the prior year. This 16% decrease in operating expenses was
the result of lower expenses in all categories including advertising and
promotion costs, other selling and marketing costs, general and administrative
costs and depreciation expense.
Advertising
and promotion expenses decreased by 32% (or $82,648) from $260,780 in the first
quarter of fiscal 2009 to $178,132 in the first quarter of fiscal
2010. Advertising and promotion expenses were reduced during the
first quarter of fiscal 2010 as part of an on going program to improve the
targeting, timing and effectiveness of advertising spending. Other
Selling and Marketing costs decreased 18% (or $53,503) from the first quarter of
fiscal 2009 to the current quarter of fiscal 2010, primarily as a result of
lower professional fees and graphic services cost which was partially offset by
higher trade show and travel costs.
General
and administrative costs decreased by 5% (or $24,657) from $460,404 in the first
quarter of fiscal 2009 to $435,747 in the first quarter of fiscal 2010. This was
primarily the result of lower utility costs and lower product development
payroll related costs during the current year first quarter.
Other
income (expense) during the first quarter increased from expense of ($61,765) in
fiscal 2009 to expense of ($248,747) in fiscal 2010. Interest
(expense) and financing costs in the current quarter included $5,358 from the
amortization of the debt discount on the convertible note. Expenses related to
the issuance of the convertible note payable to acquire majority control of WES
Consulting, Inc. during the first quarter of fiscal 2010 totaled
$192,167. This item consists of the discounted face value of the
$250,000 convertible note payable to Hope Capital, which is net of the value of
the embedded derivative.
No
expense or benefit from income taxes was recorded in the three months ended
September 30, 2009 or 2008. We do not expect any U.S. federal or
state income taxes to be recorded for the current fiscal year because of
available net operating loss carry-forwards.
15
We had a
net loss of $514,756, or ($0.01) per diluted share, for the three months ended
September 30, 2009 compared with a net loss of $347,106, or ($0.01) per diluted
share, for the three months ended September 30, 2008.
Variability
of Results
We have
experienced significant quarterly fluctuations in operating results and
anticipates that these fluctuations may continue in future periods. As described
in previous paragraphs, operating results have fluctuated as a result of changes
in sales levels to consumers and wholesalers, competition, costs associated with
new product introductions and increases in raw material costs. In addition,
future operating results may fluctuate as a result of factors beyond the
Company’s control such as foreign exchange fluctuation, changes in government
regulations, and economic changes in the regions in which we operate and
sell. A portion of our operating expenses are relatively fixed and
the timing of increases in expense levels is based in large part on forecasts of
future sales. Therefore, if net sales are below expectations in any given
period, the adverse impact on results of operations may be magnified by our
inability to meaningfully adjust spending in certain areas, or the inability to
adjust spending quickly enough, as in personnel and administrative costs, to
compensate for a sales shortfall. We may also choose to reduce prices or
increase spending in response to market conditions, and these decisions may have
a material adverse effect on financial condition and results of
operations.
Financial
Condition
Cash and
cash equivalents decreased $1,586,278 to $229,355 at September 30, 2009 from
$1,815,633 at June 30, 2009. This decrease in cash resulted from cash used in
operating activities of $1,157,996, cash used in investing activities
of $97,688, and by cash used in financing activities of $330,594, as more fully
described below.
Cash used
in operating activities for the three months ended September 30, 2009 represents
the results of operations adjusted for non-cash depreciation ($58,749) and the
non-cash deferred rent accrual reversal $4,854, and the non-cash expense related
to the issuance of the convertible note payable of $192,167. Changes in
operating assets and liabilities include an increase in accounts receivable of
$84,873, and increase in inventory of $74,141 and an increase in prepaid
expenses and other assets of $50,886. Additional cash was used to
reduce accounts payable by $581,633 during the three months ended September 30,
2009, and reduce accrued compensation and accrued expenses and interest by
$33,492 and $69,631, respectively.
Cash
flows used in investing activities reflects capital expenditures during the
quarter ended September 30, 2009. The largest component of capital expenditures
during the three months ended September 30, 2009, was our project to upgrade its
e-commerce platform and ERP system. Expenditures on the e-commerce platform and
ERP system, as of September 30, 2009, total approximately $344,000 and the
systems were operational and in use as of September 1, 2009.
Cash
flows used in financing activities are attributable to the repayment of the
revolving line of credit of $171,433, repayment of the credit card cash advance
of $96,326, and principal payments on notes payable and capital leases totaling
$36,917.
As of
September 30, 2009, our net accounts receivable increased by $84,873, or 24%, to
$431,303 from $346,430 at June 30, 2009. The increase in accounts receivable is
primarily the result of increased sales to certain wholesale accounts near the
end of September 2009. Management believes that our accounts receivable are
collectible net of the allowance for doubtful accounts of $15,178 at September
30, 2009.
Our net
inventory increased by $74,141, or 11%, to $774,544 as of September 30, 2009
compared to $700,403 as of June 30, 2009. The increase reflects an increase in
finished goods inventory in anticipation of increased product sales during the
three months ended December 31, 2009.
Accounts
payable decreased by $581,633, or 26%, to $1,666,212 as of September 30, 2009
compared to $2,247,845 as of June 30, 2009. The decrease in accounts payable was
the result of our improved working capital position that resulted from the net
proceeds of the private placement of Liberator, Inc.’s common stock that closed
on June 26, 2009.
Liquidity
and Capital Resources
At
September 30, 2009, our working capital deficiency was $536,826, a decrease of
$430,702 compared to the deficiency of $106,124 at June 30,
2009. Cash and cash equivalents at September 30, 2009 totaled
$229,355, a decrease of $1,586,278 from $1,815,633 at June 30,
2009.
On
November 10, 2009, the Company entered into a loan agreement for a revolving
line of credit with a commercial finance company that provides credit to 80% of
domestic accounts receivable aged less than 90 days up to $250,000. Borrowings
under the agreement bear interest at Prime rate plus six percent (9.25 percent
as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly
collateral monitoring fee, as defined in the agreement.
16
Management
believes anticipated cash flows generated from operations during the second and
third quarter of fiscal 2010, along with current cash and cash equivalents as
well as borrowing capacity under the line of credit should be sufficient to
finance working capital requirements required by operations during the next
twelve months. However, if product sales are less than anticipated during the
three months ended December 31, 2009 and the three months ended March 31, 2010,
we will need to raise additional funding in the near term to meet its working
capital requirements. If we raise additional capital by issuing equity
securities, our existing stockholders’ ownership will be diluted. We
cannot provide assurance that additional financing will be available in the near
term when needed, particularly in light of the current economic environment and
adverse conditions in the financial markets, or that, if available, financing
will be obtained on terms favorable to the Company or to our
stockholders. If we require additional financing in the near-term and
are unable to obtain it, this will adversely affect our ability to operate as a
going concern and may require the Company to substantial scale back operations
or cease operations altogether.
Sufficiency
of Liquidity
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. We incurred a net loss of $514,756 and $347,106 for
the three months ended September 30, 2009 and 2008, respectively, and, as of
September 30, 2009, we have an accumulated deficit of $530,722 and a working
capital deficit of $536,826.
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 our ability to meet our financing
requirements, and the success of our future operations. Management believes that
actions presently being taken to revise our 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, we 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.
Capital
Resources
We do not
currently have any material commitments for capital expenditures. We expect
total capital expenditures for the remainder of fiscal 2010 to be under $150,000
and to be funded by capital leases and, to a lesser extent, anticipated
operating cash flows and borrowings under the revolving line of credit. This
includes capital expenditures in support of our normal operations, and
expenditures that we may incur in conjunction with initiatives to further
upgrade our e-commerce platform and enterprise resource planning system (ERP
system.)
If our
business plans and cost estimates are inaccurate and our operations require
additional cash or if we deviate from our current plans, we could be required to
seek additional debt financing for particular projects or for ongoing
operational needs. This indebtedness could harm our business if we
are unable to obtain additional financing on reasonable terms. In
addition, any indebtedness we incur in the future could subject us to
restrictive covenants limiting our flexibility in planning for, or reacting to
changes in, our business. If we do not comply with such covenants,
our lenders could accelerate repayment of our debt or restrict our access to
further borrowings, which in turn could restrict our operating flexibility and
endanger our ability to continue operations.
ITEM
3.
Quantitative and Qualitative Disclosures about Market Risk
Not
applicable
ITEM
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that we file or
submit under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms and to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosures. As of the end of the period covered by
this quarterly report, an evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures, as of
the end of the period covered by this Quarterly Report on Form 10-Q, were
effective at the reasonable assurance level to ensure that information required
to be disclosed by the Company in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in United States Securities and Exchange Commission rules and
forms and to ensure that information required to be disclosed by the Company in
the reports that we file or submit under the Exchange Act is accumulated and
communicated to the management, including CEO and CFO, as appropriate to allow
timely decisions regarding required disclosures.
17
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1. Legal
Proceedings
There
have been no material developments during the quarter ended September 30, 2009 in
any material pending legal proceedings to which the Company is a party or of
which any of our property is the subject.
ITEM 2. Unregistered Sales of Equity
Securities and Use of Proceeds
There
were no unregistered sales of equity securities during the quarter ended
September 30, 2009 to report that have not already been disclosed in a Current
Report on Form 8-K.
ITEM 3. Defaults upon Senior
Securities
None.
ITEM 4. Submission of Matters to a Vote of
Security Holders
None.
ITEM 5. Other
Information
(a) None.
(b) There
were no changes to the procedures by which security holders may recommend
nominees to our board of directors.
ITEM
6.
Exhibits
Exh.
No.
|
Description
|
|
3.1
|
Articles
of Incorporation (1)
|
|
3.2
|
Amended
and Restated Certificate of Incorporation (1)
|
|
3.3
|
Bylaws
(1)
|
|
4.1
|
3%
Convertible Note issued to Hope Capital, Inc. on September 2, 2009
*
|
|
10.1
|
Common
Stock Purchase Agreement dated September 2, 2009 by and between Liberator,
Inc, Belmont Partners, LLC, and WES Consulting, Inc.
(2)
|
|
31.1
|
Section 302
Certification by the Corporation’s Principal Executive Officer
*
|
|
31.2
|
Section 302
Certification by the Corporation’s Principal Financial and Accounting
Officer *
|
|
32.1
|
Section 906
Certification by the Corporation’s Principal Executive Officer
*
|
|
32.2
|
Section 906
Certification by the Corporation’s Principal Financial and Accounting
Officer *
|
*
|
Filed
herewith.
|
(1)
|
Filed
on December 3, 2008 as an exhibit to our Registration Statement on Form
10, and incorporated herein by
reference.
|
(2)
|
Filed
on February 2, 2010 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
18
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIBERATOR,
INC.
|
|||
(Registrant)
|
|||
February 19,
2009
|
By:
|
/s/ Louis
S. Friedman
|
|
(Date)
|
Louis
S. Friedman
|
||
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|||
February 19,
2009
|
By:
|
/s/
Ronald P. Scott
|
|
(Date)
|
Ronald
P. Scott
|
||
Chief
Financial Office and Secretary
(Principal
Executive Officer)
|
19