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EX-31.2 - Luvu Brands, Inc.v198800_ex31-2.htm
EX-32.2 - Luvu Brands, Inc.v198800_ex32-2.htm
EX-31.1 - Luvu Brands, Inc.v198800_ex31-1.htm
EX-32.1 - Luvu Brands, Inc.v198800_ex32-1.htm
EX-10.21 - Luvu Brands, Inc.v198800_ex10-21.htm
EX-10.24 - Luvu Brands, Inc.v198800_ex10-24.htm
EX-10.23 - Luvu Brands, Inc.v198800_ex10-23.htm
EX-10.22 - Luvu Brands, Inc.v198800_ex10-22.htm
EX-10.25 - Luvu Brands, Inc.v198800_ex10-25.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
Form 10-K
   

    
 (MARK ONE)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2010
 
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 number000-53314
  
WES Consulting, Inc.
(Exact name of Company as specified in its charter)
 
Florida
59-3581576
(State of incorporation)
(IRS Employer Identification No.)
 
2745 Bankers Industrial Drive, Atlanta, Georgia 30360
(Address of principal executive offices) (Zip Code)

Company's telephone number: (770) 246-6400

Securities registered pursuant to Section 12(b) of the Act:  None
 
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ YES     x NO
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ YES x NO
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.  x YES     ¨ NO
 
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 during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files)   ¨ YES  ¨  NO
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act 
             
Large accelerated filer  ¨
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ YES     x NO

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  The registrant’s common stock had no active trading market as of the last business day of its most recently completed second fiscal quarter.

The number of shares of Common Stock, $.01 par value, outstanding as of the close of business on October 12, 2010 was 63,182,647.

 
 

 

TABLE OF CONTENTS
 
 
  
 
  
PAGE
     
FORWARD-LOOKING STATEMENTS
 
2
     
PART I.
  
3
     
ITEM 1.
  
Business
  
3
         
ITEM 2.
  
Properties
  
 8
         
ITEM 3.
  
Legal Proceedings
  
 8
         
PART II.
  
9
     
ITEM 5.
  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
 9
         
ITEM 7.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
10
         
ITEM 8.
  
Financial Statements and Supplementary Data
  
 16
         
ITEM 9.
  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
17
         
ITEM 9A.
  
Controls and Procedures
  
 17
         
ITEM 9B.
  
Other Information
  
18
     
PART III.
  
19
     
ITEM 10.
  
Directors, Executive Officers and Corporate Governance
  
19
         
ITEM 11.
  
Executive Compensation
  
 22
         
ITEM 12.
  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 23
         
ITEM 13.
  
Certain Relationships and Related Transactions, and Director Independence
  
24
         
ITEM 14.
  
Principal Accounting Fees and Services
  
25
         
PART IV.
  
26
     
ITEM 15.
  
Exhibits, Financial Statement Schedules
  
26
         
SIGNATURES
     
28
 
 
i

 

 FORWARD-LOOKING STATEMENTS
       
This report may contain "forward-looking statements," which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as "expects," "anticipates," "intends," "plan," "believes," "predicts", "estimates" or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning the Company, the performance of the industry in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Forward-looking statements speak only as of the date of this report, presentation or filing in which they are made. Except to the extent required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this report include, but are not limited to:

 
·
Statements relating to our business strategy;

 
·
Statements relating to our business objectives; and

 
·
Expectations concerning future operations, profitability, liquidity and financial resources.

These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

 
·
competition from other sexual wellness retailers and adult-oriented websites;

 
·
our ability to generate significant sales revenue from magazine, radio and television advertising;

 
·
our ability to maintain our brands;

 
·
unfavorable economic and market conditions;

 
·
our reliance on credit cards as a form of payment;

 
·
our ability to keep up with new technologies and remain competitive;

 
·
our ability to continue as a going concern;

 
·
our history of operating losses and the risk of incurring additional losses in the future;

 
·
security breaches may cause harm to our systems;

 
·
supply interruptions from raw material vendors:

 
·
our ability to enforce and protect our intellectual property rights;

 
·
we may be subject to claims that we have violated the intellectual property rights of others;

 
·
the loss of our main data center or other parts of our infrastructure;

 
·
systems failures and interruptions in our ability to provide access to our websites and content;

 
·
companies providing products and services on which we rely may refuse to do business with us;

 
·
changes in government laws affecting our business;

 
·
we may not be successful in integrating any future acquisitions we make;

 
·
our dependence on the experience and competence of our executive officers and other key employees;

 
2

 
 
 
·
restrictions to access on the internet affecting traffic to our websites;

 
·
risks associated with currency fluctuations;

 
·
risks associated with litigation and legal proceedings; and

 
·
other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by the Company with the Securities and Exchange Commission.

PART I.
  
ITEM 1.        Business

General

We are a provider of goods and information to consumers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life. The information that we provide consists primarily of product demonstration videos that we show on our websites and instructional DVDs that we sell.
 
Unless the context requires otherwise, all references in this report to the “Company,” “WES,” “we,” “our,” and “us” refer to WES Consulting, Inc. and our subsidiaries.
  
Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400.  Our primary Web site addresses are www.liberator.com, www.studiooneup.com, and www.foamlabs.com. 
 
Our History

The Company was incorporated in the State of Florida on February 25, 1999. Prior to our merger with Liberator, Inc. in October 2009, our principal business plan was to provide consulting services to companies requiring expert guidance and assistance in successfully upgrading and improving their high-volume commercial printing businesses. The primary emphasis was on global companies involved in printing telephone directories.

On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement with Liberator, Inc., a Nevada corporation (“Liberator”).  Pursuant to the agreement, Liberator merged with and into the Company, with the Company surviving as the sole remaining entity.   As a result of the merger, Liberator’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), a Georgia corporation, became our wholly owned subsidiary.  OneUp wholly owns Foam Labs, Inc., a Georgia corporation. All of the operations of the Company are conducted through OneUp.

Liberator, Inc.

Liberator was incorporated in the State of Nevada on October 31, 2007 under the name “Remark Enterprises Inc.”  Since inception, Liberator was engaged in organizational efforts and obtaining initial financing. Liberator was formed as a vehicle to pursue a business combination. Liberator formed OneUp Acquisition, Inc., a Georgia corporation and as a wholly owned subsidiary (the “Subsidiary”) on March 11, 2009.  On April 3, 2009, Liberator entered into a Stock Purchase and Recapitalization Agreement with OneUp Innovations, Inc., a privately held Georgia corporation (“OneUp”), and the Subsidiary.  On June 26, 2009, Liberator consummated the transactions contemplated by the agreement, as amended.  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 Liberator’s common stock (90% of the total issued and outstanding shares of common stock of Liberator).  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 Liberator.  After the merger, OneUp became Liberator’s wholly owned subsidiary, and Liberator’s business operations were conducted through OneUp.  On July 2, 2009, Liberator changed its name to “Liberator, Inc.”

OneUp Innovations, Inc.
 
Founded in Atlanta, Georgia in 2000, OneUp is a provider of goods and information to customers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life. The information that OneUp provides consists primarily of product demonstration videos that the Company shows on its websites and instructional DVDs that the Company sells.
 
Established with this conviction, Liberator Bedroom Adventure Gear ® empowers exploration, fantasy and the communication of desire, no matter the person’s shape, size or ability. Products include the original Liberator shapes and furniture, sophisticated lingerie and latex apparel, pleasure objects, as well as bath and body, bedding and home décor. The Liberator brand of OneUp is a growing consumer brand that celebrates intimacy by inspiring romantic imagination.
 
 
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Liberator Bedroom Adventure Gear ® is a love-style brand that exists in a space where the act of love meets art and invention. Not prurient enough to be an "adult" product, yet too sexy to be considered mainstream, we created a retail category and a brand called “Liberator” to define ourselves in a marketplace that is rapidly gaining in popularity and acceptance.
 
Since we shipped our first product in 2002, OneUp has evolved into a community of approximately one hundred people that create, develop, make, market, advertise, promote and re-invent items and ideas that allow couples to have a fuller sexual experience of themselves and each other.
 
OneUp is focused on building, developing and marketing its Liberator brand of Bedroom Adventure Gear products. Since inception, we have spent over $8 million in print advertising, building awareness of the brand primarily through magazine advertisements. We now intend to broaden our marketing reach by advertising on selected cable television and radio channels.
 
In addition to the Liberator Shapes ®, we also produce a line of casual foam-based furniture that we sell under the Studio OneUp “Jaxx” brand. These products are produced as a by-product from the manufacturing of Liberator products, as we re-purpose the scrap foam created from the cutting of the cushions. The Studio OneUp products are offered directly to consumers through our web site www.studiooneup.com, to e-Merchants under drop-ship agreements where we ship directly to their customers, and to other resellers.
 
OneUp is currently housed in a 140,000 sq. ft. vertically integrated manufacturing facility on eight acres in a suburb of Atlanta, Georgia. Our products are sold directly to consumers and through approximately six hundred domestic resellers and six international resellers, approximately 1,300 marketing affiliates, and several dozen independent sales consultants within the United States. Other than the six international resellers, none of our customers are subject to a written agreement or are required to purchase or sell a specific amount of our products. Marketing affiliates are companies that operate websites that market our products on their websites. These marketing affiliates direct visitor traffic to our websites by using our technology to place banners or links on their websites to our website.

Industry Background

WES participates in the rapidly growing worldwide market of sexual wellness. What was once called Family Planning has evolved over the last 6 years into a new category called Sexual Wellness. All of the major retailers, pharmacies and on-line retailers have embraced this development.

Major consumer brands are rapidly entering the Sexual Wellness market, with either new products or repackaged existing products. These brands include:

 
·
K-Y Personal Lubricant (a division of $62 billion Johnson & Johnson)
 
·
Trojan Condoms (a division of $2.5 billion Church & Dwight)
 
·
Philips Electronics (a €23 billion company) recently introduced a line of personal vibrators
 
·
Durex Condoms and Durex Play (a £348 million division of UK-based SSL International)

We believe that the category of sexual wellness is in the early stages of consumer awareness and that it will continue to grow and gain consumer acceptance to become a major trend in society.

Overview of our Facilities and Operations

Our 140,000 square foot facility on eight acres is located in metro Atlanta, Georgia and includes manufacturing and distribution, sales and marketing, product development, customer service and administrative staff.  Our manufacturing operation has CAD controlled fabric cutting and foam contouring equipment and two state-of-the-art conveyor unit production sewing systems.

Business Strategy

As one of the few recognized brands in the sexual wellness market, our goals are to achieve long-term growth and profitability and diversify our sales base. We plan to achieve these goals using the following strategies:

 
·
Expand Advertising Beyond Magazines. Since inception, 95% of our advertising expenditures have been for print advertisements in magazines. While we plan to continue with print advertising, we also believe that we may be more successful by advertising on adult and mainstream cable television and network channels, and satellite and terrestrial radio stations and expanding our efforts in internet advertising. We are currently developing television advertisements in order to test their effectiveness in driving traffic to our Liberator.com website.

 
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·
Pursue Targeted Acquisitions. We believe that the sexual wellness industry is highly fragmented, with few market leaders, and we seek to pursue acquisitions that meet our values, strategic focus and economic criteria. We believe there is a significant opportunity to expand our business by acquiring and integrating companies that manufacture or market high-quality products to the sexual wellness consumer market and that, in many cases, such companies could increase their sales as a result of offering their products for sale under the Liberator brand.

 
·
Capitalize on the Liberator brand. We intend to extend the Liberator brand through the introduction of Liberator brand pleasure objects and consumables, like personal lubricants and massage oils.

 
·
Expand our Channels of Distribution. In 2008, we began licensing the Liberator brand to entrepreneurs in foreign countries and we now have licensees in 11 European and Asian countries with a total population of 250 million. We intend to continue to add to our list of international licensees. We also believe there is a significant opportunity to open Liberator Love Artist stores in specific domestic markets like Atlanta, New York, Los Angeles and Miami. Not only will such stores increase awareness of the brand, but they will serve as regional hubs to support local networks of independent sales agents that purchase products from our stores and resell them to their friends and family members through in-home parties.

 
·
Expand Distribution of our Studio OneUp “Jaxx” products. We have developed a unique point-of-purchase packaging system for our Jaxx “foam bag” line of Studio OneUp seating. This system allows the retailer to stock a variety of foam bag colors and fabric types while maintaining minimal inventory of the foam-based filling. The foam-based filling is re-purposed scrap foam created from the manufacturing of the Liberator cushions. The foam-based filling is compressed into square capsules with a maximum weight of 25 pounds, which makes it easier for the consumer to transport the product, and it reduces the amount of shelf space required by the retailer. To purchase one of the various sizes of foam bags, consumers simply select the required size and number of compressed foam capsules that match the selected cover.

Our Competitive Strengths

We believe that we have the following competitive strengths that we can leverage to implement our strategy:

Leading market position. Since our first magazine advertisements appeared in 2002, we have been one of only a handful of companies that are permitted to advertise sexual wellness products in mainstream publications. Because of our upscale presentation and mainstream appeal, Liberator product advertisements have passed the approval of magazines that have never before permitted an adult product to advertise. As a result, we believe that we enjoy a somewhat exclusive franchise in this category. Because of our ability to reach mainstream consumers through print advertisements, we believe that we have established a leading market position in the category of sexual wellness products. To some degree, we believe this is evidenced by our product position on leading e-commerce websites as a product category and as a brand name.

Vertically integrated operations which includes product and packaging design, website design, manufacturing, and marketing capabilities. Our state-of-the-art design and production facility allows us to rapidly bring new products to market and respond quickly to changes in consumer preference, and our in-house website design capabilities allows us to create a constant stream of website content that provides our consumers with an entertainment venue, which in turn creates a catalyst for them to revisit our website after their initial purchase.

Broad product offering. We currently manufacture approximately 1,500 products and purchase for resale an additional 1,300 products.

Established and diversified customer base. We have approximately 175,000 unique individual customers in addition to leading retailers and e-merchants.

Experienced executive team. We have an experienced team of corporate managers. Our founder and Chief Executive Officer, Louis Friedman, is an entrepreneur and investor whose management experience spans the past 30 years. Our Chief Financial Officer, Ronald Scott, has over 30 years of experience in accounting and financial management, with 13 years as the Chief Financial Officer for a NASDAQ-listed natural products company.

Products and Services

Liberator Products
 
We developed a product line of Bedroom Adventure Gear which consists of 15 differently shaped cushions being marketed as Liberator Shapes.  Liberator Shapes are positioning props that rock, elevate, and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting. As human bodies come in different sizes, so do Liberator Shapes, and Liberator Shapes are available in an assortment of fabric colors and prints to add to the visual excitement. The Shapes are covered under United States Patent #6,925,669. Each of the 15 Liberator Shapes has a unique shape, designed to introduce to the sexual experience positions that were previously difficult to achieve. The Liberator Shapes are manufactured from structured urethane foam cut at angles, in large cubes, rounds and in platform shapes. The urethane base is encased in a tight, fluid resistant polyester shell, helping the cushions to maintain their shape.  Our best-selling lines of the Liberator Shapes products are the Wedge, Ramp, and Wedge/Ramp combination.

 
5

 
 
We have also developed a unique a line of furniture pieces, called “sex furniture”, which set the benchmark for relaxed interaction and creative sex. Three of the sex furniture pieces are made from contoured urethane foam and covered in a variety of fabrics and colors. These items are marketed as the Esse®, the Esse Chaise, and the Equus.  The sex furniture line also includes products based on shredded polyurethane foam encased in a wide range of fabric types and colors and sold as the Zeppelin, the Zeppelin Lounger, the Zeppelin Cocoon, the Zeppelin Rest, the Palooza, and the Zeppelin Pillow.
 
The products sold under the Liberator Shapes line, including the sex furniture, provided 59.1%, 67.5%, and 69.9% of our revenues for our fiscal years ended June 30, 2010, 2009, and 2008, respectively.  Revenues from the Wedge, Ramp, and Wedge/Ramp combination products made up approximately 62% of the revenue from the Liberator Shapes in fiscal 2010 and approximately 50% of the revenues from the Liberator Shapes line in fiscal years 2009 and 2008.
 
Studio OneUp Products

In addition to the Liberator product line, we also produce a line of casual foam-based furniture sold under the Studio OneUp brand. These products are offered directly to consumers through our Studio OneUp web site and to e-Merchants under drop-ship arrangements where we ship directly to customers and to other resellers.  Our Studio OneUp products provided 17.2%, 13.7%, and 9.8% of our revenues for our fiscal years ended June 30, 2010, 2009, and 2008, respectively.
 
Resale Products

Beginning in 2006, we began importing high-quality pleasure objects and erotica from around the world. This collection now includes products for the body and mind, including erotic books and gifts. These resale products provided 17.1%, 10.9%, and 12.2% of our revenues for our fiscal years ended June 30, 2010, 2009, and 2008, respectively.

Miscellaneous Products and Contract Manufacturing

We also manufacture couture lingerie, latex garments, fetish wear, and a line of boudoir bedding items that are sold under the Fascinator line.  The Fascinator line provided an immaterial portion of our revenues during the last 3 fiscal years. Beginning in early fiscal 2007, we began providing contract manufacturing services to companies seeking private label specialty products made from fabric and foam. These products are typically designed by the client companies and manufactured to their specifications and, to date, have not been a material part of our business.

Competition

The markets for the sexual wellness products offered by the Company are highly fragmented and are characterized by thousands of small and often undercapitalized businesses. We believe that we compete on the basis of integrity, the distinctiveness, quality and performance of our products, quality of customer service, creative presentations and brand name recognition.

We believe that the primary competitive factors in e-commerce are brand recognition, site content, ease of use, price, fulfillment speed, customer support, reliability and integrity. Our success, particularly against larger and better financed competitors, will continue to depend upon our ability to provide a compelling and satisfying shopping experience for the consumer, both on-line and at our current and future retail stores.

Intellectual Property

Liberator, Wedge, Ramp, Cube, Stage, Esse, Zeppelin, Jaxx, Hipster, Wing, “Explore More”, “Bedroom Adventure Gear“, and the Liberator logo are subject to trademark applications of the Company.

We also currently hold 28 web domain names relating to our brand.

In August 2005, we were issued a United States utility patent number US 6,925,669, “Support Cushion and System of Cushions.”

Marketing

Through advertisements in a broad range of national magazines, consumers are directed to one of our primary e-commerce websites to learn more about our products and place their orders.

 
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We intend to expand our advertising efforts beyond magazines to reach broader segments of the population and increase our consumer base. These initiatives may include expanded use of internet advertising, television advertising, and radio advertising.

Through our in-house wholesale sales organization, we engage retailers directly and then either ship to them on a wholesale basis or provide fulfillment services by drop-shipping directly to their customers.

Through attendance at a variety of domestic and international consumer and industry trade shows, we gain valuable feedback from consumers and retailers regarding our product offering. Attendance at these trade shows also provides us with an opportunity to monitor the competitive environment and be made aware of any emerging trends in the sexual wellness industry.

Licenses

In mid-2008, we launched an international expansion program through a licensing program. Through a co-manufacturing arrangement whereby the foam is contoured in the local country, the Company has created a way for local partners to launch the brand quickly and aggressively. Each licensee has the full capability to sell directly to consumers and traditional resellers, and has made significant financial commitments to marketing the Liberator brand through country specific advertising channels which include print, television, and radio. These licensees are also empowered to interpret the brand so as to be culturally sensitive to their respective territories.

Since September 2008, we have issued six license agreements that cover 11 countries around the world including the UK, Germany, Netherlands, Belgium, France, Italy, Australia / New Zealand, Singapore, Indonesia, and Malaysia (with a combined population greater than 250 million residents.) All territories will have, if not already, a fully functional consumer website, and in some cases, our partners will develop Liberator Lovestyle retail stores.

International websites are now offering Liberator products in Singapore, the United Kingdom, the Netherlands, Germany, Belgium, France, and Australia/New Zealand.
 
These international licensees are expected to eventually be distribution pipelines which will market the Liberator branded products, ranging from consumables and toys to shapes and furniture. Under the licensing agreements, the licensees are encouraged to open all sales channels within their territories including big box retailers, drugstores, and other retail channels. Sales to licensees consist of an initial license fee plus recurring product sales. Product sales and license fees from international licensees was less than 3% of total net sales in fiscal 2009 and less than 1% of total net sales during fiscal 2010. The international license agreements, which have a term of three to six years, appoint the companies or individuals as exclusive distributors in their respective territories (with no minimum annual purchase requirements) and require the licensees to spend specific amounts on advertising in their local markets. However, to date, these advertising requirements have not been enforced by the Company. The international license agreements may be terminated at any time upon the mutual written agreement of the parties, and upon the occurrence of any event of default, as defined in the agreements.

Sales Channels

We conduct our business through two primary sales channels: Direct (consisting of our Internet website and telephone sales) and Wholesale (consisting of our stocking reseller, drop-ship, contract manufacturing and distributor accounts). The following is a summary of our revenues:

(Dollars in thousands)
 
Fiscal
2008
   
Fiscal
2009
   
Fiscal
2010
 
Direct
  $ 6,703     $ 5,144     $ 5,355  
Wholesale
    3,550       4,022       4,736  
Other
    1,498       1,095       989  
Total Net Sales
  $ 11,751     $ 10,261     $ 11,080  

Other revenues consist principally of shipping and handling fees derived from our Direct business.
 
Direct
 
The following is a summary of our Direct business net sales and the percentage relationship to total revenues:

(Dollars in thousands)
 
Fiscal
2008
   
Fiscal
2009
   
Fiscal
2010
 
Internet
  $ 6,096     $ 4,536     $ 4,637  
Phone
    607       608       718  
Total Direct Net Sales
  $ 6,703     $ 5,144     $ 5,355  
Direct net sales as a percentage of total revenues
    57.0 %     50.1 %     48.3 %

            Since inception, OneUp has sold directly to approximately 200,000 consumers, many of these consumers have ordered from the Company more than once.

Wholesale

The following is a summary of our net sales to Wholesale customers and the percentage relationship to total revenues:

(Dollars in thousands)
 
Fiscal
2008
   
Fiscal
2009
   
Fiscal
2010
 
Wholesale customers
  $ 3,550     $ 4,022     $ 4,736  
Percentage of total revenues
    30.2 %     39.2 %     42.7 %

As of June 30, 2010, the Company has approximately 600 active wholesale accounts, most of which are located in the United States.

Internet Website

Since 2002, our main website located at www.liberator.com has allowed our customers to purchase our merchandise over the Internet. Using a consistent standard measure, our website logged over 3.2 million visits in fiscal 2010, as compared to 3.1 million visits in fiscal 2009, representing a 3% increase in website visits.  Internet revenues represented 87% of the Direct business in fiscal 2010, compared to 88% of the Direct business in fiscal 2009. We design and operate our websites using an in-house technical and creative staff. Our www.liberator.com website is intended to be an entertainment and educational venue where consumers can watch product demonstration videos, videos on sexual wellness topics and humorous videos on the many facets of human sexuality.

In response to declining sales on our main website between fiscal 2008 and 2009, in fiscal 2009 (the year ended June 30, 2009) we began an implementation project of a new e-commerce platform and a new enterprise resource planning (ERP) system. The implementation of both of these systems was substantially completed during the first quarter of fiscal 2010 (the year ended June 30, 2010).

Liberator® “Lovestyle” Store

Sex and love are inherently essential to life, but we do not believe they have been properly presented in retailing. Couples seeking products to enhance intimacy have limited choices beyond that of the local sex shop.  In our 3,500 square foot factory store we present “lovestyle” and sexual adventure in an interactive environment that is couple friendly and appeals to a broad consumer market.

Products offered include:

 
·
Liberator Shapes, sexual furniture, playful restraints
 
·
Bedding – silk / satin sheets, duvets, pillows
 
·
Pleasure objects (imported high-end)
 
·
Leather products.
 
·
Erotic prints, books and sculptures
 
·
Borosilicate glass art and pleasure objects
 
·
Lingerie – leather, silk, latex, and high end dress-up costumes
 
·
Dance wear & accessories – burlesque, belly dance, strip tease plus DVDs
 
·
Sensual Massage, bath and body products
 
·
Music, educational DVDs, limited erotic DVDs
 
·
Personal lubricants
 
·
Scents, fragrances and candles
 
·
Instructional monthly presentations or salons
 
 
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Our factory store has demonstrated the power of the Liberator brand – customers want to feel and touch Liberator products and are willing to travel to the store, return repeatedly and refer friends.

The Liberator Lovestyle Store serves as a laboratory to observe consumer reaction to new products and to evaluate price points and merchandising techniques.

We believe that our retail store concept is ready to be expanded beyond our single location and either franchised or licensed throughout the United States, providing an upscale experience in-sync with the mainstreaming of sexual well-being.

Government Regulation

We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations that regulate the promotion and sale of merchandise and the operation of warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

Seasonality

Our business has a seasonal pattern. During the past three years, we have realized an average of approximately 28% of our annual revenues in our second quarter, which includes Christmas, and an average of approximately 29% of our revenues in the third quarter, which includes Valentine’s Day.

Employees and Labor Relations

As of September 25, 2010, we had 108 employees. In addition, approximately 12 employees will be hired on a seasonal basis to meet demand during the peak season which includes the Christmas holiday and Valentine’s Day. None of our employees are represented by a union. We have had no labor-related work stoppages, and we believe our relationships with our employees are good.

ITEM 2.        Properties

We operate our business from one facility. We lease 140,000 square feet on eight acres located at 2745 Bankers Industrial Drive, Atlanta, GA 30360. This facility serves as our manufacturing facility, design and creative center, fulfillment warehouse, retail store, and administrative and corporate headquarters.  The lease for this facility expires on December 31, 2015.

We believe our facilities are currently adequate for their intended purposes and are adequately maintained.

ITEM 3.        Legal Proceedings

As of the date of this Annual Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us, other than the following:

 
·
On June 30, 2010, an Austin, Texas-based company, Interactive Life Forms, LLC (“ILF”) initiated an investigation before the International Trade Commission (“ITC”) by filing a complaint with the ITC (the “Investigation”) against the Company and 26 other manufacturers, distributors, and retailers of various elastomeric gel-based male masturbator products.  In the Investigation, ILF accused the companies of violating Section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1337, by importing or selling imported products that allegedly infringe certain U.S. patents.  ILF’s claims against some of the respondents have been dismissed pursuant to settlement agreements.  With respect to the Company, ILF alleged that by distributing the Flip Hole product of TENGA Co. Ltd. (TENGA), the Company was importing or selling imported products that infringe U.S. Patent Nos. 5,782,818 (“the ’818 Patent”) and 5,807,360 (“the ’360 Patent).  ILF asked the ITC to issue orders that would prohibit the future sale in the United States of any such products by any company found to have violated the Tariff Act.  The Company believes that it has meritorious defenses to the claims and has answered the complaint in the Investigation, and denied liability on all claims.  The ITC proceeding is currently in its discovery phase and is set for evidentiary hearing on May 16-20, 2011.

 
·
On June 30, 2010, the same day ILF filed its complaint with the ITC, ILF also filed a complaint in the United States District Court for the Western District of Texas against mostly the same parties (“the Litigation”).  ILF has dismissed its claims against some of the Defendants ostensibly pursuant to the same settlement agreements mentioned in connection with the ITC proceeding, above.  In the Litigation, ILF seeks injunctive relief and unspecified monetary damages for patent infringement.  On August 27, 2010, the parties jointly filed a motion that would stay the proceedings in the Litigation until the Investigation has concluded based on a federal statute that provides for such a stay.  The motion to stay is pending.  If granted, the proceedings in the Litigation will be suspended until resolution of the Investigation.  If the motion is not granted or ruled upon by November 19, 2010, the Company will file an answer to the complaint.  As with the Investigation, the Company believes that it has meritorious defenses to all of the ILF claims made against the Company, and the Company intends to vigorously pursue such defenses.  Furthermore, TENGA Co., Ltd. has agreed to indemnify the Company for reasonable and actual costs and expenses associated with the Investigation and Litigation, as well as provide a defense in both matters.
 
 
8

 

 
·
On September 1, 2010, Donald Cohen, a former officer, director and independent sales representative of Liberator, Inc., commenced an action against the Company and other defendants including certain current officers and directors, Cohen v. WES Consulting, Inc., OneUp Innovations, Inc., OneUp Acquisitions, Inc., Liberator, Inc., f/k/a Remark Enterprises, Inc., Remark Enterprises, Inc., Belmont Partners LLC, Louis Friedman, Ronald Scott and Leslie Vogelman, Civil Action File No. 100V10590-8. in the Superior Court of Dekalb County, Georgia. The plaintiff seeks repayment of a shareholder loan in the amount of $29,948 and unspecified amounts of compensatory, punitive, and statutorily trebled damages. The plaintiff alleges breach of fiduciary duty, breach of contract, fraud, and violation of the Georgia Securities Act, among other claims. The Company intends to vigorously contest the case and intends to file a Motion to Dismiss the lawsuit on or before October 15, 2010.
 
Although we believe that we have meritorious defenses to Mr. Cohen’s claims and will prevail against those claims, this matter is at a preliminary stage and we are not in a position to predict or assess the likely outcome of these proceedings.  Accordingly, other than the amount of the shareholder loan, we have not reserved for any future loss that may arise as a result of an adverse outcome in this litigation.

PART II.
 
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “WSCU.”  The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock as reported on the OTCBB.  The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions.

Fiscal Year
           
2010
 
High Bid
   
Low Bid
 
Fourth Quarter: 4/1/10 to 6/30/10
    0.34       0.25  
Third Quarter: 1/1/10 to 3/31/10
    *       *  
Second Quarter: 10/1/09 to 12/31/09
    *       *  
First Quarter: 7/1/09 to 9/30/09
    *       *  

Fiscal Year
           
2009
 
High Bid
   
Low Bid
 
Fourth Quarter: 4/1/09 to 6/30/09
    *       *  
Third Quarter: 1/1/09 to 3/31/09
    *       *  
Second Quarter: 10/1/08 to 12/31/08
    *       *  
First Quarter: 7/1/08 to 9/30/08
    *       *  
 

* Our common stock had no trading price until May 3, 2010.

Holders

As of September 28, 2010, we had approximately 73 stockholders of record of our common stock.

Transfer Agent

The transfer agent and registrar for our common stock is Pacific Stock Transfer Company, 500 E. Warm Springs Road, Suite 240, Las Vegas, NV, 89119-4355.
 
Dividend Policy
 
We plan to retain all earnings generated by our operations, if any, for use in our business. We do not anticipate paying any cash dividends to our stockholders in the foreseeable future. The payment of future dividends on the common stock and the rate of such dividends, if any, and when not restricted, will be determined by our board of directors in light of our earnings, financial condition, capital requirements, and other factors. Additionally, under the terms of our credit facility, we are precluded from paying a dividend.

 
9

 
 
Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information regarding securities authorized for issuance under our equity compensation plans as of June 30, 2010.
 
   
Number of securities
to be issued upon
exercise of
outstanding options,
   
Weighted
average
exercise price
of outstanding
options
   
Number of securities remaining
available for
future issuance under equity
compensation plans (excluding
securities reflected in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders (1)
    872,000     $ .25       4,128,000 (2)
Equity compensation plans not approved by security holders (3)
    438,456       .228       -0-  
                         
Total
    1,310,456     $ .243       4,128,000  
 
(1)
Includes option awards outstanding under our 2009 Stock Option Plan.
(2)
Includes shares remaining available for future issuance under our 2009 Stock Option Plan.
(3)
Non-qualified stock option issued to the Company’s Chief Financial Officer, Ronald Scott.

Recent Sales of Unregistered Securities
 
None.
 
Repurchases.

None.
 
ITEM 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Company during the fiscal years ended June 30, 2010 and 2009 and should be read in conjunction with our financial statements and accompanying notes thereto included elsewhere herein. Certain information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results may differ materially from the results discussed in this section because of various factors, including those set forth elsewhere herein. See “Forward-Looking Statements” included in this report.

Overview of the Company and Business Segments

We are a provider of goods and information to consumers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life. The information that we provide consists primarily of product demonstration videos that the Company shows on its websites and instructional DVDs that the Company sells.
 
Established with the conviction that sensual pleasure and fulfillment are essential to a well-lived and healthy life, Liberator Bedroom Adventure Gear® was created to empower exploration, fantasy and the communication of desire, no matter the person’s shape, size or ability. Products include the original Liberator shapes and furniture, sophisticated lingerie and latex apparel, pleasure objects, as well as bath and body, bedding and home décor. Liberator is a growing consumer brand that celebrates intimacy by inspiring romantic imagination.

Liberator Bedroom Adventure Gear is a love-style brand that exists in a space where the act of love meets art and invention. Not prurient enough to be an "adult" product, yet too sexy to be considered mainstream, we created a retail product category and brand called “Liberator” to define ourselves in a marketplace that is rapidly gaining in popularity and acceptance.

 
10

 
 
Since we shipped our first products in 2002, the Company has evolved into a community of dedicated employees that create, develop, make, market, advertise, and promote products and ideas that allow couples to have a fuller sexual experience of themselves and each other.

We are focused on building, developing and marketing our Liberator brand of Bedroom Adventure Gear products. Since inception, we have spent over $8 million in print advertising, building awareness of the Liberator brand primarily through magazine advertisements. We now intend to broaden our marketing reach by advertising on selected cable television and radio channels, and through expanded internet advertising.

In addition to the Liberator Shapes, we also produce a line of casual foam-based furniture that we sell under the Studio OneUp “Jaxx” brand. These products are produced as a by-product from the manufacturing of Liberator products, as we re-purpose the scrap foam created from the cutting of the cushions. The Studio OneUp products are offered directly to consumers through our web site www.studiooneup.com, to e-Merchants under drop-ship agreements where we ship directly to their customers, and to other resellers.

We are currently housed in a 140,000 sq. ft. vertically integrated manufacturing facility on eight acres in a suburb of Atlanta, Georgia. Since our first sale in May 2002, we have grown to include 108 employees, with our products being sold directly to consumers and through hundreds of domestic resellers and on-line affiliates and six international resellers.

The following information should be read together with the consolidated financial statements and notes thereto included elsewhere herein.

Critical Accounting Policies and Estimates

Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below.

Revenue Recognition.  To recognize revenue, four basic criteria must be met: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

Net sales are comprised of the total product sales billed during the period plus amounts paid for shipping and handling, less the actual returns, customer allowances, and customer discounts.

Allowance for Doubtful Account. We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and an additional allowance may be required.

Inventories. We value inventory at the lower of cost or market on an item-by-item basis and establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations. Finished goods and goods in process include a provision for manufacturing overhead, including depreciation.

 
11

 
 
Accounting for Income Taxes. We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2010 and June 30, 2009, we had not recorded any tax liabilities for uncertain tax positions.

We estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items, such as property and equipment depreciation, for tax and financial reporting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examination reviews.

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determine that it is more likely than not that we will not realize all or part of our deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which would be reflected as income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currently has a valuation allowance, we will reverse the valuation allowance, which would be reflected as an income tax benefit.

During fiscal 2009 and 2010, we recorded valuation allowances against deferred income tax assets of $700,419 and $378,803, respectively, representing the amount of our deferred income tax assets in excess of our deferred income tax liabilities. We recorded the valuation allowance because management was unable to conclude, in light of the cumulative losses we have realized for the three year period ended June 30, 2010, that realization of the net deferred income tax asset was more likely than not.

Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amounts of such assets to future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

New Accounting Pronouncements

Please refer to Note C, “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our financial statements included in this report for a discussion on the impact of the adoption of new accounting pronouncements.

Results of Operations

Overview

Comparisons of selected consolidated statements of operations data as reported herein follow for the periods indicated:

Total Company:
 
Year Ended
June 30, 2010
   
Year Ended
June 30, 2009
   
%
Change
 
                   
Net sales
  $ 11,079,760     $ 10,260,552       8 %
Gross profit
  $ 3,680,399     $ 3,116,444       18 %
Loss from operations
  $ (624,257 )   $ (1,000,869 )      
Diluted (loss) per share
  $ (0.02 )   $ (0.07 )      

Net Sales by Channel:
 
Year Ended
June 30, 2010
   
Year Ended
June 30, 2009
   
%
Change
 
                   
Direct
  $ 5,354,622     $ 5,143,604       4 %
Wholesale
  $ 4,735,789     $ 4,022,127       18 %
Other
  $ 989,349     $ 1,094,821       (10 )%
Total Net Sales
  $ 11,079,760     $ 10,260,552       8 %

Other revenues consist principally of shipping and handling fees derived from our Direct business.

 
12

 

 
 
Year Ended
   
Margin
   
Year Ended
   
Margin
   
%
 
Gross Profit by Channel:
 
June 30, 2010
   
%
   
June 30, 2009
   
%
   
Change
 
                               
Direct
  $ 2,601,700       49 %   $ 2,017,835       39 %     29 %
Wholesale
  $ 1,177,732       25 %   $ 975,404       24 %     21 %
Other
  $ (99,033 )     (10 )%   $ 123,205       11 %     (180 )%
Total Gross Profit
  $ 3,680,399       33 %   $ 3,116,444       30 %     18 %

Fiscal Year ended June 30, 2010 Compared to the Fiscal Year Ended June 30, 2009

Net sales for the twelve months ended June 30, 2010 increased from the comparable prior year period by $819,208, or 8%. The increase in sales was substantially due to an increase in sales through the Wholesale channel and, to a lesser extent, higher sales of Liberator products through the Direct sales channel.  The Direct sales channel, which consists of consumer sales through our two websites and, to a lesser extent, our factory store, increased from approximately $5.1 million in the twelve months ended June 30, 2009 to approximately $5.4 million in the twelve months ended June 30, 2010, an increase of approximately 4%. We attribute this increase to a stabilization of the U.S. economy and more typical levels of consumer spending on discretionary purchases. As a result of an ongoing focus on our Wholesale business, sales to wholesale customers increased approximately 18% from the prior year. 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 from 30% for the year ended June 30, 2009 to 33% for the year ended June 30, 2010. The improvement in gross margin was primarily the result of a selling price increase that was implemented in January 2010 in both the Direct and Wholesale channels.  This impact of the price increase was partially offset by more frequent consumer promotions offering “free” or significantly reduced shipping and handling, which accounts for the decrease in the Other category revenue and gross profit. Because product gross profit margins for all products in a given distribution channel are comparable, we analyze and manage our business based on changes in distribution channels and not by product mix.

Total operating expenses for the year ended June 30, 2010 were 39% of net sales, or $4,304,656, compared to 40% of sales, or $4,117,313, for the year ended June 30, 2009. Operating expenses increased 5% from fiscal 2009 to fiscal 2010. This increase in operating expenses was primarily the result of a 23% increase in General and Administrative expense which was primarily the result of higher personnel related costs.  The increase in General and Administrative expense was partially offset by a decrease in Advertising and Promotion expense of $182,358, or a 21% decrease.  Advertising and promotion expenses were reduced during fiscal 2010 as part of a plan to improve the targeting, timing and effectiveness of advertising spending.

Other income (expense) decreased from ($2,586,234) to ($409,695) in fiscal 2010.  Expense 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.  Interest expense and financing costs during fiscal 2010 decreased by 29% from $314,719 in fiscal 2009 to $222,071 in fiscal 2010. The decrease was primarily the result of lower interest rates on lower average interest bearing debt balances.

No expense or benefit from income taxes was recorded in the twelve months ended June 30, 2010 or 2009. 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.

We had a net loss of $1,033,952, or ($0.02) per diluted share, for the twelve months ended June 30, 2010 compared with a net loss of $3,587,103, or $(0.07) per diluted share, for the twelve months ended June 30, 2009.

Liquidity and Capital Resources
 
Our primary sources of liquidity and capital resources are the availability of borrowings under our credit facility and through sales of debt and equity securities.
 
The loss from operations decreased to $624,257 during fiscal 2010 as compared to a loss from operations of $1,000,869 in the prior fiscal year. At June 30, 2010, increases in accounts receivable, consisting primarily of amounts due from our wholesale customers, required $216,442 in cash during fiscal 2010 compared to requiring $16,710 in fiscal 2009. At June 30, 2010, increases in inventory required $208,448 in cash during fiscal 2010 compared to $552,400 of cash provided in fiscal 2009. The increase in inventory in fiscal 2010 was primarily related to increasing sales demand and management’s continued efforts to reduce delivery lead times to customers.

 
13

 
 
At June 30, 2010, decreases in accounts payable required $668,707 in cash during fiscal 2010 compared to providing $633,674 in cash during fiscal 2009. At June 30, 2010, increases in accrued payroll and related expenses provided $129,802 in cash compared to $16,916 in the prior fiscal year. The increase in accrued payroll and related expenses is primarily due to the timing of the pay day at the end of the fiscal year relative to the end of the pay period and the accrual of $76,838 in deferred compensation expense.
 
Operating activities required $1,661,640 of our cash flow in fiscal 2010. This compares with net cash provided by operating activities of $252,097 in fiscal 2009.
 
Cash used in investing activities in fiscal 2010 was $189,178 compared to $352,392 in fiscal 2009 and consisted of capital expenditures for machinery, equipment and software.
 
At June 30, 2010, we had $320,184 outstanding on our line of credit, compared to an outstanding balance of $171,433 at June 30, 2009.
 
On May 17, 2010, OneUp Innovations, Inc., our wholly owned subsidiary, entered into a credit facility to provide it with an asset based line of credit of up to $600,000 against 80% of eligible accounts receivable (as defined in the agreement.)  The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 60 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable and inventory balances. Advances under the agreement bear interest at a rate of 2% over the prime rate (5.25% as of June 30, 2010) for the accounts receivable portion of the advances and the inventory portion of the borrowings.  In addition there are collateral management fees of 0.4% for each 10-day period that an advance on an accounts receivable invoice remains outstanding and a 1.9% collateral management fee on the average monthly loan outstanding on the inventory portion of any advance. As of June 30, 2010, we had $320,184 outstanding on this line of credit.  The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation.  On June 30, 2010, we were in compliance with all of the financial and other covenants required under this credit facility.

On November 10, 2009, the Company entered into a loan agreement for a line of credit with a commercial finance company that provided credit of up 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 6% (9.25% as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as defined in the agreement.  The balance owed under this revolving line of credit was repaid on May 17, 2010.

As of June 30, 2009, we had a line of credit with a commercial finance company which provided up to $500,000 credit against 85% of eligible accounts receivable (aged less than 90 days) 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. As of June 30, 2009, we were in full compliance with the terms of this revolving line of credit. As of June 30, 2009, the amount owed on the line of credit was $171,433 and it was repaid in full in August, 2009.

As of June 30, 2010, we had $388,659 in cash and cash equivalents.

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 $1,033,952 and $3,587,103 for the years ended June 30, 2010 and 2009, respectively, and, as of June 30, 2010, the Company has an accumulated deficit of $6,175,531 and a working capital deficit of $676,989.

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 internal 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.
 
 
14

 

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.

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 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.

Off-Balance Sheet Arrangements

As of June 30, 2010, we did not have any significant off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

Inflation

During early fiscal 2009, we experienced increases in various product raw material costs, transportation costs and the cost of petroleum based raw materials and packaging supplies used in our business, which were associated with higher oil and fuel costs. We currently believe petroleum related raw material and product cost pricing pressures have stabilized and will remain relatively constant throughout fiscal 2011, although there is no assurance this will occur. We do not believe current inflation rates will have a material impact on our future operations or profitability.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and anticipate 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 our control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the markets we operate in and sell to. 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.

 
15

 

ITEM 8.          Financial Statements and Supplementary Data
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Page
Consolidated Financial Statements:
   
     
Report of Independent Registered Public Accounting Firm
 
F-1
     
Consolidated Balance Sheets as of June 30, 2010 and 2009
 
F-2
     
Consolidated Statements of Operations for the years ended June 30, 2010 and 2009
 
  F-3
     
Consolidated Statements of Changes in Stockholders' Equity (Deficit) from July 1, 2008 to June 30, 2010
 
  F-4
     
Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009
 
  F-5
     
Notes to Consolidated Financial Statements
 
  F-6
 
 
16

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of WES Consulting, Inc.

We have audited the accompanying consolidated balance sheets of WES Consulting, Inc. as of June 30, 2010 and 2009, 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, 2010.  WES Consulting, 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 provides 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 WES Consulting, Inc. as of June 30, 2010 and 2009, 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, 2010, 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 attain 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

/s/ Gruber & Company, LLC

Lake Saint Louis, Missouri
October 8, 2010

 
F-1

 

WES Consulting, Inc. and Subsidiaries

Consolidated Balance Sheets
 
   
June 30,
2010
   
(restated)
June 30,
2009
 
Assets:
           
Current assets:
           
Cash and cash equivalents
 
$
388,659
   
$
1,815,633
 
Accounts receivable, net of allowance for doubtful accounts of $14,143 in 2010 and $5,740 in 2009
   
562,872
     
346,430
 
Inventories
   
908,851
     
700,403
 
Prepaid expenses
   
212,438
     
95,891
 
Total current assets
   
2,072,820
     
2,958,357
 
                 
Property and equipment, net
   
1,075,315
     
1,135,517
 
                 
Total assets
 
$
3,148,135
   
$
4,093,874
 
Liabilities and stockholders’ equity:
               
Current liabilities:
               
Accounts payable
 
$
1,579,138
   
$
2,247,845
 
Accrued compensation
   
284,796
     
154,994
 
Accrued expenses and interest
   
125,869
     
145,793
 
Line of credit
   
320,184
     
171,433
 
Short-term notes payable
   
362,812
     
 
Current portion of long-term debt
   
77,010
     
145,481
 
Credit card advance
   
     
198,935
 
Total current liabilities
   
2,749,809
     
3,064,481
 
Long-term liabilities:
               
Note payable – equipment
   
12,136
     
72,812
 
Leases payable
   
140,749
     
225,032
 
Notes payable – related party
   
105,948
     
125,948
 
Convertible notes payable – shareholder (net)
   
523,731
     
285,750
 
Unsecured lines of credit
   
99,664
     
124,989
 
Deferred rent payable
   
331,570
     
356,308
 
Less: current portion of long-term debt
   
(77,010
)     
(145,481
)
Total long-term liabilities
   
1,136,788
     
1,045,358
 
Total Liabilities
   
3,886,597
     
4,109,839
 
Commitments and contingencies
               
Stockholders’ deficit:
               
Series A Convertible Preferred stock, zero shares authorized, 4,300,000 shares are obligated to be issued by the Company with a liquidation preference of  $1,000,000 as of June 30, 2010. On June 30, 2009, 4,300,000 shares of Convertible Preferred Stock, $0.0001 par value, with a liquidation preference of $1,000,000 were outstanding
   
     
430
 
Common stock, $0.01 par value, 175,000,000 shares authorized, 63,182,647 and 60,932,981 shares issued and outstanding in 2010 and 2009, respectively
   
631,826
     
609,330
 
Additional paid-in capital
   
4,805,243
     
4,515,854
 
Retained deficit
   
(6,175,531
)
   
(5,141,579
)
Total stockholders’ deficit
   
(738,462
)     
(15,965
)
Total liabilities and stockholders’ equity
 
$
3,148,135
   
$
4,093,874
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-2

 

WES Consulting, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
Years Ended June 30, 2010 and 2009
 
   
2010
   
(restated)
2009
 
             
Net Sales
 
$
11,079,760
   
$
10,260,552
 
Cost of goods sold
   
7,399,361
     
7,144,108
 
Gross profit
   
3,680,399
     
3,116,444
 
Operating expenses:
               
Advertising and Promotion
   
682,332
     
864,690
 
Other Selling and Marketing
   
1,184,391
     
1,201,054
 
General and Administrative
   
2,188,553
     
1,781,352
 
Depreciation
   
249,380
     
270,217
 
Total operating expenses
   
4,304,656
     
4,117,313
 
Loss from Operations
   
(624,257
)
   
(1,000,869
Other Income (Expense):
               
Interest income
   
4,543
     
1,980
 
Interest (expense) and financing costs
   
(222,071
)
   
(314,719
)
Expenses related to merger
   
(192,167
)
   
(2,273,495
)
Total Other Income (Expense)
   
(409,695
)
   
(2,586,234
)
Net Loss Before Income taxes
   
(1,033,952
)
   
(3,587,103
)
Provision for Income Taxes
   
     
 
 Net Loss
 
 $
   (1,033,952
)
 
 $
(3,587,103
)
 Loss per share:
               
           Basic
 
$
(0.02
)
 
$
(0.07
)
           Diluted
 
$
(0.02
)
 
$
(0.07
)
Weighted-average number of common shares outstanding:
               
           Basic
   
62,103,434
     
48,341,549
 
           Diluted
   
62,103,434
     
48,341,549
 

The accompanying notes are an integral part of these consolidated financial statements.

 
F-3

 

WES Consulting, Inc. and Subsidiaries
 
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Restated)
 
From July 1, 2008 to June 30, 2010
 
                           
Total
 
   
Series A Preferred
         
Additional
         
Stockholders'
 
 
 
Stock
   
Common Stock
   
Paid-in
   
Accumulated
   
Equity
 
   
Shares
   
$
   
Shares
   
$
   
Capital
   
Deficit
   
(Deficit)
 
                                               
Balance, July 1, 2008
          $ -      
45,000,001
    $
450,000
    $
156,284
    $
(1,554,476
)
  $
(948,192
)
                                                         
Stock issued for cash
   
-
     
-
     
5,000,000
     
50,000
     
(47,000
   
-
     
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
     
80,000
     
1,616,465
     
-
     
1,696,465
 
Shares issued for services in connection with the private placement
   
-
     
-
     
2,932,980
     
29,330
     
(29,330
)
   
-
     
-
 
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 merger
   
-
     
-
     
-
     
-
     
1,250,000
     
-
     
1,250,000
 
Fair market value of warrant issued to Hope Capital
   
-
     
-
     
-
     
-
     
4,500
     
-
     
4,500
 
Net loss (restated)
   
-
     
-
     
-
     
-
     
-
     
(3,587,103
)
   
(3,587,103
)
Ending balance, June 30, 2009
   
4,300,000
   
$
430
     
60,932,981
   
$
609,330
   
$
4,515,854
   
$
(5,141,579
)
 
$
(15,965
)
Obligation to issue preferred stock
   
(4,300,000
   
(430
                   
430
             
-
 
Recapitalization in connection with merger with Liberator, Inc.
   
-
     
-
     
983,000
     
9,830
     
(9,830
   
  -
     
-
 
Common stock issued in private placement, net of $48,500 in issuance costs, fees and expenses
   
-
     
-
     
1,000,000
     
10,000
     
241,500
     
-
     
251,500
 
Shares issued for services in connection with the private placement
     
-
   
-
     
100,000
     
1,000
     
(1,000
)    
-
     
-
 
Common stock issued in private placement
     
-
   
-
     
166,666
     
1,666
     
48,334
     
-
     
50,000
 
Stock-based compensation
     
-
   
-
     
-
     
-
     
9,955
     
-
     
9,955
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(1,033,952
   
(1,033,952
)
Ending balance, June 30, 2010
   
-
   
$
-
     
63,182,647
   
$
631,826
   
$
4,805,243
   
$
(6,175,531
)
 
$
(738,462
)

The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 

WES Consulting, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2010 and 2009

 
 
2010
   
(restated)
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(1,033,952
)
 
$
(3,587,103
)
Adjustments to reconcile (loss) from continued operations to net cash from operations:
               
Depreciation
   
249,380
     
270,217
 
Equity compensation
   
9,955
     
-
 
Expenses related to merger
   
192,167
     
2,273,495
 
Amortization of debt issuance costs
   
45,815
     
-
 
Change in operating assets and liabilities:
               
Accounts Receivable
   
(216,442
   
(16,710
)
Inventory
   
(208,448
   
552,400
 
Prepaid expenses
   
(116,547
   
17,107
 
Accounts payable
   
(668,707
   
633,674
 
Accrued expenses
   
(19,924
   
72,947
 
Accrued Payroll and Related
   
129,802
     
16,916
 
Deferred rent payable
   
(24,738
   
19,153
 
Net cash (used in) provided by operating activities
   
(1,661,640
   
252,097
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investments in equipment
   
(189,178
)
   
(352,392
)
Net cash used in investing activities
   
(189,178
)
   
(352,392
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from sale of common stock
   
301,500
     
1,699,465
 
Borrowings under line of credit
   
2,056,071
     
2,710,368
 
Repayment of line of credit
   
(1,907,320
)
   
(2,817,075
)
Borrowings (repayments) of loans from related party
   
(20,000
)
   
120,948
 
Proceeds from credit card advance
   
-
     
550,000
 
Repayment of credit card advance
   
(198,935
)
   
(351,065
Proceeds from short term note and unsecured notes
   
465,000
     
100,000
 
Repayment of short term note and unsecured notes
   
(127,513
)
   
(214,160
Principle payments on note payable and capital leases
   
(144,959
)
   
(83,260
)
Additions to capital leases
   
-
     
111,188
 
Net cash provided by financing activities
   
423,844
     
1,826,409
 
                 
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
   
(1,426,974
   
1,726,114
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
1,815,633
     
89,519
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
388,659
   
$
1,815,633
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Non cash items:
               
Common stock issued in acquisition of subsidiary
 
$
-
    $
1,987,745
 
Note payable issued in acquisition of majority control, net of embedded derivative
 
$
192,167
   
285,750
 
                 
Cash paid during the year for:
               
Interest
 
$
153,763
   
$
245,256
 
Income Taxes
   
     
 

The accompanying notes are an integral part of these consolidated financial statements.

 
F-5

 

WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
NOTE A – ORGANIZATION AND NATURE OF BUSINESS
 
WES Consulting, Inc. (the “Company”) was incorporated February 25, 1999 in the State of Florida. Until October 19, 2009, the Company was in the business of consulting and commercial property management.  On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc., a Nevada corporation (“Liberator”).  Pursuant to the Agreement, Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”).  References to the “Company” in these notes includes the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc.

As a result of the Merger, each issued and outstanding share of the common stock of Liberator (the “Liberator Common Shares”) were converted into one share of the Company’s 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 the Company (the “WES Common Stock”).  Pursuant to the Merger Agreement, each issued and outstanding share of preferred stock of Liberator (the “Liberator Preferred Shares”) was to be converted into one share of the Company’s preferred stock with the provisions, rights, and designations set forth in the Merger Agreement (the “WES Preferred Stock”).  On the execution date of the Merger Agreement, the Company was not authorized to issue any preferred stock, and the parties agreed that the Company will file an amendment to its Articles of Incorporation authorizing the issuance of the WES Preferred Stock, and at such time the WES Preferred Stock will be exchanged pursuant to the terms of the Merger Agreement.  As of the execution date of the Merger Agreement, Liberator owned eighty-one point seven (80.7%) percent of the issued and outstanding shares of the Company’s common stock.  Upon the consummation of the Merger, the shares of WES Common Stock owned by Liberator prior to the Merger were cancelled.

The Merger 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.

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 Atlanta, Georgia.  Sales are generated through the internet and print advertisements. 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 $1,033,952 and $3,587,103 (as restated) for the years ended June 30, 2010 and 2009, respectively and as of June 30, 2010 the Company had an accumulated deficit of $6,175,531 and a working capital deficit of $676,989.

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 and additional manufacturing equipment to improve production efficiencies. To that end, the Company recently implemented a new Enterprise Resource Planning (ERP) software system and installed a second unit production sewing 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, borrowings under our line of credit, 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.
 
 
F-6

 

WES Consulting, Inc. and Subsidiaries
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 the Company and our wholly owned 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) 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 June 30, 2010, accounts receivable totaled $562,872 net of $14,143 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.
 
 
F-7

 

WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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, 2010, substantially all of our cash and cash equivalents were managed by a single financial institution.  As of June 30, 2010 none of our cash and cash equivalents exceeded the FDIC insured limits.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in the United States, Canada and Europe.

Fair Value of Financial Instruments

The Company values its financial instruments in accordance with 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. We have no assets or liabilities valued with Level 1 inputs.
 
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.  We have no assets or liabilities valued with Level 2 inputs.
 
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. We have no assets or liabilities valued with Level 3 inputs.

At June 30, 2010, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, obligations under capital leases, 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 $60,427 at June 30, 2010 and $57,625 at June 30, 2009. Advertising expense for the years ended June 30, 2010 and 2009 was $682,332 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 $140,547 for the year ended June 30, 2010 and $173,583 for the year ended June 30, 2009. Research and development costs are included in general and administrative expense.

 
Shipping and Handling

We account for shipping and handling costs in accordance with FASB ASC 605, Revenue Recognition.  Amounts billed to customers in sale transactions related to shipping and handling costs are recorded as revenue. Shipping and handling costs incurred by us are included in cost of sales in the consolidated statements of operations.

Net sales for the year ended June 30, 2010 and 2009 includes amounts charged to customers of $954,924 and $1,071,978, respectively, for shipping and handling charges.

 
F-8

 

 
WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 on December 31, 2015.  The lease is on an escalating schedule with payments during the final year of 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, 2010 is $331,570.  The rent expense under this lease for the years ended June 30, 2010 and 2009 was $323,723.

Segment Information

During fiscal 2010 and 2009, the Company only operated in one segment; therefore, segment information has not been presented.

  Recent Accounting Pronouncements

In June 2008, the FASB issued revisions to FASB ASC 260, Earnings Per Share (“FASB ASC 260”) that prescribe guidelines on determining whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share. Further, the revisions clarify that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. As required, we adopted these revisions to FASB ASC 260 effective July 1, 2009.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification ™ (“ASC”) as the sole source of authoritative non-governmental GAAP. The ASC supersedes all non-grandfathered, non-SEC accounting literature but does not change how the Company accounts for transactions or the nature of related disclosures made. Instead, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than individual pronouncements. The Company has adopted the ASC, which became effective for interim and annual periods ending after September 15, 2009, and adoption did not have a material impact on its consolidated financial statements.
 
In July 2009, the Company adopted authoritative guidance for business combinations in accordance with ASC 805, “Business Combinations.” The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations but introduced a number of changes, including the way assets and liabilities are valued, recognized, and measured as a result of business combinations. ASC 805 requires an acquisition date fair value measurement of assets acquired and liabilities assumed. It also requires the capitalization of in-process research and development at fair value and requires acquisition-related costs to be expensed as incurred. The Company has applied this guidance to business combinations completed since July 1, 2009.

In January 2010, the FASB issued ASU 2010-06 “Improving Disclosures about Fair Value Measurements”, which is an update to Topic 820, “Fair Value Measurement and Disclosures.” This update establishes further disclosure requirements regarding transfers in and out of levels 1 and 2, and activity in level 3 fair value measurements. In addition, companies will be required to disclose quantitative information about the inputs used in determining fair values. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the new Level 3 disclosures which become effective after December 15, 2010. The Company adopted ASU 2010-06 on January 1, 2010, and the adoption had no impact on the Company’s financial position or results of operations as it only amends required disclosures.

 
F-9

 
 
WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  Recent Accounting Pronouncements (continued)

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855).”  The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed.  Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP.  ASU 2010-09 is effective for interim or annual financial periods ending after June 15, 2010.  The Company does not expect the provisions of ASU 2010-09 to have a material effect on its consolidated financial statements.

We have determined that all other recently issued accounting standards will not have a material impact on our consolidated financial statements, or do not apply to our operations.

Basic and Diluted Net Loss Per Share

The loss per share (“EPS”) is presented in accordance with the provisions of the Accounting Standards Codification (“ASC”).  Basic EPS is calculated by dividing the income or loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  Basic and diluted EPS were the same for fiscal 2010 and 2009, as the Company had losses from operations during both years and therefore the effect of all potential common stock equivalents is anti-dilutive (reduces loss per share).
 
There were approximately 5,650,849 and 4,400,849 securities excluded from the calculation of diluted loss per share because their effect was anti-dilutive for the years ended June 30, 2010 and 2009, respectively.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period that includes the enactment date.
 
As a result of the implementation of accounting for uncertain tax positions effective July 1, 2008, the Company did not recognize a liability for unrecognized tax benefits and, accordingly, was not required to record any cumulative effect adjustment to beginning of year retained earnings. As of both the date of adoption and June 30, 2010, there was no significant liability for income tax associated with unrecognized tax benefits.
 
In evaluating a tax position for recognition, management evaluates whether it is more-likely-than-not that a position will be sustained upon examination, including resolution of related appeals or litigation processes, based on technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company's financial statements as the largest amount of tax benefit that, in management's judgment, is greater than 50% likely of being realized upon settlement.
 
The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its consolidated statements of operations. As of the date of adoption and during the years ended June 30, 2010 and 2009, there was no accrual for the payment of interest and penalties related to uncertain tax positions.
 
Stock Based Compensation

We account for stock-based compensation in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and restricted stock award at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period. The expense recognized reflects an estimated forfeiture rate for unvested awards of 25%.
 
 
F-10

 

WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE D – IMPAIRMENT OF LONG-LIVED ASSETS
 
We follow Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, Property, Plant, and Equipment, regarding impairment of our other long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
 
An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived asset.

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, 2010 or 2009.
NOTE E – INVENTORIES
 
All inventories are stated at the lower of cost or market using the first-in, first-out method of valuation.
 
The Company's inventories consisted of the following components at June 30, 2010 and 2009:
 
   
2010
   
2009
 
Raw materials
 
$
443,043
   
$
366,355
 
Work in Process
   
170,996
     
176,637
 
Finished Goods
   
294,812
     
157,411
 
   
$
908,851
   
$
700,403
 

NOTE F – PROPERTY AND EQUIPMENT, NET
 
Property and equipment at June 30, 2010 and 2009 consisted of the following:
 
 
2010
 
2009
 
Estimated
Useful Life 
 
Factory Equipment
 
$
1,531,734
   
$
1,506,147
 
7-10 years
 
Computer Equipment and Software
   
819,870
     
665,135
 
5-7 years
 
Office Equipment and Furniture
   
166,996
     
166,996
 
5-7 years
 
Leasehold Improvements
   
321,288
     
312,433
 
15 years
 
Subtotal
   
2,839,888
     
2,650,711
     
Accumulated Depreciation & Amortization
   
(1,764,573
)
   
(1,515,194
)
   
   
$
1,075,315
   
$
1,135,517
     

Depreciation expense was $249,380 and $270,217 for the years ended June 30, 2010 and 2009, respectively.
 
 
F-11

 

WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE G – NOTE PAYABLE - EQUIPMENT
 
Note payable – equipment, at June 30, 2010 and 2009 consisted of the following: 
 
 
 
June 30,
 
   
2010
   
2009
 
Note payable to Fidelity Bank in monthly installments of $5,364 including
           
Interest at 8%, maturing October 25, 2010, secured by equipment
 
$
12,136
   
$
72,812
 
Long term debt portion
 
$
0
   
$
12,136
 
 
The schedule of minimum maturities of the note payable for fiscal years subsequent to June 30, 2010 is as follows:
 
Year ending June 30,
     
2011
 
$
12,136
 

NOTE H – LINE OF CREDIT
 
 On May 17, 2010, our wholly owned subsidiary, OneUp Innovations, Inc., entered into a financing agreement with an “asset-based” lender for the purpose of improving working capital.  The agreement provides for up to $600,000 and is secured primarily by accounts receivable, inventory, equipment, and all general intangibles. Under the financing agreement, the lender will make loans at our request and in the lender’s discretion (a) based on purchases of our accounts by the lender, with recourse against us and an advance rate of 80% (or such other percentage determined by the lender in its discretion), and (b) based on certain acceptable inventory not to exceed certain amounts, including an aggregate maximum of $200,000, not to exceed 50% of the aggregate amount of outstanding accounts on which an advance has been made.  The inventory component of the financing agreement is available to the Company, at the discretion of the lender and based upon the certain acceptable inventory, from October 1 through November 30 of each year.  The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 60 days prior to the end of the current financing period. Advances under the agreement bear interest at a rate of 2% over the prime rate (5.25% as of June 30, 2010) for the accounts receivable portion of the advances and the inventory portion of the borrowings.  In addition there are collateral management fees of 0.4% for each 10-day period that an advance on an accounts receivable invoice remains outstanding and a 1.9% collateral management fee on the average monthly loan outstanding on the inventory portion of any advance. The agreement provides that no change in control concerning us or any of our active subsidiaries shall occur except with the prior written consent of the lender. Events of default include, but are not limited to, the failure to make a payment when due or a default occurring on any of our indebtedness.  The financing agreement is personally guaranteed by the Company's CEO and majority shareholder, Louis Friedman and by the Company.  On June 30, 2010, the balance due under this financing agreement was $320,184.

On November 10, 2009, the Company entered into a loan agreement for a line of credit with a commercial finance company that provided 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 6% (9.25% as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as defined in the agreement.  The balance owed under this revolving line of credit was repaid on May 17, 2010.

On March 19, 2008, our wholly owned subsidiary, OneUp Innovations, Inc., entered into a loan agreement for a line of credit with a commercial finance company that provided 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, with such inventory loan not to exceed 30% of the accounts receivable loan. Borrowings under the agreement bear interest at the prime rate plus 2% (5.25% at June 30, 2009), payable monthly.  At June 30, 2009, the balance owed under the revolving line of credit was $171,433 and the line of credit was fully repaid in August 2009.
 
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.

 
F-12

 

WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
NOTE I – SHORT TERM NOTES PAYABLE

Current notes payable are comprised of the following at June 30:

   
2010
   
2009
 
Unsecured note payable to an individual, with interest at 16%, principal and interest due on January 3, 2011
 
$
200,000
   
$
-
 
                 
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing April 16, 2011
   
78,659
     
-
 
                 
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing January 19, 2011
   
60,109
     
-
 
                 
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing January 13, 2011
   
24,044
     
-
 
                 
   
$
362,812
   
$
-
 

NOTE J – CREDIT CARD ADVANCE
 
On July 2, 2008, the Company received $350,000 from a finance company under the terms of a credit facility that was secured by the Company's future credit card receivables.  Terms of the credit facility required 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 equated to an effective annual interest rate of 21.1%.  The credit facility was 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 this loan required repayment on each business day of principal and interest at a daily rate of $1,723.08 over a six month period. This six month $200,000 loan had a financing fee of 12% (equal to $24,000) on the principal amount, which equated to an effective annual interest rate of 43.2%.  The $200,000 loan was fully repaid in December, 2009.
 
NOTE K – CONVERTIBLE NOTES PAYABLE - SHAREHOLDER

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. 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 issuer 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 June 30, 2010, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $59,500.  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. 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 June 30, 2010, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $41,769.  This amount will be amortized over the life of the note as additional interest expense.
 
NOTE L – 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 4.5% to 11.2%. The aggregate amount owed on the three unsecured lines of credit was $99,664 at June 30, 2010 and $124,989 at June 30, 2009.

 
F-13

 
 
WES Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE M – COMMITMENTS AND CONTINGENCIES
 
Operating Leases

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires on December 31, 2015. The lease is on an escalating schedule with payment during the final year of 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, 2010 and 2009 is $331,570 and $356,308, respectively. The rent expense under this lease for the years ended June 30, 2010 and 2009 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 in September 2012.

The Company also leases certain warehouse equipment under an operating lease.  The monthly lease is $508 per month and expires in February 2011.

The Company also leases certain postage equipment under an operating lease.  The monthly lease is $144 per month and expires in January 2013.

Future minimum lease payments under non-cancelable operating leases at June 30, 2010 are as follows:

Year ending June 30,
     
2011
 
$
412,858
 
2012
   
413,940
 
2013
   
392,028
 
2014
   
391,685
 
2015
   
404,985
 
Thereafter through 2016
   
206,150
 
       
Total minimum lease payments
 
$
2,221,646
 
 
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 F 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, 2010:

Year ending June 30 
  
   
  
2011
 
 $
94,209
 
2012
   
43,843
 
2013
   
27,178
 
2014
   
7,601
 
2015
   
-
 
Total minimum lease payments
   
172,831
 
Less