Luvu Brands, Inc. - FORM 10-K - September 29, 2014

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Luvu Brands, Inc.	Financial_Report.xls
EX-32.2 - SECTION 906 CERTIFICATION BY THE CORPORATION'S PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - Luvu Brands, Inc.	exhibit_32-2.htm
EX-23.1 - CONSENT OF LIGGETT, VOGT & WEBB P.A., INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Luvu Brands, Inc.	exhibit_23-1.htm
EX-21.1 - LIST OF SUBSIDIARIES OF LIBERATOR, INC. - Luvu Brands, Inc.	exhibit_21-1.htm
EX-31.2 - SECTION 302 CERTIFICATION BY THE CORPORATION'S PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - Luvu Brands, Inc.	exhibit_31-2.htm
EX-31.1 - SECTION 302 CERTIFICATION BY THE CORPORATION'S PRINCIPAL EXECUTIVE OFFICER - Luvu Brands, Inc.	exhibit_31-1.htm
EX-32.1 - SECTION 906 CERTIFICATION BY THE CORPORATION'S PRINCIPAL EXECUTIVE OFFICER - Luvu Brands, Inc.	exhibit_32-1.htm
EX-10.12 - FIRST AMENDMENT TO LEASE DATED JULY 23, 2014 BY AND BETWEEN BEDFORD REALTY COMPANY, LLC AND ONEUP INNOVATIONS, INC. - Luvu Brands, Inc.	exhibit_10-12.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2014

Commission file number: 000-53314

Liberator, 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) x 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. ¨

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 o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ YES x NO

The aggregate market value of the common stock held by non−affiliates of the registrant computed by reference to the closing price of the common stock on December 31, 2013, the last trading day of the registrant’s most recently completed second fiscal quarter, was $2,215,813.

The number of shares of Common Stock, $.01 par value, outstanding as of the close of business on

September 25, 2014 was 70,702,596.

Liberator, Inc.

Index to Annual Report on Form 10-K

		PAGE

PART I

ITEM 1.	Business	3

ITEM 1A.	Risk Factors	11

ITEM 2.	Properties	11

ITEM 3.	Legal Proceedings	11

ITEM 4.	Mine Safety Disclosures	11

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	20

ITEM 8.	Financial Statements and Supplementary Data	21

ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22

ITEM 9A.	Controls and Procedures	22

ITEM 9B.	Other Information	23

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	23

ITEM 11.	Executive Compensation	25

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	27

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	28

ITEM 14.	Principal Accounting Fees and Services	29

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules	30

SIGNATURES		33

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Annual Report”) for Liberator, Inc. (“Liberator” the “Company””we” “our” or “us”) 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. You should not place undue reliance on forward-looking statements.

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 risks, 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 extend, renew or refinance our existing debt;

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

the loss of one or more significant customers, or the loss of the rights to distribute Tenga products in North America;

our plan to make continued investments in advertising and marketing;

our ability to maintain our brands;

unfavorable economic and market conditions and the impact on our leveraged financial position;

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 improve manufacturing efficiency at our production facility;

trends in raw material costs and other costs both in the industry and specific to the Company;

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 acquisitions we make;

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

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

risks associated with currency fluctuations;

an anticipated worsening US deficit and a rise in inflation in coming years that would put further stress on consumer spending;

management’s goals and plans for future operations;

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

Our Business

Liberator, Inc. is the manufacturer and marketer of Liberator Bedroom Adventure Gear^®, one of the world’s most widely-recognized brand categories in the sexual well-being space, now emerging into mainstream retail.

Liberator’s mission is to enhance couples’ intimacy by inspiring creativity and romantic imagination. Liberator Bedroom Adventure Gear^® creates surfaces and elevations that facilitate and expand sexual performance and repertoire. We believe our products make the act of love more exciting and rewarding for people of all shapes and sizes, regardless of age or physical limitations.

For more than 12 years, Liberator’s reputation and distinctive image has been consistently developed across an expanding number of sales channels including: Liberator.com, a direct-to consumer website; adult and couple-friendly adult retailers; Internet retailers in drug, mass, catalog and specialty areas selling products under the sexual wellness or well-being category; and Liberator’s retail flagship store.

The entire Liberator line, including more than a dozen trademarked products, is produced by a team of over 110 dedicated employees in a 140,000 square-foot factory in Atlanta, Georgia.

Liberator Bedroom Adventure Gear combines functional design with sensuous textures that transform ordinary bedrooms into supportive landscapes for intimacy. Liberator presents angles, elevations, curves and motion that help people of all sizes, including those with back injuries and other medical conditions find comfortable ways to connect intimately while assisting their stamina and performance.

We are a vertically integrated manufacturer that designs, develops and markets products and accessories that enhance intimacy. Liberator is also a nationally recognized brand trademark, brand category and a patented line of products commonly referred to as sexual positioning shapes and sex furniture. We are an integrated multi-channel, multi-brand direct-to-consumer retailer, distributor and wholesaler that also operates the Liberator brand websites. We conduct our manufacturing, distribution and all administrative functions from a single facility in Atlanta, Georgia. All business activity of the Company is done through our wholly-owned subsidiary, OneUp Innovations, Inc. (“OneUp”). OneUp was organized in 2000.

We believe our Liberator customer base consists primarily of affluent, college educated couples that buy Liberator to enhance bedroom play and/or to improve sexual performance.

In the sexual wellness market, the Company conducts direct to consumer business through its owned and managed websites, www.liberator.com and www.theliberator.co.uk, and the Liberator exhibition and concept store within our factory.

We conduct our wholesale business for Liberator products through five primary channels: (1) adult and female friendly retailers, flash sites and specialty boutiques, (2) e-tailers who sell our products through adult, mass market, drug and other sites offering sexual wellness products, (3) adult “toy” home party businesses, (4) mail order catalogers, and (5) wholesale distributors of adult / sexual wellness products. These wholesale accounts have approximately 950 retail locations and/or websites in the United States and Canada. We have a growing number of retailers who are also adding a dedicated Liberator exhibition concept to their merchandising space. We also sell internationally through a UK-based third-party fulfillment service, and through a distributor in Australia.

Under OneUp, we also function as an exclusive resale distributor of the Tenga brand sold through the same wholesale and direct-to-consumer channels as branded Liberator products. For the year ended June 30, 2014, Tenga products represented approximately twenty-one percent of our consolidated net sales.

In addition, the Company sells a line of contemporary casual seating under the Jaxx brand. Jaxx is an offshoot from Liberator manufacturing as it provides additional revenue from repurposing our polyurethane foam trim into shredded beanbag fill. The Jaxx product line and accessory products are sold through the following four wholesale channels: (1) beanbag e-tailers, (2) mass markets, (3) mail order catalogers, and (4) retail furniture stores. The Company also owns and manages a website under the URL www.JaxxLiving.com for direct to consumer sales. For the year ended June 30, 2014, this product line represented approximately twelve percent of our consolidated net sales.

Unless the context requires otherwise, all references in this report to the “Company,” “Liberator,” “we,” “our,” and “us” refers to Liberator, Inc. and its subsidiaries.

Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400.

Corporate History

The Company was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. to provide consulting and commercial property management services. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc. (f/k/a Remark Enterprises Inc.), a Nevada corporation (“Old Liberator”). Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”).

As of the execution date of the Merger Agreement, Old Liberator shareholders owned 80.7% of the issued and outstanding shares of the Company’s common stock. Upon the consummation of the Merger, the shares of Liberator Common Stock owned by Old Liberator prior to the Merger were cancelled.

On February 28, 2011, the Company name was changed from WES Consulting, Inc. to Liberator, Inc.

Industry Background

The Company participates in the rapidly growing worldwide market of sexual wellness. What was once called Family Planning has evolved over the last decade into a new category called Sexual Wellness, a growing worldwide movement toward sexual health. Many of the major health and wellness retailers, pharmacies and on-line retailers have started embracing this movement, especially over the last two to three years. A Google search of the term “Sexual Wellness” returns over 3 million entries, with the first two entries in organic search being Walgreens.com and Amazon.com.

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

K-Y ^®: the personal lubricant first introduced in 1917, offers 5 products including products marketed as lubricants with sensation that provide heightened intimate sensations. The K-Y brand is owned by UK-based Reckitt Benckiser.

Trojan Condoms ®, the leading condom in North America, now offers a line of nine vibrators and vibrating products. A recent quote from the Trojan Condom website - “vibrators are increasingly becoming as common in Americans’ bedrooms as coffee makers are in their kitchens.” The Trojan Condoms brand is owned by Church & Dwight Co. Inc, a Fortune 1000 company.

Durex Condoms ® (a division of Reckitt Benckiser) now offers a selection of vibrating products in addition to condoms.

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 retailing.

Business Strategy

As we believe Liberator is one of the few recognized brands and brand categories 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:

Manufacturing. To improve our business results, we constantly look for ways to manage the impact of rising raw material costs by improving the productivity of our manufacturing processes. We recently implemented modest price increases for certain products, but are unable to predict if we will be able to successfully pass on recent raw material cost increases to our wholesale and retail customers.

Wholesale Operations. Our goal is to increase consumer demand through advertising and public relations while our wholesale operations expand our offering to distributors, retailers and e-tailers across every channel of adult, mass market, drug and specialty accounts. For wholesalers thinking about adding Sexual Wellness products to their retail or online store, Liberator is typically one of the first “safer” products presented, as it can be promoted as an assistive aid to sexual positioning. As the mainstream demand for Sexual Wellness products grows, our sales staff is training and educating new resellers on how to get started in this category. For retail display, we offer mainstream packaging in a variety of sizes and price points to meet their customers particular demographic. For e-tailers, we maintain brand continuity by providing rich product content, photography and instructional videos for use on their websites. We also provide fulfillment services and can drop-ship orders directly to their customer, typically the same day the order is received.

Eco-Packaging. In fiscal 2013, we developed vacuum compressed packaging (described below) to reduce our carbon foot print, make our products more convenient for the consumer and easier to display for the retailer, and reduce our outbound shipping costs. During fiscal 2014, we expanded the number of products that used Eco-Packaging to include all shapes. Our ability to grow the Liberator brand and develop new growth opportunities depends in part on our ability to appropriately identify and execute our strategies and initiatives. Implementation of these plans may be delayed or may not be successful for a variety of reasons.

Liberator Concept Store. Our 2,500 square foot Liberator exhibition store is the retail extension of our Liberator.com website. Located at our Atlanta factory, it is a gallery-like setting for sensual and erotic discovery, offering a presentation of products that celebrate intimacy and romantic imagination. In our opinion, Liberator and luxury pleasure objects are meant to go together. Our concept store is a destination where customers can learn about, touch and purchase the Liberator products they have only been able to see online. In addition to Liberator branded shapes, furniture and accessories, the store features a range of better brands from around the globe including: designer sex toys, lounge-wear and lingerie collections, masks, cuffs and intimate accessories. Also included are limited addition hand-made items in glass and leather. We are dedicated to bringing our customers a compelling in-store experience through knowledgeable associates, interactive media displays and a high level of service, quality and innovation. The store also serves as a laboratory to listen and observe consumer reaction to new products and evaluate price points and merchandising techniques. Our concept store has demonstrated the strength of the Liberator brand as customers, both singles and couples, want to feel and experience our products and, although we are located in an industrial park, they are willing to travel to the store, return repeatedly and refer friends. We believe that a Liberator branded retail concept is ready to be expanded beyond our single location to large metropolitan areas, providing an upscale experience in-sync with the overall mainstreaming of sexual wellness.

Jaxx Products. The Jaxx product line was originally started in 2007 with the idea that we could create higher value from using our polyurethane foam trim as beanbag fill versus recycling this material as carpet pad regrind. Since then, the Jaxx product line has developed into a wide variety of styles, sizes and fabric choices including those designed for children. Our wholesale and mass market distribution channels are established mostly as drop-ship accounts and are seasonally busy during November and December. Further growth is expected to come from Jaxx as we expand sales into retail stores. We have also developed higher priced modern design seating and private labeled products, and offer contract production services around our core competency in manufacturing. The contemporary seating business is highly competitive. We believe we can compete effectively on the basis of product quality, design, customer service and price. We believe that our primary competitive advantages are consumer recognition of the Jaxx brand, as well as distribution through the multiple sales channels where consumers prefer to purchase. However, our plans to expand this product offering and sales channels may not be successful and implementation may hamper our operational and managerial resources.

Core Business Strengths

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

Design Vision

Our in-house design group continues to reinforce our constantly evolving brand image. Our products are designed to reflect utility and sensuality as well as be room décor that incorporates high quality fabrics and construction with comfort and performance in the bedroom. Evolving from our iconic Liberator shapes, we combined form with function to launch contemporary furniture and accessories for sex play, as well as products for mainstream and mass market retailers which embrace the sexual wellness category of products.

Advertising and Branding

The Liberator.com website is the primary branding and advertising vehicle for the Liberator brand. We believe our website reinforces the Liberator mission and brand image while driving sales to all of our wholesale channels. We also believe we have distinguished ourselves from other web e-tailers in the adult and sexual wellness space by using sophisticated photography, instructional videos and exceptional art direction combined with an entertainment bent. Liberator attracts customers to its website and other retailers and e-tailers through internally developed print ads, and radio and television advertising during holiday periods. These provocative advertising campaigns communicate a distinctive image that differentiates us and creates a connection and following with our customers. Since inception, over $9.7 million has been spent building brand awareness. We have also aligned the brand with the entertainment industry appearing in Meet the Fockers, Burn after Reading, The Real Housewives of Atlanta and numerous other TV and media events.

Diverse Mainstream Appeal

The Liberator brand is marketed and distributed through diverse wholesale mass market channels, specialty retailers and web stores. We estimate that approximately 50% of our purchases are made jointly by couples, varying in ages from 30 to 55 years old, who view sexual expression and experimentation as essential to a well-lived life. Liberator, as a company, also understands and supports sexuality as a potentially positive force in everyone’s life, and celebrates sexual diversity, differing desires, relationship structures, and individual choices based on consent. We offer our customers a broad range of Liberator styles and designs. By offering such a broad range of products, including higher priced luxury items, we believe it elevates the perception of the brand while providing more accessible price points for every customer and budget.

Flexible and Vertically Integrated Model

Our vertically integrated business model, with manufacturing, distribution, product development and marketing performed in-house, allows us to create new products with reduced lead times at a lower cost while enabling us to quickly respond to market and customer demands for new product releases. For our wholesale accounts, being able to fulfill large orders with shorter turnaround times allows us to capture business during December and February when wholesale customers make just-in-time holiday purchases.

American Manufacturing and Sourcing

Liberator has been crafting Bedroom Adventure Gear at its Atlanta headquarters for more than 12 years. It is our pride and heritage to manufacture in America, and to use other domestic sources of raw materials in our manufacturing process. We devote as much effort into providing jobs for our community as we do focusing on bettering the love lives of thousands. Our goal is to see that the jobs we create are more than just a paycheck, but rather are examples of good and lasting employment that support families and communities.

We implemented a state-of-the-art conveyor-based sewing system to manufacture sewn products at the lowest possible cost in the United States. Because all cutting, sewing, foam contouring, assembly and packaging are performed in-house, we believe we can exercise greater control over product quality and respond faster to changing customer demands, which gives us a competitive advantage over companies that utilize out-sourced sewing services. Liberator can source raw materials from multiple domestic suppliers and we have supply contracts in place to produce our specialty fabrics under specific quality control and performance standards with just-in-time deliveries.

Liberator Eco-Packaging

When we set about redesigning our packaging at the beginning of fiscal 2013, we were concerned about two things: how to make it more convenient at the point of purchase and how it would affect the world around us.

Before we could envision how our products could be more easily carried out of a store, we had to consider what path they must travel to get there. The majority of our Liberator products are large, high density foam pieces leaving us with a difficult product to reduce in size. In order to cut down the dimensions, we developed a proprietary vacuum compression process that removes approximately 90% of the air from the Liberator foam-based products without compromising the integrity of the product. This allows our Liberator foam-based products to leave our Atlanta manufacturing facility in a box that is approximately 60% smaller than our previous packaging.

As our boxes shrink, so does our carbon footprint. With less space necessary for shipping, we use less fuel for deliveries and fewer paper products for packaging, reducing our impact on the environment. For our customers, this means they get an easy-to-carry retail package, or a small, discreet plain brown box when ordering online.

Just like we have redefined the bedroom, we are redefining the way we impact the world around us.

Management Information Systems

Our enterprise resource planning software is designed specifically for the sewn products industry to provide comprehensive inventory, order processing, production planning, accounting and management information for the marketing, manufacturing, finance and distribution functions of our business. Item level replenishment and real time inventory is directly linked to our website feeds and online wholesale order portals. We continue to expand and upgrade our information systems, networks and infrastructure to support recent and future growth. To support our internal information technology infrastructure, we have agreements with third party providers for hosting services and administration support.

During fiscal 2013, we implemented a comprehensive new enterprise level e-commerce platform in the United States and the United Kingdom. This new e-commerce platform provides our domestic and European customers with a better user experience and, as a result, has increased our Direct to consumer sales.

Products and Services

Liberator Products

We developed a product category which we call “Liberator Bedroom Adventure Gear”. They are positioning props that elevate, rock and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting.

Liberator foam-based products (called “Liberator Shapes”) are manufactured in a variety of heights and widths to accommodate variations in the human body. They consist of differently shaped cushions and props that are available in an assortment of fabric colors and prints to add to the visual excitement. Each of the product profiles of the Liberator Shapes is unique, designed to introduce positions to the sexual experience that were previously difficult to achieve or impossible to achieve with standard pillows or cushions. Liberator Shapes are manufactured from structured polyurethane foam, cut at various angles, platforms and profiles. The foam base is encased in a tight, fluid resistant polyester shell, helping the cushions to maintain their shape. The original offering of the Liberator Wedge and Ramp, sold as a set, continue to be our best-selling items. All of the Liberator Shapes are also available in our Black Label Series which includes blindfolds and snap-on Velcro cuffs.

We have also developed larger profile designs that are commonly referred to as “sex furniture”. 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^®, Esse Stage, and the Equus^®. Other larger designs include products based on shredded polyurethane foam encased in a wide range of fabric types and colors and sold under our Zeppelin^® product offering. The Liberator larger profile designs can also be used as seating when not being used for relaxed interaction and creative intimacy.

All products sold under the Liberator brand provided 48% and 49% of our revenues for our fiscal years ended June 30, 2014 and 2013, respectively.

Jaxx Products

In addition to the Liberator product line, we also produce a line of casual foam-based furniture sold under the “Jaxx” brand. These products are primarily offered directly to consumers through our JaxxLiving.com web site and to e-Merchants under drop-ship arrangements where we ship directly to customers and to other resellers. Our Jaxx products provided 12% of our revenues in our fiscal year ended June 30, 2014 and 13% in our fiscal year ended June 30, 2013.

Resale Products

Beginning in 2006, we began importing high-quality pleasure objects from around the world. These resale products (including Tenga products) provided 32% of our revenues in each of our fiscal years ended June 30, 2014 and 2013.

Sales of Tenga products accounted for approximately 21% of net sales in each of the years ended June 30, 2014 and 2013 and approximately 17% and 19% of the total gross profit in those same years, respectively.

Intellectual Property

The Liberator trademark is registered with the United States Patent and Trademark office and with the registries of many foreign countries. In addition we were issued approximately 20 other product name trademarks and trade names including: “Bedroom Adventure Gear”, “Explore More”, Ramp, Wedge, Stage, Esse, Zeppelin, Hipster, Wing, Equus, Jaxx and Bonbon. In August 2005, we were issued utility patent number US 6,925,669 “Support Cushion and System of Cushions.” We believe our trademarks and patent have significant value and we intend to continue to vigorously protect them against infringement.

Sales and Distribution

Our sales personnel are organized by geographic market and by customer type. In addition, in North America, we have sales personnel who routinely visit sexual wellness retailers to assist in product training, merchandising and stocking of selling areas. 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.

As is customary in the sexual wellness and casual furniture industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers or wholesale distributors. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of sexual wellness and casual furniture products, combined with our expertise in marketing and new product introduction.

Our ten largest customers (excluding our own e-commerce sites and retail store) accounted for approximately 28% of net sales for the year ended June 30, 2014 and 24% of net sales for the year ended June 30, 2013. Sales to and through Amazon accounted for 16% of our net sales during the year ended June 30, 2014. The loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Marketing

Our marketing strategy is designed to increase brand awareness and drive highly targeted new and repeat customers to our websites, our e-merchants’ websites and our retail customers’ stores. We use a multi-channel approach which includes search engine marketing, print advertising, email campaigns, and other sales strategies to acquire and retain our customer base.

Online Marketing — We promote our websites via keywords and shopping feeds on internet search engines including but not limited to Google, Bing and Yahoo. Banner advertisements on display networks are also used to drive traffic to our websites.

Email Campaigns — Our weekly email marketing campaigns distribute information on new products, promotional discounts and product information to registered e-commerce customers.

Print Advertising — For Liberator and Jaxx products, we place advertisements in a broad range of national magazines and consumers are directed to one of our primary e-commerce websites to learn more about our products and place their orders. 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 television and radio advertising.

Manufacturing Facilities

Our 140,000 square foot facility on eight acres is located in a suburb of 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. Our in-house manufacturing capabilities have enabled us to achieve greater efficiencies and cost savings, as well as strict control over the entire manufacturing cycle including raw material procurement, finished goods production and logistics optimization. In addition to providing us with greater production flexibility, our in-house manufacturing provides us with the opportunity to improve fulfillment response time, reduces the risk of out-of-stock situations, limits finished goods obsolescence and improves overall operating margins.

Technology and Operations

Our websites are supported by a technology infrastructure that is designed to provide a superior customer experience, including speed, ease of use and security. Our technology infrastructure uses highly scalable, fully fault tolerant enterprise-class technology and provides a high-availability system that we believe rivals those of larger companies. We maintain strategic partnerships with vendors to ensure that we can rapidly deploy new products and information technology solutions that we believe are key to our success.

We follow rigorous industry standards to protect our internal operations and the personal information we collect from our customers. We do not sell or disclose the personal information of our customers. We continue to maintain and upgrade our technology framework that can support high levels of security while meeting the compliance requirements of Payment Card Industry security standards. We are considered a “sender” under the CAN-SPAM Act and comply with the applicable aspects thereof.

International Sales

In fiscal 2014, the Company adopted a new international sales strategy. In the European Union, the Company has shifted from a licensee model to a direct sales model with the addition of a US-based sales person. This salesperson is responsible for wholesale sales, marketing operations and customer service in the European Union and other international markets. Although total international sales represent less than 2% of total net sales, this change has resulted in increased product sales during the second half of fiscal 2014 from the same period in the prior year.

In fiscal 2013, the Company also launched a new e-commerce site that services consumers in the European Union. Orders placed on the website, www.theliberator.co.uk , are shipped from a third-party fulfillment center located in England directly to consumers. Our new eco-compression packaging significantly reduces the freight cost to send the products to England and to send the products from the fulfillment center to the end consumer, creating a better value for our customers.

Sales Channels

We conduct our business through two primary sales channels: Direct (consisting of our Internet websites and Atlanta store) 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 2014		Fiscal 2013
Direct	$	6,016	$	5,214
Wholesale		8,178		7,758
Other		526		874
Total Net Sales	$	14,720	$	13,846

Net sales in the Other channel consists 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 2014			Fiscal 2013
Direct sales channel net sales	$	6,016		$	5,214
Direct net sales as a percentage of total revenues		40.9	%		37.7	%

Wholesale

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

(Dollars in thousands)	Fiscal 2014			Fiscal 2013
Wholesale sales channel net sales	$	8,178		$	7,758
Wholesale net sales as a percentage of total revenues		55.6	%		56.0	%

As of June 30, 2014, the Company has over 1,000 active wholesale accounts, most of which are located in the United States.

Internet Websites

Since 2002, our Liberator website located at www.Liberator.com has allowed our customers to purchase our Liberator merchandise over the Internet. 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.

Our www.JaxxLiving.com website offers contemporary seating to the young adult and student market.

Our www.AvanaComfort.com website blends rest, relaxation and intimacy products in an offering that appeals to a broad range of consumers.

Unless specifically set forth to the contrary, the information that appears on our websites is not part of this annual report.

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 is seasonal and, as a result, revenues will vary from quarter to quarter. During the past three years, we have realized an average of approximately 29% of our annual revenues in our second quarter, which includes Christmas, and an average of approximately 27% of our revenues in the third quarter, which includes Valentine’s Day.

Competition

Competition among retailers of adult products and web based marketers is high. Although we compete with retail, catalog, and internet businesses and now mass and drug retailers that sell sexual wellness products including vibrators, pleasure objects, accessories and similar merchandise, we believe that this opens new channels of distribution for our products and that we are able to compete favorably as our Liberator products are unique, are couple-centric, and are assistive devices for couples with sexual limitations and issues.

We believe that our primary competitive advantage is consumer recognition of our brand. Since we sell through multiple sales channels, we provide consumers with the ability to shop for intimacy products in an environment or website that they are most comfortable in. In fact, many e-tailer websites refer to Liberator as a product category and not as a discrete product. We also believe that we differentiate ourselves from conventional sex toys based on our utility of design and overall customer satisfaction as it relates to enhanced intimacy.

Our range of retail product price points places us in the upper 50th percentile of the average adult retail pleasure object purchased. We believe our success depends, in large part, on our ability to create and market products that enhance intimacy and provide consumers with on-going value which will lead them to purchase other Liberator styles and designs.

For the Liberator e-commerce website, other competitive factors include the effectiveness of our electronic customer mailing lists, maintaining natural search listing, advertising response rates, website design and functionality. The broad range of designs, color choice, fabrics and accessories that we offer helps to differentiate us and allows us to compete favorably against many other adult or sexual wellness websites. Liberator.com also competes against numerous mainstream websites, many of which have a greater volume of web traffic, greater financial strength and marketing resources.

Geographic Information

During our last two years, substantially all of our revenue was generated within North America, and all of our long-lived assets are located within the United States.

Employees and Labor Relations

As of September 19, 2014, we had 118 employees (83 in production and warehouse operations, and 35 in sales, marketing and administrative operations). Additional staffing is typically required for peak holiday periods through 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 1A. Risk Factors

Not applicable to a smaller reporting company.

ITEM 2. Properties

We are headquartered in Atlanta, Georgia. Our mailing address is 2745 Bankers Industrial Drive, Atlanta, GA 30360. We lease a 140,000 square feet building on eight acres which we believe allows for expansion when needed. Our facility houses manufacturing, distribution and fulfillment, call center, in-house advertising and creative departments, product design group, administrative offices and a 2,500 square foot factory concept store. Subsequent to June 30, 2014, the lease was extended until December 31, 2020 and the rent reduced to $29,415 beginning December 1, 2014. The lease extension is on an escalating schedule with the final year on the lease at $35,123 per month.

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.

ITEM 4. Mine Safety Disclosures

None.

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 OTC Markets Group on the OTCQB tier (“OTCQB”) under the symbol “LUVU.” 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 OTCQB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions. The last sale price of our common stock as reporting on the OTCQB on September 23, 2014 was $0.02 per share.

Fiscal Year
2014	High Bid		Low Bid
Fourth Quarter: 4/1/14 to 6/30/14	$	0.05	$	0.02
Third Quarter: 1/1/14 to 3/31/14		0.09		0.04
Second Quarter: 10/1/13 to 12/31/13		0.07		0.04
First Quarter: 7/1/13 to 9/30/13	$	0.07	$	0.05

Fiscal Year
2013	High Bid		Low Bid
Fourth Quarter: 4/1/13 to 6/30/13	$	0.11	$	0.05
Third Quarter: 1/1/13 to 3/31/13		0.12		0.06
Second Quarter: 10/1/12 to 12/31/12		0.15		0.02
First Quarter: 7/1/12 to 9/30/12	$	0.13	$	0.06

Holders

As of September 23, 2014, we had approximately 82 stockholders of record of our common stock and approximately 450 beneficial holders.

Transfer Agent

The transfer agent and registrar for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, OR 97214. Their telephone number is 503-227-2950.

Dividend Policy

We have not paid dividends. 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 shareholders 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 and we may in the future issue preferred stock and/or other securities that provides for preferences over holders of common stock in the payment of dividends.

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, 2014.

	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)		3,870,500	$	.09		1,129,500	(2)
Equity compensation plans not approved by security holders (3)		400,000		.06		-0-

Total		4,270,500	$	.09		1,129,500

(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 options issued to two unsecured lenders.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6. Selected Financial Data.

Not applicable to smaller reporting company.

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, 2014 and 2013 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.

Results of Operations

Overview

The following table sets forth, for the periods indicated, information derived from our Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows the table should be read in conjunction with our Consolidated Financial Statements.

	Year Ended June 30, 2014		Year Ended June 30, 2013
Net sales	100 %		100 %
Cost of goods sold		74 %		71 %
Gross profit		26 %		29 %
Selling, General and Administrative Expenses		26 %		26.3 %
Income (loss) from continuing operations		(0) %		1.4 %

The following table represents the percentage of net sales by product type:

	Year Ended June 30, 2013		Year Ended June 30, 2013
Net sales:
Liberator		48 %		49 %
Jaxx		13 %		13 %
Resale		32 %		32 %
Other		7 %		6%
Total Net Sales		100 %		100 %

Liberator - Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market. Liberator products are sold to retailers and distributors as well as directly through our two e-commerce sites and single retail store. Net sales of Liberator products increased 4% during the year ended June 30, 2014, from the comparable year earlier period. This increase is primarily related to the launching of our new eco-compression packaging and improved sales conversion from our Liberator.com e-commerce platform, which was launched on February 1, 2013.

Jaxx - Jaxx products are casual and contemporary furniture products manufactured by us and sold under the Jaxx brand. Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site. Net sales of Jaxx products increased 11% during the year ended June 30, 2014, compared to the prior year. This increase is primarily due to greater sales of Jaxx products through Amazon and other e-merchants.

Resale - Resale products are non-Liberator branded products (including Tenga) that we purchase from others at wholesale or distributor prices and resell through our sales channels to retailers, distributors, or through one of our e-commerce sites and single retail store. Sales of resale products increased 5% during the year ended June 30, 2014 from the prior year.

Other - Other products include sales from contract manufacturing and fulfillment services. Net sales during the year ended June 30, 2014 increased 15% compared to the prior year. This increase is due to an increase in the number of contract manufacturing projects during fiscal year 2014 from the prior fiscal year, offset in part by lower fulfillment revenue.

Fiscal Year ended June 30, 2014 Compared to the Fiscal Year Ended June 30, 2013

Net sales. Net sales for the twelve months ended June 30, 2014 increased from $13,845,509 for the comparable prior year period by approximately $874,132, or 6%, to $14,719,641. The increase in total net sales was substantially due to higher sales through the Direct sales channel and, to a lesser extent, higher sales through the Wholesale channel. This was partially offset by lower shipping and handling fees derived from our Direct business (which is reported as the Other channel.). The Direct sales channel, which consists of consumer sales through our three websites and, to a lesser extent, our single retail store, increased from approximately $5.2 million in the twelve months ended June 30, 2013 to approximately $6.0 million in the twelve months ended June 30, 2014, an increase of approximately 15%. During fiscal 2013, we launched a new e-commerce platform to provide our on-line customers with a better user experience with a goal of increasing our Direct to consumer sales. In addition, sales to wholesale customers increased approximately 5% from the prior year to approximately $8.2 million. The increase in sales through the Wholesale channel was primarily due to higher sales to and through Amazon.com. The Wholesale sales channel includes Liberator products sold to distributors and retailers, products sold under exclusive (like the Tenga product line) and non-exclusive distribution agreements, and retailers, and private label items sold to other resellers. The Wholesale sales channel also includes contract manufacturing services which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. The Other sales channel consists principally of shipping and handling fees derived from our Direct sales channel. The Other sales channel decreased 40% to $.5 million in the twelve months ended June 30, 2014, primarily as a result of lower shipping and handling charges on sales through the Direct channel. We expect Other revenue to continue to decline in future periods as “free” or reduced-cost shipping and handling becomes a growing trend in the e-commerce industry.

Gross profit. Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead and depreciation. As a result of a 10% increase in the cost of goods sold from the fiscal year ended June 30, 2013, total gross profit as a percentage of sales for the year ended June 30, 2014 decreased to 26% from 29% in the prior year. Despite the increased sales, gross profit dollars decreased to $3.8 million from $4 million in the prior year and represented a 5% decrease. Gross profit as a percentage of sales decreased primarily as a result of a price increase from Tenga in May, 2013 and higher production costs for raw materials and labor related to manufactured products.

Operating expenses. Excluding depreciation expense, total operating expenses for the year ended June 30, 2014 were 25% of net sales, or $3,592,102, compared to 26% of net sales, or $3,646,597, for the year ended June 30, 2013. Other selling and marketing expense (which excludes advertising and promotion expense) decreased by 11% to $1,276,980, due to lower personnel related costs including salaries and travel expense, and e-commerce related costs. General and administrative expense increased by 10%, or $170,347, due primarily to higher salaries expense of $135,660, higher insurance expense of $14,982 and higher facilities related costs of $45,282.

Other income (expense). Other income (expense) decreased from ($476,530) in fiscal 2013 to ($403,538) in fiscal 2014, primarily as a result of a loss on disposal of assets of $87,853 in fiscal 2013 and was offset by slightly higher interest expense in fiscal 2014. The loss on disposal of assets in fiscal 2013 was primarily due to the write-down of the former e-commerce platform.

Income taxes. No expense or benefit from income taxes was recorded in the twelve months ended June 30, 2014 and 2013. 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 from continuing operations of ($376,056), or ($0.01) per diluted share, for the twelve months ended June 30, 2014 compared with a net loss from continuing operations of ($288,485), or ($0.00) per diluted share, for the twelve months ended June 30, 2013.

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 regions in which we operate and sell. A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales. Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to meaningfully adjust spending in certain areas, or the inability to adjust spending quickly enough, as in personnel and administrative costs, to compensate for a sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

Liquidity and Capital Resources

	Year ended
The following table summarizes our cash flows:	June 30,
	2014			2013
Cash flow data from continuing operations:
Cash used in operating activities	$	(199,396	)	$	(103,765	)
Cash provided used in investing activities		(35,417	)		(262,261	)
Cash provided by financing activities	$	429,454		$	269,466

As of June 30, 2014, our cash and cash equivalents totaled $592,501, compared to $397,860 in cash and cash equivalents as of June 30, 2013.

Operating Activities

Net cash used in operating activities primarily consists of the net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, loss on disposal of fixed assets, and the effect of changes in operating assets and liabilities. Net cash used in operating activities was $199,396 and $103,765 in the years ended June 30, 2014 and 2013, respectively. The primary reasons for the increase in cash used in operating activities is the increased net loss and an increase in accounts receivable of $105,946 to support the higher sales levels.

Investing Activities

Cash used in investing activities in the year ended June 30, 2014 of $35,417 was primarily for the purchase of production equipment, leasehold improvements and computer equipment.

Cash used in investing activities from continuing operations in the year ended June 30, 2013 of $262,261 was primarily attributable to the costs associated with the new e-commerce platform. The new e-commerce platform became operational on February 1, 2013.

Financing Activities

Cash provided by financing activities in the year ended June 30, 2014 of $429,454 was primarily attributable to borrowings from unsecured notes payable, net borrowings under our line of credit, and proceeds from the credit card advance, partially offset by repayment of the unsecured notes payable and the credit card advance.

Cash provided by financing activities in the year ended June 30, 2013 of $269,466 was primarily attributable to the proceeds from the credit card advance, borrowings from unsecured notes payable, partially offset by the repayment of the line of credit and other obligations, including the unsecured notes payable and principal payments on capital leases.

Sufficiency of Liquidity

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We incurred a net loss of $376,056 for the year ended June 30, 2014 and a net loss of $288,485 for the year ended June 30, 2013. As of June 30, 2014, we have an accumulated deficit of $8,423,741 and a working capital deficit of $1,685,712. This raises substantial doubt about our own ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to meet our financing requirements, and the success of our future operations. Management believes that actions presently being taken to revise our operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase sales and gross profits through a greater focus on higher margin Direct to consumer sales and branded Liberator products, and through improved production controls and reporting. To that end, on February 1, 2013 we launched a new enterprise level e-commerce platform. We believe this new e-commerce platform provides our customers with a better user experience and has increased our Direct to consumer sales. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation during the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic Direct sales. We estimate that the operational and strategic growth plans we have identified will require approximately $250,000 of funding, of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

Capital Resources

We expect total capital expenditures for fiscal 2014 to be under $150,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit with Advance Financial Corporation. This includes capital expenditures in support of our normal operations.

If our business plans and cost estimates are inaccurate and our operations require additional cash or if we deviate from our current plans, we could be required to seek additional debt financing for particular projects or for ongoing operational needs. This indebtedness could harm our business if we are unable to obtain additional financing on reasonable terms. In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business. If we do not comply with such covenants, our lenders could accelerate repayment of our debt or restrict our access to further borrowings, which in turn could restrict our operating flexibility and endanger our ability to continue operations.

On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,000,000 and include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% (as of June 30, 2014 the prime rate was 3.25%) and the Monthly Service Fee was changed to .5% per month. 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 90 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. The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation. In addition, the loan has a corporate guarantee from Liberator, Inc. At June 30, 2014, we had utilized $698,258 from our line of credit, compared to a utilization of $366,196 at June 30, 2013. On June 30, 2014, we were current and in compliance with all terms and conditions of this line of credit.

On October 4, 2012, the Company entered into an agreement with Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after the funding date. On May 14, 2013, the loan was renewed for $400,000 and the remaining balance of $126,518 on the prior loan was repaid from the net proceeds of the renewal. At the time of the renewal, the Company had a balance of $14,400 in unamortized discount which was charged to interest expense during the fourth quarter. Terms of the renewal loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after May 14, 2013. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman. As of June 30, 2013, the principle amount is $349,952, net of a discount of $38,400. This loan was repaid in full on March 14, 2014.

On May 23, 2014, the Company entered into an agreement with Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $460,000, which includes a one-time finance charge of $60,000, approximately ten months after the funding date. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,123 from OneUp’s credit card receipts until full repayment is made. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman. As of June 30, 2014, the principle amount is $365,542, net of a discount of $48,000.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 30, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain equipment and our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Future minimum lease payments under our operating leases as of June 30, 2014 are detailed in the section entitled “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements.

Inflation

During fiscal 2014, we experienced increases in various raw material costs and increases in costs impacted by increases in fuel prices, such as freight and transportation costs. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2015, although there is no assurance this will occur. Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease.

Effect of Recently Issued Accounting Standards and Estimates

We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our consolidated financial position, results of operations, or cash flows.

Application of 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 Accounts

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.

Accounting for Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2014, we carried a valuation allowance of $2.5 million against our net deferred tax assets.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

In fiscal year 2014, we did not generate positive cash flows from operations. If our long-term future plans do not yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.

Non-GAAP Financial Measures

Reconciliation of net loss from continuing operations to Adjusted EBITDA income from continuing operations for the years ended June 30, 2014 and 2013:

	Year ended June 30,
	2014			2013
Net loss	$	(376,056	)	$	(288,485	)

Less interest income		(628	)		(648	)

Plus interest expense		404,166			389,325

Plus income tax expense		—			—

Plus depreciation and amortization expense		232,849			176,946

Plus common stock issued for services		—			—

Plus stock-based compensation		59,497			34,380

Plus loss on disposal of assets		—			87,853

Plus amortization of debt issuance costs		—			—

Adjusted EBITDA income from continuing operations	$	319,828		$	399,371

As used herein, Adjusted EBITDA represents income from continuing operations before interest income, interest expense, income taxes, depreciation, amortization, amortization of debt issuance costs, loss on disposal of assets, stock-based compensation expense and common stock issued for services. We have excluded the non-operating item, amortization of debt issuance costs, because it represents a non-cash charge that is not related to the Company’s operations. We have excluded the non-cash expenses, stock-based compensation and common stock issued for services, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net loss from continuing operations of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss from continuing operations as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for amortization of debt issuance costs, stock-based compensation expense and common stock issued for services.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable for a smaller reporting company.

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, 2014 and 2013	F-2

Consolidated Statements of Operations for the years ended June 30, 2014 and 2013	F-3

Consolidated Statements of Changes in Stockholders’ Deficit from July 1, 2012 to June 30, 2014	F-4

Consolidated Statements of Cash Flows for the years ended June 30, 2014 and 2013	F-5

Notes to Consolidated Financial Statements	F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:

Liberator, Inc.

We have audited the accompanying consolidated balance sheets of Liberator, Inc. and Subsidiaries (the “Company”) as of June 30, 2014 and 2013 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Liberator, Inc. and Subsidiaries as of June 30, 2014 and 2013 and the results of its operations and its cash flows for the years ended June 30, 2014 and 2013 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, the Company has a net loss of $376,056, a working capital deficiency of $1,685,712, an accumulated deficit of $8,423,741 and a negative cash flow from continuing operations of $199,396. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Liggett, Vogt & Webb, P.A.

LIGGETT, VOGT & WEBB, P.A.

Certified Public Accountants

Boynton Beach, Florida

September 29, 2014

F-1

Liberator, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30, 2014			June 30, 2013
Assets:
Current assets:
Cash and cash equivalents	$	592,501		$	397,860
Accounts receivable, net of allowance for doubtful accounts of $9,076 in 2014 and $4,986 in 2013		615,744			522,900
Inventories		1,371,832			1,409,703
Prepaid expenses		97,558			76,932
Total current assets		2,677,635			2,407,395

Equipment and leasehold improvements, net		630,217			756,990
Other assets		2,996			4,479
Total assets	$	3,310,848		$	3,168,864
Liabilities and stockholders’ deficit:
Current liabilities:
Accounts payable	$	1,651,152		$	1,607,765
Accrued compensation		213,444			214,110
Unsecured lines of credit		1,002			—
Accrued expenses and interest		216,386			232,714
Line of credit		698,258			366,196
Short-term unsecured notes payable		988,464			664,625
Current portion of leases payable		31,836			21,422
Current portion of deferred rent payable		81,263			67,963
Merchant cash advance (net of discount; $48,000 in 2014 and $38,400 in 2013)		365,542			349,952
Notes payable-related party		116,000			116,000
Total current liabilities		4,363,347			3,640,747
Long-term liabilities:
Leases payable		70,668			40,927
Unsecured note payable		100,000			300,000
Unsecured lines of credit		—			12,535
Convertible notes payable – shareholder		625,000			625,000
Deferred rent payable		44,290			125,553
Total long-term liabilities		839,958			1,104,015
Total liabilities		5,203,305			4,744,762
Commitments and contingencies (See Note M)		—			—
Stockholders’ deficit:
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding		—			—
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000,000 as of June 30, 2014 and 2013		430			430
Common stock, $0.01 par value, 175,000,000 shares authorized, and 70,702,596 shares issued and outstanding in 2014 and 2013, respectively		707,026			707,026
Additional paid-in capital		5,823,828			5,764,331
Accumulated deficit		(8,423,741	)		(8,047,685	)
Total stockholders’ deficit		(1,892,457	)		(1,575,898	)
Total liabilities and stockholders’ deficit	$	3,310,848		$	3,168,864

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

F-2

Liberator, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended June 30, 2014 and 2013

	2014			2013

Net Sales	$	14,719,641		$	13,845,509
Cost of goods sold		10,867,208			9,833,921
Gross profit		3,852,433			4,011,588
Operating expenses:
Advertising and promotion		404,288			468,639
Other selling and marketing		1,276,980			1,437,471
General and administrative		1,910,834			1,740,487
Depreciation		232,849			176,946
Total operating expenses		3,824,951			3,823,543
Operating income		27,482			188,045

Other income (expense):
Loss on disposal of assets		—			(87,853	)
Interest income		628			648
Interest expense and financing costs		(404,166	)		(389,325	)
Total other income (expense)		(403,538	)		(476,530	)
Loss from operations before income taxes		(376,056	)		(288,485	)
Provision for income taxes		—			—
Net loss	$	(376,056	)	$	(288,485	)

Net loss per share:
Basic and diluted loss per common share	$	(0.01	)	$	(0.00	)
Weighted-average common shares outstanding:
Basic and diluted weighted average common and common equivalents shares outstanding		70,702,596			70,702,596

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

F-3

Liberator, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Deficit

From July 1, 2012 to June 30, 2014


	Series A Preferred								Additional					Total
	Stock				Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Deficit

Balance, July 1, 2012		4,300,000	$	430		70,702,596	$	707,026	$	5,729,951	$	(7,759,200	)	$	(1,321,793	)
Stock-based compensation expense		—		—		—		—		34,380		—			34,380
Net loss		—		—		—		—		—		(288,485	)		(288,485	)

Ending balance, June 30, 2013		4,300,000		430		70,702,596		707,026		5,764,331		(8,047,685	)		(1,575,898	)

Stock-based compensation expense		—		—		—		—		59,497		—			59,497
Net loss		—		—		—		—		—		(376,056	)		(376,056	)
Ending balance, June 30, 2014		4,300,000	$	430		70,702,596	$	707,026	$	5,823,828	$	(8,423,741	)	$	(1,892,457	)

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

F-4

Liberator, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2014 and 2013

	2014			2013
OPERATING ACTIVITIES:
Net loss	$	(376,056	)	$	(288,485	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		232,849			176,946
Stock-based compensation expense		59,497			34,380
Loss on disposal of fixed assets		—			87,853
Provision for bad debt		13,102			17,771
Deferred rent payable		(67,963	)		(56,658	)

Change in operating assets and liabilities:
Accounts receivable		(105,946	)		214,632
Inventory		37,871			(267,934	)
Prepaid expenses and other assets		(19,143	)		(5,287	)
Accounts payable		43,387			(35,639	)
Accrued expenses and interest		(16,328	)		59,651
Accrued payroll and related		(666	)		(40,995	)
Net cash used in operating activities		(199,396	)		(103,765	)

INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(35,417	)		(262,261	)
Net cash used in investing activities		(35,417	)		(262,261	)
FINANCING ACTIVITIES:
Net cash provided by (used in) line of credit		332,062			(140,557	)
Repayment of unsecured line of credit		(11,533	)		(26,446	)
Proceeds from credit card advance		400,000			400,000
Repayment of credit card advance		(384,410	)		(50,048	)
Proceeds from short-term debt		730,000			630,000
Repayment of short-term debt		(606,161	)		(508,415	)
Principle payments on capital leases		(30,504	)		(35,068	)
Net cash provided by financing activities		429,454			269,466
Net increase (decrease) in cash and cash equivalents		194,641			(96,560	)
Cash and cash equivalents at beginning of period		397,860			494,420
Cash and cash equivalents at end of period	$	592,501		$	397,860
Supplemental Disclosure of Cash Flow Information:
Non cash items:
Additions to capital leases	$	70,659		$	23,851
Cash paid during the year for:
Interest	$	378,813		$	366,805
Income taxes	$	—		$	—

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

F-5

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE A – ORGANIZATION AND NATURE OF BUSINESS

Liberator, Inc. (the “Company” or Liberator) was incorporated in the State of Florida on February 25, 1999. References to the “Company” in these notes include the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. (“OneUp”), and Foam Labs, Inc. (“Foam Labs”) .

The Company is primarily a designer and manufacturer of various specialty furnishings for the sexual wellness market. The Company has also become an online retailer of products 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 internet and print advertisements. We have a diversified customer base with only one customer accounting for 10% or more of consolidated net sales in the current and prior fiscal year and no particular concentration of credit risk in one economic sector. Foreign operations and foreign net sales are not material. Our business is seasonal and as a result we experience higher sales in the second and third quarters.

NOTE B – GOING CONCERN

The accompanying consolidated 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 $376,056 and $288,485 for the years ended June 30, 2014 and 2013, respectively and as of June 30, 2014 the Company has an accumulated deficit of $8,423,741 and a working capital deficit of $1,685,712. This raised substantial doubt about to its ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying consolidated 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 an ongoing initiative to increase sales and gross profits through a greater focus on higher margin Direct to consumer sales and branded Liberator products, and through improved production controls and reporting. To that end, on February 1, 2013 we launched a new enterprise level e-commerce platform. We believe this new e-commerce platform provides our customers with a better user experience and, as a result, has increased our Direct to consumer sales. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation during the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic Direct sales. We estimate that the operational and strategic growth plans we have identified will require approximately $250,000 of funding, of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

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.

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp and Foam Labs. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

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: income taxes; tax valuation reserves; allowances for doubtful accounts; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.

F-6

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Revenue Recognition

We recognize revenues as goods are shipped to customers and title is transferred. The criteria for recognition of revenue are when persuasive evidence that an arrangement exists and both title and risk of loss have passed to the customer, the price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are estimated and recorded as a reduction to sales in the period in which sales are recorded.

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.

The following is a summary of Accounts Receivable as of June 30, 2014 and June 30, 2013.

	June 30, 2014			June 30, 2013
Accounts receivable	$	634,553		$	555,628
Allowance for doubtful accounts		(9,076	)		(4,986	)
Allowance for discounts and returns		(9,733	)		(27,742	)
Total accounts receivable, net	$	615,744		$	522,900

Inventories and Inventory Reserves

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. The company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or market may be adjusted in response to changing conditions.

Concentration of Credit Risk

The Company maintains its cash accounts with banks located in Georgia. The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank. The Company had cash balances on deposit at June 30, 2014 that exceeded the balance insured by the FDIC by $287,183. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During 2014, we purchased 30% and 19% of total inventory purchases from two vendors.

During 2013, we purchased 30% and 18% of total inventory purchases from two vendors.

F-7

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of June 30, 2014, one of the Company’s customers (Amazon) represents 38% of the total accounts receivables.

Fair Value of Financial Instruments

At June 30, 2014, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other long-term debt.

The fair values of these financial instruments approximated their carrying values based on either their short maturity or current terms for similar instruments.

The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

· Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

· Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

· Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

The valuation techniques that may be used to measure fair value are as follows:

A. Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method.

C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

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 $35,516 at June 30, 2014 and $16,709 at June 30, 2013. Advertising expense for the years ended June 30, 2014 and 2013 was $404,288 and $468,639, respectively.

F-8

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development (included in general and administrative expense) totaled $103,194 for the year ended June 30, 2014 and $104,806 for the year ended June 30, 2013.

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 of 2-10 years.

Expenditures for major renewals and betterments which extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently.

Operating Leases

The Company leases its facility under a ten year operating lease which was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at June 30, 2014 is $125,553. Subsequent to June 30, 2014, the lease was extended until December 31, 2020 and the rent reduced from the current rent of $33,139 to $29,415 per month beginning December 1, 2014. The lease extension is on an escalating schedule with the final year on the lease at $35,123 per month. The rent expense under this lease for each of the years ended June 30, 2014 and 2013 was $323,722.

Segment Information

We have identified three reportable sales channels: Direct, Wholesale and Other. Direct includes product sales through our two e-commerce sites and our single retail store. Wholesale includes Liberator branded products sold to distributors and retailers, non-Liberator products sold to 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 customers, and which, to date, has not been a material part of our business. Other consists principally of shipping and handling fees and costs derived from our Direct business and fulfillment service fees.

The following is a summary of sales results for the Direct, Wholesale, and Other channels.

	Year Ended June 30, 2014		Year Ended June 30, 2013		% Change
Net Sales by Channel:
Direct	$	6,015,303	$	5,213,506		15	%
Wholesale	$	8,178,630	$	7,758,126		5	%
Other	$	525,708	$	873,877		-40	%
Total Net Sales	$	14,719,641	$	13,845,509		6	%

	Year Ended			Margin			Year Ended			Margin			%
	June 30, 2014			%			June 30, 2013			%			Change
Gross Profit by Channel:
Direct	$	2,911,254			48	%	$	2,595,875			50	%		11	%
Wholesale	$	1,364,034			17	%	$	1,548,197			20	%		(12	)%
Other	$	(422,855	)		(80	)%	$	(132,484	)		(15	)%		(219	)%
Total Gross Profit	$	3,852,433			26	%	$	4,011,588			29	%		(5	)%

F-9

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Recent Accounting Pronouncements

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In August 2014, the FASB issued ASU 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this Update are effective for annual periods ending after December 15, 2016. The Company is currently evaluating the impact of adopting this accounting guidance in the first quarter of fiscal 2018.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC, did not, or are not believed by management, to have a material impact on the Company’s present or future financial statements.

Net Loss Per Share

In accordance with FASB Accounting Standards Codification No. 260 (“FASB ASC 260”), “Earnings Per Share”, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares outstanding as of June 30, 2014 and 2013, which consist of options, warrants, and convertible notes, have been excluded from the diluted net loss per common share calculations because they are anti-dilutive.

The total potential anti-dilutive securities as of June 30, 2014 and 2013 are as follows:

	2014		2013
Warrants		—		2,462,393
Stock options		4,270,500		3,583,500
Convertible debt		7,545,455		4,375,000
Total		11,815,955		10,420,893

F-10

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Income Taxes

Stock Based Compensation

We account for stock-based compensation to employees 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.

Stock Issued for Services to other than Employees

Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by FASB ASC 505, which is measured as of the date required by FASB ASC 505, “Equity – Based Payments to Non-Employees”. In accordance with FASB ASC 505, the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying common stock on the “valuation date”, which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.

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 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, 2014 or 2013.

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 consist of the following components at June 30, 2014 and 2013:

	2014		2013
Raw materials	$	561,405	$	528,771
Work in Process		195,588		138,240
Finished Goods		614,839		742,692
	$	1,371,832	$	1,409,703

F-11

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE F – EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

Property and equipment at June 30, 2014 and 2013 consisted of the following:

	2014			2013			Estimated Useful Life
Factory equipment	$	1,768,253		$	1,693,993		2-10 years
Computer equipment and software		899,493			867,677		5-7 years
Office equipment and furniture		166,996			166,996		5-7 years
Leasehold improvements		343,120			343,120		10 years
Subtotal		3,177,862			3,071,786
Accumulated depreciation		(2,547,645	)		(2,314,796	)
Equipment and leasehold improvements, net	$	630,217		$	756,990

Depreciation expense was $232,849 and $176,946 for the years ended June 30, 2014 and 2013, respectively.

NOTE G - UNSECURED NOTES PAYABLE

Unsecured notes payable at June 30, 2014 and 2013 consisted of the following:

	2014			2013

Unsecured note payable for $250,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing December 19, 2014. Personally guaranteed by principal stockholder.	$	131,221		$	—

Unsecured note payable for $250,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing January 23, 2015. Personally guaranteed by principal stockholder.		150,274			—

Unsecured note payable for $130,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing April 3, 2015. Personally guaranteed by principal stockholder.		106,969			—

Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on October 31, 2014. Personally guaranteed by principal stockholder.		100,000			—

Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, matured December 6, 2013. Personally guaranteed by principal stockholder.		—			121,584

Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, matured January 10, 2014. Personally guaranteed by principal stockholder.		—			140,784

Unsecured note payable for $130,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, matured April 4, 2014. Personally guaranteed by principal stockholder.		—			102,256

Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2013. Subsequent to June 30, 2013, the due date on this note was extended by the holder to July 31, 2015. Personally guaranteed by principal stockholder.		100,000			100,000

Unsecured note payable for $300,000 to an individual, with interest at 20%, principal and interest originally due in full on January 3, 2013; extended to January 3, 2015 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder.		300,000			300,000

Unsecured note payable for $200,000 to an individual, with interest payable monthly at 20%, the principal was due in full on May 1, 2013; extended to May 1, 2015 by the note holder. Personally guaranteed by principal stockholder.		200,000			200,000

Total unsecured notes payable	$	1,088,464		$	964,624
Less: current portion		(988,464	)		(664,624	)
Long-term unsecured notes payable	$	100,000		$	300,000

F-12

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE H - NOTES PAYABLE- RELATED PARTY

	2014			2013
Unsecured note payable to an officer, with interest at 3.25%, due on demand	$	40,000		$	40,000

Unsecured note payable to an officer, with interest at 3.25%, due on demand	$	76,000		$	76,000
Total unsecured notes payable	$	116,000		$	116,000
Less: current portion		(116,000	)		(116,000	)
Long-term unsecured notes payable	$	—		$	—

NOTE I – 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. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp. The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. Effective August 15, 2013, the note was amended again to reduce the per share conversion price to $0.125 and extend the maturity date to August 15, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.125 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. As of June 30, 2014, the principle balance was $375,000 and accrued interest was $56,312. See Note Q – Subsequent Events.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital, Inc. with a face amount of $250,000. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. Effective September 2, 2013, the note was amended again to reduce the per share conversion price to $0.055 and extend the maturity date to September 2, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.055 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. As of June 30, 2014, the principle balance was $250,000 and the accrued interest was $36,205. See Note Q – Subsequent Events.

The principal payments required at maturity under the Company’s outstanding short term notes, short term related party notes and convertible notes payable at June 30, 2014 are as follows:

Fiscal Years Ending June 30,
2015	$	1,729,464
2016		100,000
2017		—
2018		—
2019		—

Total	$	1,829,464

NOTE J – CREDIT CARD ADVANCE

On October 4, 2012, the Company entered into an agreement with Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan was secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan called for a repayment of $448,000, which included a one-time finance charge of $48,000, approximately ten months after the funding date. On May 14, 2013, the loan was renewed for $400,000 and the remaining balance of $126,518 on the prior loan was repaid from the net proceeds of the renewal. At the time of the renewal, the Company had a balance of $14,400 in unamortized discount which was charged to interest expense during the fourth quarter. Terms of the renewal loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after May 14, 2013. This was accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note N). As of June 30, 2013, the principle amount was $349,952, net of a discount of $38,400. This loan was repaid in full on March 14, 2014.

F-13

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

On May 23, 2014, the Company entered into an agreement with Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $460,000, which includes a one-time finance charge of $60,000, approximately ten months after the funding date. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,123 from OneUp’s credit card receipts until full repayment is made. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note N). As of June 30, 2014, the principle amount is $365,542, net of a discount of $48,000.

NOTE K – LINE OF CREDIT

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital. The term of the agreement was one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility was 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. Advances under the agreement were charged interest at a rate of 2.5% over the lenders Index Rate. In addition there was a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month.

On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,000,000 to include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% (as of June 30, 2014, the interest rate was 6.25%) and the Monthly Service Fee was changed to .5% per month.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the facility. In addition, Liberator has provided its corporate guarantee of the credit facility (see Note N). On June 30, 2014, the balance owed under this line of credit was $698,258. On June 30, 2014, we were current and in compliance with all terms and conditions of this line of credit.

Management believes cash flows generated from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may be required.

NOTE L – UNSECURED LINES OF CREDIT

The Company has drawn cash advances on two 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 7% to 18%. The aggregate amount owed on the two unsecured lines of credit was $1,002 at June 30, 2014 and $12,535 at June 30, 2013.

NOTE M – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facility under a ten year operating lease which was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at June 30, 2014 and 2013 is $125,553 and $193,156. Subsequent to June 30, 2014, the lease was extended until December 31, 2020 and the rent reduced from the current rent of $33,139 to $29,415 per month beginning December 1, 2014. The lease extension is on an escalating schedule with the final year on the lease at $35,123 per month. The rent expense under this lease for each of the years ended June 30, 2014 and 2013 was $323,722.

The Company also leases certain postage equipment under an operating lease. The monthly lease is $104 per month and expires January 2017.

The Company entered into an operating lease for certain material handling equipment in September 2010. The monthly lease amount is $1,587 per month and expires in September 2015.

F-14

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Future minimum lease payments under non-cancelable operating leases at June 30, 2014 are as follows:

Year ending June 30,
2015	$	264,628
2016		373,442
2017		381,131
2018		391,496
2019		403,242
Thereafter through 2020		626,077
Total minimum lease payments	$	2,440,016

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 $216,703. 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, 2014:

Year ending June 30,
2015	$	46,004
2016		44,908
2017		30,863
2018		7,332
2019		—
Future Minimum Lease Payments	$	129,107
Less Amount Representing Interest		(26,603	)
Present Value of Minimum Lease Payments		102,504
Less Current Portion		(31,836	)
Long-Term Obligations under Leases Payable	$	70,668

Employment Agreements

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. The agreement provides for an annual base salary of $150,000 and eligibility to receive a bonus. In certain termination situations, the Company is liable to pay severance compensation to Mr. Friedman for up to nine months at his current salary.

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.

NOTE N – RELATED PARTY TRANSACTIONS

The Company has a subordinated note payable to the majority shareholder’s wife in the amount of $76,000. Interest on the note during the year ended June 30, 2013 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $2,470. The accrued interest on the note as of June 30, 2014 was $12,621. This note is subordinate to all other credit facilities currently in place.

F-15

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations. The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. On August 15, 2013, the note was further amended to reduce the per share conversion price to $.125 and extend the maturity date to August 15, 2014. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.125 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $375,000 and accrued interest was $56,312. See Note Q – Subsequent Events.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. Effective September 2, 2013, the note was amended again to reduce the per share conversion price to $0.055 and extend the maturity date to September 2, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $250,000 and the accrued interest was $28,705. See Note Q – Subsequent Events.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the loan is accrued by the Company at the prevailing prime rate (which was 3.25% on June 30, 2014) and totaled $1,300 for the year ended June 30, 2014. On February 21, 2014, one interest installment payment was made to Mr. Friedman in the amount of $4,184. The accrued interest on the note as of June 30, 2014 was $645. This note is subordinate to all other credit facilities currently in place.

On January 3, 2011, an individual loaned the Company $300,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on January 3, 2012; extended to January 3, 2013; then extended to January 3, 2015 with the principle due on maturity (see Note G). Mr. Friedman personally guaranteed the repayment of the loan obligation.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note K – Line of Credit). In addition, Liberator has provided its corporate guarantees of the credit facility. On June 30, 2014, the balance owed under this line of credit was $698,258.

On July 20, 2011, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum), with the principal amount due in full on July 31, 2012. On July 31, 2012, the note was extended to July 31, 2013 under the same terms. Prior to June 30, 2013, the note was extended to July 31, 2015 under the same terms (see Note G). Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On May 1, 2012, an individual loaned the Company $200,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on May 1, 2013; then extended to May 1, 2015 with the principle due on maturity (see Note G). Mr. Friedman personally guaranteed the repayment of the loan obligation.

On December 10, 2012, the Company issued an unsecured promissory note to two individual shareholders for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on December 6, 2013 (see Note G). Mr. Friedman has personally guaranteed the repayment of the loan obligation.

On January 14, 2013, the Company issued an unsecured promissory note to two individual shareholders for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on January 10, 2014 (see Note G). Mr. Friedman has personally guaranteed the repayment of the loan obligation.

On April 5, 2013, the Company issued an unsecured promissory note to two individual shareholders for $130,000. Terms of the promissory note call for bi-weekly principal and interest payments of $5,536 with the note due in full on April 4, 2014 (see Note G). Repayment of the promissory note is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

F-16

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

On October 31, 2013, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum) beginning on November 30, 2013, with the principal amount due in full on or before October 31, 2014 (see Note G). Repayment of the promissory note is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On December 19, 2013, the Company issued an unsecured promissory note to two individual shareholders for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on December 19, 2014 (see Note G). Mr. Friedman has personally guaranteed the repayment of the loan obligation. See Note Q – Subsequent Events.

On January 24, 2014, the Company issued an unsecured promissory note to two individual shareholders for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on January 23, 2015 (see Note G). Mr. Friedman has personally guaranteed the repayment of the loan obligation. See Note Q – Subsequent Events.

On April 4, 2014, the Company issued an unsecured promissory note to two individual shareholders for $130,000. Terms of the note call for bi-weekly principal and interest payments of $5,536 with the note due in full on April 3, 2015 (see Note G). Mr. Friedman has personally guaranteed the repayment of the loan obligation. See Note Q – Subsequent Events.

The loan from Credit Cash (see Note J – Credit Card Advance) is guaranteed by the Company (including OneUp and Foam Labs) and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

NOTE O – STOCKHOLDERS’ EQUITY

Options

As of June 30, 2014, the Company had one shareholder approved plan, the 2009 Stock Option Plan (the “Plan”), under which shares were available for equity based awards. Under the Plan, 5,000,000 shares of common stock are reserved for issuance until the Plan terminates on October 19, 2019.

Under the Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of June 30, 2014, there were 1,416,500 options available for grant under the Plan.

All stock option grants made under the Plan were at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the Plan were determined by the board of directors in accordance with the provisions of the plan. The terms of each option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The Company has no awards with market or performance conditions.

The following table summarizes stock-based compensation expense by line item in the consolidated statements of operations, all relating to employee stock plans:

	Twelve Months Ended June 30,
	2014		2013

Cost of Goods Sold	$	14,082	$	10,275
Other Selling and Marketing		7,297		8,186
General and Administrative		38,118		15,919
Total	$	59,497	$	34,380

Stock-based compensation expense recognized in the consolidated statements of operations for each of the twelve month period ended June 30, 2014 and 2013 is based on awards ultimately expected to vest.

A summary of option activity under the Company’s stock plan for the year ended June 30, 2014 and 2013 is presented below:

F-17

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value as of June 30, 2014
Outstanding at June 30, 2012		3,506,956		$	.18		3.4 years	$	—
Granted		2,894,000		$	.06			$	—
Exercised		—		$	—			$	—
Forfeited or Expired		(2,817,456	)	$	.16			$	—
Outstanding at June 30, 2013		3,583,500		$	.10		3.8 years	$	—
Granted		2,026,000		$	.05			$	—
Exercised		—		$	—			$	—
Forfeited or Expired		(1,339,000	)	$	.09			$	—
Outstanding at June 30, 2014		4,270,500		$	.09		3.2 years	$	—
Exercisable at June 30, 2014		1,437,625		$	.12		2.6 years	$	—

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $.03 for such day. The total intrinsic value of stock options as of June 30, 2014 and 2013 was $0.

A summary of the Company’s non-vested options for the year ended June 30, 2014 is presented below:

Non-vested Options	Shares			Weighted Average Grant-Date Fair Value
Non-vested at June 30, 2013		2,860,750		$	.04
Granted		2,026,000			.05
Vested		(859,875	)		.09
Forfeited		(1,194,000	)		.05
Non-vested at June 30, 2014		2,832,875		$	.09

The weighted average grant-date fair value of stock options granted during fiscal years 2014 and 2013 were $172,537 and $217,600, respectively. The total grant-date fair values of stock options that vested during fiscal years 2014 and 2013 were $39,346 and $20,147, respectively.

The following table summarizes the weighted average characteristics of outstanding stock options as of June 30, 2014:

	Outstanding Options						Exercisable Options
Exercise Prices	Number of Shares		Remaining Life (Years)		Weighted Average Price		Number of Shares		Weighted Average Price
$.06 to $.09		3,216,000		3.7	$	.06		742,250	$	.06
$.15 to $.16		852,500		2.1	$	.16		493,375	$	.16
$.25		202,000		0.3	$	.25		202,000	$	.25
Total stock options		4,270,500		3.2	$	.09		1,437,625	$	.12

The range of fair value assumptions related to options granted during the years ended June 30, 2014 and 2013 were as follows:

	2014		2013
Exercise Price:	$	0.045 - 0.051	$	0.06 - 0.10
Volatility:		231% to 251%		40% to 47%
Risk Free Rate:		0.99% to 1.04%		0.43% to 0.65%
Vesting Period:	Immediate to 4 years		4 years
Forfeiture Rate:		0%		25%
Expected Life	4.1 to 4.5 years		4.5 years
Dividend Rate		0%		0%

F-18

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of June 30, 2014, total unrecognized stock-based compensation expense related to all unvested stock options was $96,816, which is expected to be expensed over a weighted average period of 2.2 years.

Share Purchase Warrants

As of June 30, 2014, there were no share purchase warrants outstanding:

The following table summarizes the continuity of the Company’s share purchase warrants:

	Shares			Weighted Average Exercise Price
Balance June 30, 2013		2,462,393		$	.76
Issued		—			—
Expired		(2,462,393	)		.76
Balance June 30, 2014		—		$	—

NOTE P – INCOME TAXES

Deferred tax assets and liabilities are computed by applying the effective U.S. federal income tax rate to the gross amounts of temporary differences and other tax attributes. Deferred tax assets and liabilities relating to state income taxes are not material. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of June 30, 2014 and 2013, the Company believed it was more likely than not that future tax benefits from net operating loss carryforwards and other deferred tax assets would not be realizable through generation of future taxable income; therefore, they were fully reserved.

The components of deferred tax assets and liabilities at June 30, 2014 and 2013 are approximately as follows:

	2014			2013
Deferred tax assets:
Net operating loss carry-forwards	$	2,529,234		$	2,360,009
Valuation allowance		(2,529,234	)		(2,360,009	)
Net deferred tax assets	$	—		$	—

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 38% to pretax loss from continuing operations for the years ended June 30, 2014 and 2013 due to the following:

	2014			2013

Book loss from operations	$	169,255		$	109,509
Valuation (allowance)		(169,255	)		(109,509	)
Net tax benefit	$	—		$	—

At June 30, 2014, the Company had net operating loss (NOL) carryforwards of approximately $2.5million that may be offset against future taxable income. During 2014 and 2013, the total increase in the valuation allowance was $169,225 and $109,509, respectively. The Company’s ability to use its NOL carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50.0% of the outstanding stock of a company by certain stockholders or public groups.

F-19

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the definition of Section 382. If the Company has experienced an ownership change, utilization of the NOL carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed and any limitation known, no positions related to limitations are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company. The NOL carryforwards expire in the years 2024 through 2033.

The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended June 30, 2009 through 2014.

NOTE Q – SUBSEQUENT EVENTS

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous lease was to expire on December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment is effective August 1, 2014 and includes a four month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company has agreed to make improvements to the facility totaling $123,505 within six months of August 1, 2014. In addition, the monthly rent on the facility decreases from the current rent of $33,139 to $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating schedule with the final year of the lease at $35,123 per month.

On August 26, 2014, the Company issued an unsecured promissory note for $400,000 to two individual shareholders. Proceeds from the promissory note were used to retire three other notes held by the two individual shareholders including the $250,000 note dated December 19, 2013 with a balance of $92,228; the $250,000 note dated January 20, 2014 with a balance of $111,874 and the $130,000 note dated April 4, 2014 with a balance of $87,899 (collectively the “Prior Notes”). The remaining balance, after paying the balance on the Prior Notes, of $107,999 was received in cash by the Company. Terms of the $400,000 are 26 bi-weekly payments of principal and interest of $17,033.

On September 5, 2014, the Company amended and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to Hope Capital, Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible Note in the original principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September 2009 Note”), the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to provide for a 3% unsecured promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due on or before August 31, 2019 and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall be made on a monthly basis, starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly payments. In the event the Company fails to make a monthly payment under the Note or the Company is subject to an bankruptcy event (as defined under the Note), subject to the Company’s ability to cure such default, HCI may convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under the Note into shares of our common stock at a conversion price equal to $0.10 per share. Conversion is subject to HCI not being able to beneficially own more than 9.99% of our outstanding common stock upon any conversion, subject to waiver by HCI. The Company has the right to prepay the Note, in whole or in part, subject to notice to HCI, without penalty.

F-20

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are no events required to be disclosed under this Item.

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of June 30, 2014, our CEO and CFO believe that:

(i)

our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and

(ii)

our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

(a) Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on our assessment, management believes that, as of June 30, 2014, our internal control over financial reporting is effective based on those criteria.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a permanent exemption of the SEC that permits the Company to provide only management’s report in the Annual Report on Form 10-K. Accordingly, our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2014, has not been audited by our auditors or any other independent registered accounting firm.

(b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule15d-15(d) promulgated under the Exchange Act that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information

None.

PART III.

ITEM 10. Directors, Executive Officers and Corporate Governance.

The following table sets forth the officers and directors of Liberator, Inc. as of June 30, 2014.

Name	Age	Position
Louis S. Friedman	62	Chief Executive Officer, President, Director
Ronald P. Scott	59	Chief Financial Officer, Secretary, Director
Leslie S. Vogelman	62	Treasurer

All directors serve for one-year terms until their successors are elected or they are re-elected at the annual shareholders’ meeting. Officers hold their positions at the pleasure of the board of directors.

There is no arrangement, agreement or understanding between any of the directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer. Also, there is no arrangement, agreement or understanding between management and non-management shareholders under which non-management shareholders may directly or indirectly participate in or influence the management of our affairs.

Directors are not presently compensated for their service on the board, other than the repayment of actual expenses incurred. There are no present plans to compensate directors for their service on the board.

Background of Executive Officers and Directors

Louis S. Friedman, President, Chief Executive Officer and Director. Mr. Friedman has served as President, Chief Executive Officer, and director since our merger with Old Liberator, Inc. in October 2009. Prior to that, he served as Old Liberator’s Chief Executive Officer and a director since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Mr. Friedman founded OneUp in 2000. Before starting OneUp, Mr. Friedman was in business consulting, venture capital and private investing from 1990 to 2000. Earlier in his career, Mr. Friedman was Executive Vice President of Chemtronics, Inc., until its sale to Morgan Crucible in 1990. As Chief Executive Officer, Mr. Friedman has relevant insight into our operations, our industry, and related risks as well as experience bringing consumer products to market.

Ronald Scott, Chief Financial Officer, Secretary and Director. Mr. Scott joined the Company in October 2009 in connection with our merger with Old Liberator, Inc. Prior to that, he served as Old Liberator’s Chief Financial Officer, Secretary, and a director since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Mr. Scott joined OneUp Innovations as a part-time consultant in July, 2006 and as a full-time consultant in October, 2007, serving as its Chief Financial Officer. From 2004 to 2009, Mr. Scott was president of Impact Business Solutions, LLC, a consulting business that provides financial management services. Prior to Impact Business Solutions, and from 1990 to 2004, Mr. Scott was Executive Vice President - Finance and Administration and a member of the Board of Directors for Cyanotech Corporation, a NASDAQ-listed natural products company. Mr. Scott holds a B.S. degree in Finance and Management from San Jose State University and an M.B.A. degree with a concentration in Accounting from Santa Clara University. Mr. Scott has relevant operating experience with small, high growth companies and an in-depth understanding of generally accepted accounting principles, financial statements and SEC reporting requirements.

Leslie Vogelman, Treasurer. Ms. Vogelman joined the Company in October 2009 in connection with our merger with Old Liberator, Inc. Prior to that, she served as Old Liberator’s Treasurer since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Ms. Vogelman joined OneUp at its inception in 2000 as Secretary and Treasurer. Ms. Vogelman holds a B.A. from the State University of New York in Binghamton and an M.B.A. from Adelphi University.

The experience and background of each of the directors, as summarized above, were significant factors in their previously being nominated as directors of the Company.

Family Relationships

Louis Friedman, our President, Chief Executive Officer and Chairman, and Leslie Vogelman, our Treasurer, are husband and wife.

There are no other relationships between the officers or directors of the Company.

Committees

As of June 30, 2014, we have not established an audit committee or any other committee of the board of directors and, therefore, the responsibilities of such committees have been conducted by our board of directors as a whole.

An audit committee’s primary functions are to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our Annual financial performance as well as our compliance with laws and regulations; (iv) oversee management’s establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our board of directors.

We may, in the future, establish an audit committee and/or other committees of the board of directors.

Audit Committee Financial Expert

In general, an “audit committee financial expert” is an individual who:

understands generally accepted accounting principles and financial statements,
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity of our financial statements,
understands internal controls over financial reporting, and
understands audit committee functions.

Our board of directors has determined that Ronald Scott, our Chief Financial Officer, is an “audit committee financial expert” within the meaning of the foregoing definition.

Diversity

While the Company does not have a policy regarding diversity of its board members, diversity is one of a number of factors that is typically taken into account in identifying board nominees. We only have two members on our board of directors, but we hope to add more members for a diverse board in terms of previous business experience and educational and personal background of the members of our board.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership, and annual reports concerning their ownership of our common shares and other equity securities on Forms 3, 4, and 5 respectively. Executive officers, directors, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based on a review of the copies of such forms received by us, and to the best of our knowledge, there were no reports untimely filed during the fiscal year ended June 30, 2014.

Code of Ethics

We have not yet adopted a Code of Business Conduct and Ethics. We are currently working towards developing a formal Code of Business Conduct and Ethics, which will apply to all of our employees, including our board of directors. When available, a copy of our Code of Business Conduct and Ethics may, upon request made to us in writing at the following address, be made available without charge: 2745 Bankers Industrial Drive, Atlanta, Georgia, 30360.

ITEM 11. Executive Compensation.

Summary Compensation Table

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal years ended June 30, 2014 and 2013 by our named executive officers as defined in Item 402(a) of Regulation S-K (each an “NEO”).

		Fiscal	Salary		Bonus		Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation		All Other Comp- ensation		Total
Name and Principal Position		Year	($)		($)		($)		($)(1)		($)		($)		($)
Louis S. Friedman		2014		149,999		—		—		—		—		—		149,999
President, Chief Executive		2013		149,999		—		—		—		—		—		149,999
Officer and Chairman of the Board
Ronald P. Scott		2014		144,999		—		—		10,000		—		—		154,999
Chief Financial Officer, Secretary		2013		144,999		—		—		8,034		—		—		153,033
and Director

(1)	The amounts reported in this column represent the full grant date fair value of stock awards in accordance with ASC 718, net of estimated forfeitures. Refer to Note O of the financial statements included in Item 8 of this Annual Report for the assumptions made in the valuation of stock awards. See Grants of Plan-Based Awards table below.

Grants of Plan-Based Awards

The following table summarizes information concerning each grant of an award made in our fiscal year ending June 30, 2014 to each of our NEOs:

Name

Grant Date

All Other Option Awards: Number of Securities Underlying Options

(#)

Exercise or base price of option awards per share

($)

Grant Date Fair Value of Stock and Option Awards

($)

Louis S. Friedman

—

Ronald P. Scott

8/10/2013

200,000

$0.05

$10,000

These awards were each granted from our 2009 Incentive Stock Option Plan, vest in four equal annual increments beginning August 10, 2014, and expire August 10, 2018.

Outstanding Equity Awards at Fiscal Year End

The following table shows, for the fiscal year ended June 30, 2014, certain information regarding outstanding equity awards at fiscal year-end for our Named Executive Officers.

		Outstanding Equity Awards at June 30, 2014 Option Awards									Stock Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date			Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)
Louis S. Friedman			—		—		—		—			—		—
Ronald P. Scott			100,000		100,000	$	.16	12/3/2016		(1)		—		—
			100,000		300,000	$	.06	10/12/2017		(2)		—		—
			—		200,000	$	.05	8/10/2018		(3)		—		—
(1)	The common stock option vests pro rata over a four-year period on each of December 3, 2012, December 3, 2013, December 3, 2014 and December 3, 2015.
(2)	The common stock option vests pro rata over a four-year period on each of October 12, 2013, October 12, 2014, October 12, 2015 and October 12, 2016.
(3)	The common stock option vests pro rata over a four-year period on each of August 10, 2014, August 10, 2015, August 10, 2016 and August 10, 2017.

Employment Agreement

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. The agreement provides for an annual base salary of $150,000 and eligibility to receive a bonus, should the Company implement a bonus plan for executives. Under the agreement, this executive employee may be terminated at any time with or without cause, or by reason of death or disability. In certain termination situations, the Company is liable to pay severance compensation to this executive for up to 9 months.

Directors’ Compensation

For the fiscal years ended June 30, 2014 and 2013, our directors did not receive any compensation in their capacity as a director.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock by:

all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities;
each of our directors;
each of our Named Executive Officers; and
all current directors and executive officers as a group.

Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them.

Applicable percentage ownership in the following table is based on 70,702,596 shares of common stock outstanding as of September 26, 2014.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of September 26, 2014, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Liberator, Inc., 2745 Bankers Industrial Drive, Atlanta, GA 30360.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Executive Officers and Directors
Common	Louis S. Friedman		32,694,376	(1)		43.6	%
Common	Ronald P. Scott		391,700	(2)		0.6	%
Common	Leslie Vogelman		345,000	(3)		0.5	%
Common	All directors and executive officers as a group (3 persons)		33,431,076			44.1	%
5% Shareholders
Common	Hope Capital, Inc. (4)		5,378,001	(5)		7.6	%

Executive Officers and Directors
Series A Convertible Preferred Stock	Louis S. Friedman		4,300,000	(6)		100.0	%
Series A Convertible Preferred Stock	Ronald P. Scott		0			0.0	%
Series A Convertible Preferred Stock	Leslie Vogelman		0			0.0	%
Series A Convertible Preferred Stock	All directors and executive officers as a group (3 persons)		4,300,000			100.0	%

(1)	Includes 4,300,000 shares of common stock issuable upon conversion of 4,300,000 shares of Series A Convertible Preferred stock at the discretion of the holder. Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 70.2 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.
(2)	Includes options to purchase 350,000 shares of Common Stock.

(3)	Includes options to purchase 345,000 shares of Common Stock.


(4)	This person’s address is 1 Linden Place, Suite 207, Great Neck, NY 11021. Curt Kramer is the sole shareholder of Hope Capital, Inc. and the natural control person over these securities.

(5)	Includes 5,378,001 shares of common stock.

(6)

Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 70.2 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence.

Related Party Transactions

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note K – Line of Credit). In addition, Liberator, Inc. has provided its corporate guarantees of the credit facility. On June 30, 2014, the balance owed under this line of credit was $698,258.

The loan from Credit Cash (see Note J – Credit Card Advance) is guaranteed by the Company (including OneUp and Foam Labs) and was personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations. The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. On August 15, 2013, the note was further amended to reduce the per share conversion price to $.125 and extend the maturity date to August 15, 2014. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.125 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $375,000 and accrued interest was $56,312. See Note Q – Subsequent Events in the Notes to Consolidated Financial Statements.

Director Independence

Our board of directors has determined that none of its current members qualifies as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SEC or under Nasdaq’s Marketplace Rule 5605(a)(2).

ITEM 14. Principal Accounting Fees and Services.

The aggregate fees billed by our principal accountant for each of the last two fiscal years for Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees are as follows:

	Fiscal Year Ended June 30,
	2014		2013
Audit Fees (1)	$	41,500	$	41,500
Audit-Related Fees (2)	$	-	$	-
Tax Fees (3)	$	-	$	-
All Other Fees (4)	$	-	$	-

(1)

Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

(2)

Audit-Related Fees – This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC.

(3)	Tax Fees – This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

(4)	All Other Fees – This category consists of fees for other miscellaneous items.

Our board of directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of Liggett, Vogt & Webb P.A. as our independent accountants, the Board considered whether the provision of such services is compatible with maintaining independence. All of the services provided and fees charged by Liggett, Vogt & Webb P.A. were approved by the Board.

PART IV.

ITEM 15. Exhibits, Financial Statement Schedules.

Financial Statements; Schedules

Our consolidated financial statements for the fiscal years ended June 30, 2014 and 2013 begin on page F-1 of this annual report. We are not required to file any financial statement schedules.

Exhibit Table

Exhibit No.			Description
2.1			Merger and Recapitalization Agreement between WES Consulting, Inc., the majority shareholder of WES Consulting, Inc., Liberator, Inc., and the majority shareholder of Liberator, Inc., dated as of October 19, 2009 (2)
2.2			Stock Purchase and Recapitalization Agreement between OneUp Acquisition, Inc., Remark Enterprises, Inc., OneUp Innovations, Inc., and Louis S. Friedman, dated March 31, 2009 and fully executed on April 3, 2009 (3)
2.3			Amendment No. 1 to Stock Purchase and Recapitalization Agreement, dated June 22, 2009 (3)
3.1			Articles of Incorporation (1)
3.2			Bylaws (1)
3.3			Articles of Amendment to the Articles of Incorporation (4)
3.4			Articles of Amendment to the Articles of Incorporation, effective February 28, 2011 (5)
4.1			3% Convertible Note Due August 15, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on June 24, 2009 (3)
4.2			3% Convertible Note Due September 2, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on September 2, 2009 (3)
4.3			Designation of Rights and Preferences of Series A Convertible Preferred Stock of WES Consulting, Inc. (4)
4.4			Second Amendment to 3% Convertible Note originally due August 15, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on June 24, 2009 (10)
4.5			Second Amendment to 3% Convertible Note originally due September 2, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on September 2, 2009(11)
4.6			3% Promissory Note issued September 5, 2014 (12)
10.1			Lease Agreement between Bedford Realty Company, LLC and OneUp Innovations, Inc., dated September 26, 2005 (3)
10.2			Written Description of Oral Agreement between OneUp Innovations, Inc. and Leslie Vogelman, dated June 23, 2006 (3)
10.3			Exclusive Distribution Agreement between OneUp Innovations, Inc. and TENGA Co., Ltd., dated December 12, 2012 (9)
10.4			Receivables Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated May 24, 2011 (7)
10.5			Guarantee between Liberator, Inc. and Advance Financial Corporation, dated May 24, 2011 (7)
10.6			Guarantee between Foam Labs, Inc. and Advance Financial Corporation, dated May 24, 2011(7)
10.7			Guarantee between Louis S. Friedman and Advance Financial Corporation, dated May 24, 2011(7)
10.8			Amended and Restated Receivable Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated September 4, 2013 (11)
10.9			Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated November 4, 2010 (6)
10.10			Advance Schedule No. 3 to Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated October 4, 2012 (8)
10.11			Advance Schedule No. 4 to Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated May 14, 2013 (11)
10.12			First Amendment to Lease dated July 23, 2014 by and between Bedford Realty Company, LLC and OneUp Innovations, Inc. *

Exhibit No.		Description
21.1		Subsidiaries *
23.1		Consent of Liggett, Vogt & Webb P.A., independent registered public accounting firm *
31.1		Section 302 Certificate of Chief Executive Officer *
31.2		Section 302 Certificate of Chief Financial Officer *
32.1		Section 906 Certificate of Chief Executive Officer *
32.2		Section 906 Certificate of Chief Financial Officer *
101.1		The following financial information from the Company’s annual report on Form 10-K for the period ended June 30, 2014, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets as of June 30, 2014 and 2013; (ii) Consolidated Statements of Operations for the Twelve Months Ended June 30, 2014 and 2013; (iii) Consolidated Statements of Stockholders Equity for the Twelve Months Ended June 30, 2014 and 2013; (iv) Consolidated Statements of Cash Flows for the Twelve Months Ended June 30 2014 and 2013; and (v) Notes to Consolidated Financial Statements. **

___________________

* Filed herewith.

** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)	Filed on March 2, 2007 as an exhibit to our Registration Statement on Form SB-2, and incorporated herein by reference.
(2)	Filed on October 22, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(3)	Filed on March 24, 2010 as an exhibit to Amendment No. 1 to our Current Report on Form 8-K, and incorporated herein by reference.
(4)	Filed on February 23, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(5)	Filed on March 3, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(6)	Filed on November 9, 2010 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(7)	Filed on October 12, 2011 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.
(8)	Filed on October 11, 2012 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.
(9)	Filed on February 8, 2013 as an exhibit to our Current Report on Form 8-K/A, and incorporated herein by reference.
(10)	Filed on August 15, 2013 as an exhibit to our Current Report on Form 8-K/A, and incorporated herein by reference.
(11)	Filed on September 30, 2013 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.
(12)	Filed on September 5, 2014 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LIBERATOR, INC.

Date: September 29, 2014	/s/ Louis S. Friedman
	Louis S. Friedman, Chief Executive Officer and President

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME	TITLE	DATE

/s/ Louis S. Friedman	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)	September 29, 2014
Louis S. Friedman

/s/ Ronald P. Scott	Chief Financial Officer (Principal Financial and Accounting Officer), Secretary, and Director	September 29, 2014
Ronald P. Scott

Attached files

Luvu Brands, Inc. Reports

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