10-Q 1 liberator_2012mar31-10q.htm MARCH 31, 2012 QUARTERLY REPORT Liberator, Inc. March 31, 2012 Quarterly Report

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

 

For the quarterly period ended March 31, 2012

 

OR

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

For the transition period from                      to                     

 

Commission File Number: 000-53314

Liberator, Inc.

(Exact name of registrant as specified in this charter)

     

Florida

(State or other jurisdiction

of incorporation or organization)

 

59-3581576

(I.R.S. Employer

Identification No.)

 

2745 Bankers Industrial Drive, Atlanta, Georgia 30360

(Address of principal executive offices and zip code)

 

(770) 246-6400

(Registrant’s telephone number, including area code)

 

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. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company   x
       

(Do not check if a smaller reporting company)

 

   

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

 

As of April 30, 2012 there were 70,702,596 shares of the registrant’s common stock outstanding.

 


 
 

 

LIBERATOR, INC.

 

TABLE OF CONTENTS

      Page
  PART I - FINANCIAL INFORMATION    
       
Item 1. Financial Statements (unaudited)    
  Condensed Consolidated Balance Sheets as of  March 31, 2012 and June 30, 2011   3
  Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2012 and 2011   4
  Condensed Consolidated Statements of Cash Flows for the three and nine months ended March 31, 2012 and 2011   5
  Notes to Interim Unaudited Condensed Consolidated Financial Statements   6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    25
Item 3  Quantitative and Qualitative Disclosures About Market Risk   30
Item 4. Controls and Procedures    30
       
  PART II - OTHER INFORMATION    
       
Item 1. Legal Proceedings   31
Item 1A. Risk Factors   31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    31
Item 3. Defaults Under Senior Securities    
Item 4. Mine Safety Disclosures    
Item 5. Other Information   31
Item 6. Exhibits    32
. SIGNATURES    33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

 
 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

LIBERATOR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

     (unaudited)        
    March 31, 2012      June 30, 2011  
ASSETS                
Current assets:                
    Cash and cash equivalents   $ 642,005     $ 514,048  
    Accounts receivable, net     813,795       710,780  
    Inventories, net     1,334,194       1,125,423  
    Prepaid expenses     56,186       51,955  
    Current assets of discontinued operations    

-

     

1,019,685

 
        Total current assets     2,846,180       3,421,891  
    Equipment and leasehold improvements, net     825,340       932,238  
    Other assets     9,082       5,341  
     Intangible assets of discontinued operations     -       847,082  
    Goodwill of discontinued operations     -       1,633,592  
    Other assets of discontinued operations    

-

     

49,261

 
        Total assets   $

3,680,602

    $

6,889,405

 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
    Accounts payable   $ 1,779,893     $ 1,744,371  
    Accrued compensation     335,789       228,180  
    Accrued expenses and interest     133,827       165,154  
    Line of credit     429,113       460,758  
    Current portion of leases payable     29,922       33,973  
Current portion of deferred rent payable     12,834       46,017  
    Notes payable     805,710       699,961  
    Convertible notes payable- shareholder (net)     609,530       -  
    Credit card advance     -       389,926  
    Current liabilities of discontinued operations    

-

     

684,505

 
        Total current liabilities     4,136,618       4,452,845  
Long-term liabilities:                
    Long-term portion of leases payable     6,665       29,766  
    Notes payable - related party     116,000       145,948  
    Unsecured lines of credit     48,266       71,393  
Deferred rent payable     250,175       250,175  
Convertible notes payable - shareholder (net)    

-

     

572,759

 
    Total long-term liabilities    

421,106

     

1,070,041

 
        Total liabilities     4,557,724       5,522,886  
                 
Commitments and contingencies    
 
     
 
 
Stockholders’ equity (deficit):                
Series A Convertible Preferred stock, 10,000,000 shares authorized, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000,000 as of March 31, 2012 and at June 30, 2011     430       430  
Common stock of $0.01 par value, 175,000,000 shares authorized; 67,102,596 shares issued and outstanding at March 31, 2012 and 91,947,047 at June 30,2011     671,026       919,470  
    Additional paid-in capital     5,592,991       7,423,401  
    Accumulated deficit     (7,141,569 )     (7,026,870 )

   Accumulated other comprehensive income of discontinued

   operations

   

-

     

50,087

 
        Total stockholders’ equity (deficit)    

(877,122

)    

1,366,518

 
        Total liabilities and stockholders’ equity   $

3,680,602

    $

6,889,405

 

 See accompanying notes to unaudited interim financial statements.

 

3


 
 

LIBERATOR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

 

   

Quarter Ended

March 31,

 

Three Quarters Ended

March 31,

 
   

2012

   

2011

 

2012

   

2011

 
           
Net Sales   $ 3,961,059     $ 3,553,137   $ 11,208,681     $ 9,874,866  
Cost of goods sold    

2,709,453

     

2,385,223

   

7,835,682

     

6,851,793

 
Gross profit     1,251,606       1,167,914     3,372,999       3,023,073  
Operating expenses                              
Advertising and Promotion     130,507       90,768     340,657       347,396  
Other selling and marketing     366,410       385,834     983,406       1,060,831  
General and administrative     594,677       550,963     1,604,073       1,723,662  
Depreciation and amortization     54,114       53,184     157,611       162,687  
Acquisition-related costs    

-

     

81,185

   

-

     

81,185

 
Total operating expenses    

1,145,708

     

1,161,934

   

3,085,747

     

3,375,761

 
Income (loss) from continuing operations     105,898       5,980     287,252       (352,688 )
Other Income (Expense):                              
Interest income     214       317     535       516  
Interest (expense) and financing costs     (95,820 )     (90,771   (258,493 )     (259,321 )
Expenses related to merger     -       -     -       (52,500 )
Debt issuance costs    

(12,257

)    

(12,257

 

(36,771

)    

(36,771

)
Total Other Income (Expense)    

(107,863

)    

(102,711

 

(294,729

)    

(348,076

)
Loss from continuing operations before income taxes     (1,965)       (96,731 )     (7,477 )     (700,764 )
Provision for income taxes    

-

     

-

   

-

     

-

 
Loss from continuing operations     (1,965 )     (96,731 )   (7,477 )     (700,764 )
                               
Income from discontinued operations     -       198,805     -       198,805  
Loss from discontinued operations, including loss on disposal of $101,432     -       -     (127,473 )     -  
Net income (loss)   $

 

(1,965)

    $ 102,074   $

(134,950

 

)

  $

(501,959

 

)

 
Net income (loss) per share                              
            Basic   $ (0.00 )   $ 0.00   $

(0.00

)   $

(0.01

)
            Diluted   $

 

(0.00)

    $

 

0.00

  $

(0.00

)   $

(0.01

)
   Weighted average common shares outstanding                              
             Basic     69,593,750       83,414,060     87,151,237       61,762,649  
            Diluted    

 

69,632,805

     

 

83,414,060

   

87,185,121

     

61,762,649

 

 

 

 

See accompanying notes to unaudited interim financial statements. 

 

 

4


 
 

 

  LIBERATOR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

    Three Quarters Ended  
   

March 31,

 
   

2012

   

2011

 
OPERATING ACTIVITIES:                
Net loss   $ (134,950 )   $ (501,959 )
Less: Loss from discontinued operations     (26,041 )     -  
Less: Loss from sale of discontinued operations    

(101,432

)    

198,805

 
Loss from continuing operations     (7,477 )     (700,764 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Depreciation and amortization     157,611       169,854  
Amortization of debt discount     36,771       36,770  
Expenses related to merger     -       52.500  
Common stock issued for services     55,000       5,600  
Stock based compensation expense     26,469       12,612  
Deferred rent payable     (33,183 )     (25,203 )
Changes in operating assets and liabilities:                
Accounts receivable     (103,015 )     (273,524 )
Inventories     (208,772 )     (299,436 )
Prepaid expenses and other assets     (4,231 )     113,861  
Accounts payable     35,522       465,333  
Accrued compensation     107,608       52,656  
Accrued expenses and interest    

(31,327

)    

55,219

 
Cash used in operating activities - continuing operations     (96,496 )     (135,716 )
Cash provided by (used in) operating activities - discontinued operations    

28,613

     

(151,350

             
              Net cash used in operating activities     (67,883       (287,066
             
INVESTING ACTIVITIES:                
              Cash investment in Web Merchants, Inc. net of cash acquired     -       29,000  
              Investment in equipment and leasehold improvements    

(50,712

)    

(66,479

)
       Cash used in investing activities - continuing operations     (50,712 )     (37,479 )
Cash provided by investing activities - discontinued operations    

813,176

     

(13,976

)
             
Net cash provided by (used in) investing activities    

762,464

     

(51,455

)
                 
FINANCING ACTIVITIES:                
 Repayments under line of credit     (3,176,645 )     (3,319,196
 Borrowings under line of credit     3,145,000       3,497,642  
 Proceeds from credit card cash advance     -       448,000  
 Repayment of credit card cash advance     (389,926 )     (359,895 )
 Repayment of related party loans     (29,948 )     -  
 Repayment of unsecured line of credit     (23,127 )     (77,974 )
 Proceeds from issuance of debt     100,000       -  
 Proceeds from short-term debt     250,000       650,000  
 Repayment of short-term debt     (244,251 )     (301,061 )
Principal payments on equipment note payable and capital leases    

(27,153

)    

(73,742

)
Cash provided by (used in) financing activities - continuing operations    

(396,050

)    

463,774

 
             
Net cash provided by (used in) financing activities    

(396,050

)    

463,774

 
                 
             
Net increase (decrease) in cash and cash equivalents     298,531       125,253  
Cash and cash equivalents at beginning of period    

514,048

     

490,236

 
Cash and cash equivalents at end of period     812,579       615,489  
Less cash and cash equivalents of discontinued operations    

170,574

     

-

 
             
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $

642,005

    $

615,489

 
             
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
             
Cash paid during the period for:                
    Interest   $ 251,620     $ 203,310  
             
    Income taxes   $ -     $ -  
             
                     

 

See accompanying notes to unaudited interim financial statements.

5


 
 

 

LIBERATOR, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2012

(Unaudited)

 

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS

 

Overview - Liberator, Inc. (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. (fka 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”). References to the “Company” in these notes include the Company and its wholly owned subsidiaries; OneUp Innovations, Inc. and Foam Labs, Inc.

 

As a result of the Merger, each issued and outstanding share of the common stock of Old Liberator (the “Old Liberator Common Shares”) was converted into one share of the Company’s common stock, $0.01 par value, which, after giving effect to the Merger, equaled, in the aggregate, 98.4% of the total issued and outstanding common stock of the Company (the “Liberator Common Stock”).  Pursuant to the Merger Agreement, each issued and outstanding share of preferred stock of Old Liberator (the “Liberator Preferred Shares”) was to be converted into one share of the Company’s preferred stock with the provisions, rights, and designations set forth in the Merger Agreement (the “Liberator Preferred Stock”).  However, on the execution date of the Merger Agreement, the Company was not authorized to issue any preferred stock. Therefore, the parties agreed that the Company will file an amendment to its Articles of Incorporation authorizing the issuance of the Liberator Preferred Stock, whereupon the Liberator Preferred Stock will be exchanged pursuant to the terms of the Merger Agreement.  As of the execution date of the Merger Agreement, Old Liberator 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 18, 2011, the Company amended its Articles of Incorporation to increase the number of shares of capital stock to 185,000,000 of which 10,000,000 shares were designated Preferred Stock, $0.0001 par value, and issued 4,300,000 shares of Series A Convertible Preferred Stock in satisfaction of its obligation under the Merger Agreement.

 

The Merger has been accounted for as a reverse merger, and as such the historical financial statements of Old Liberator are being presented herein with those of the Company.  Also, the capital structure of the Company for all periods presented herein is different from that appearing in the historical financial statements of the Company due to the recapitalization accounting.

 

On January 27, 2011 the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Web Merchants Inc., a Delaware corporation (“WMI”) and Fyodor Petrenko and Dmitrii Spetetchii, the holders of 100% of WMI’s capital stock (the “WMI Shareholders”), to acquire 100% of WMI’s issued and outstanding equity ownership in exchange for 28,394,400 shares of our common stock to the WMI Shareholders. Dmitrii Spetetchii also received $100,000 in cash, which represented $79,000 for the repayment of a loan to WMI and $21,000 in consideration for signing a non-compete agreement with the Company.  Pursuant to the Purchase Agreement, WMI would continue to operate as a wholly owned subsidiary of the Company. The foregoing summary of the acquisition of WMI does not purport to be complete and is qualified in its entirety by reference to the Current Report on Form 8-K filed on February 2, 2011. In connection with the acquisition of WMI, the Board of Directors appointed Fyodor Petrenko, the President of WMI, as Executive Vice President of the Company and to the Board of Directors, filling a vacancy.

 

Effective February 28, 2011, the Company changed its name to Liberator, Inc. by filing an Articles of Amendment to its Articles of Incorporation with the Florida Department of State. A copy of the Articles of Amendment were included in the Company’s Form 8-K filed on March 2, 2011. 

 

6


 
 

On November 15, 2011, the Company consummated the sale of its interest in its subsidiary WMI to Web Merchants Atlanta, LLC, an entity controlled by the President and former majority shareholder of WMI, Fred Petrenko, effective October 1, 2011. The sale took place pursuant to the terms of a definitive Stock Purchase Agreement (the “WMI Sale Agreement”), which was previously disclosed in a Current Report on Form 8-K dated October 6, 2011. The WMI Purchase Agreement was filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K, which was filed on October 12, 2011.

 

At the November 15, 2011 closing of the sale of WMI, the Company received $700,000 in net proceeds, including $300,000 that had previously been delivered to the Company in the form of a down payment. In addition, approximately 25.4 million shares of Liberator common stock owned by Mr. Petrenko were surrendered by Mr. Petrenko and placed into escrow until certain outstanding loans of the Company were either satisfied or WMI and Mr. Petrenko were provided with a written release of any liability as a guarantor. On February 7, 2012, the Company obtained the written releases described in the escrow agreement and the 25,394,400 shares were disbursed from escrow to the Company and the shares were retired. Immediately following retirement of the 25,394,400 shares, there were 67,002,647 shares of common stock issued and outstanding.

 

Also effective at the closing of the transaction, (a) Fred Petrenko resigned as a director and Executive Vice President of the Company, and Rufina Bulatova resigned as Vice President - Online Marketing of the Company (b) the Voting Agreement between the Company, Louis S. Friedman and Fyodor Petrenko, dated January 27, 2011, was cancelled, and (c) the Employment Agreement between the Company and Fyodor Petrenko, dated January 27, 2011, was terminated and cancelled.

 

The assets and liabilities of WMI are classified as discontinued operations in the Company’s accompanying Condensed Consolidated Balance Sheets and the results of operations of WMI are classified as discontinued operations in the Company’s accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.

 

The Company is a designer and manufacturer of various specialty furnishings for the sexual wellness market.  The Company's sales and manufacturing operation are located in the same facility in Atlanta, Georgia.  Sales are generated through internet and print advertisements. We have a diversified customer base with no one customer accounting for 10% or more of consolidated net sales in the most recently completed quarter and no particular concentration of credit risk in one economic sector.  Foreign operations and foreign net sales are not material.

 

Going Concern - The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company had a net loss of $134,950 and $501,959 for the nine months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the Company has an accumulated deficit of $7,141,569 and a working capital deficit of $1,290,438.

 

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

 

These actions include an ongoing initiative to increase gross profit margins through improved production controls and reporting. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels.  Furthermore, our plan of operation for the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational plans we have identified will require approximately $2,000,000 of funding, primarily for working capital. We will also be exploring the opportunity to acquire other compatible and related businesses.

 

7


 
 

We plan to finance the required $2,000,000 with a combination of anticipated cash flows from operations over the next twelve months as well as cash on hand and cash we will seek to obtain through equity and debt financings.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.  However, management cannot provide any assurances that the Company will be successful in accomplishing these plans.  The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

NOTE 2. DISCONTINUED OPERATIONS

   

Major Categories of Assets and Liabilities Sold

Effective October 1, 2011, the Company sold WMI to Web Merchants Atlanta, LLC, an entity controlled by the President and former majority shareholder of WMI, Fred Petrenko. At September 30, 2011 and June 30, 2011, the major categories of assets and liabilities of WMI were comprised of the following:

 

                 
   

September 30,

2011

   

June 30,

2011

 
ASSETS                
Current assets:                
Cash and cash equivalents   $ 170,572     $ 167,929  
Accounts receivable, net     77,828       50,600  
Inventories, net     937,489       943,312  
Prepaid expenses    

54,663

     

25,773

 
Total current assets     1,240,552       1,187,614  
Equipment, net     49,445       49,261  
Intangible assets, net     836,260       847,082  
Goodwill     1,633,592       1,633,592  
             
Total assets   $

3,759,849

    $

3,717,549

 
                 
LIABILITIES                
Current liabilities:                
Accounts payable   $ 695,224     $ 646,968  
Accrued compensation     24,381       14,975  
Accrued expenses and interest    

38,797

     

22,562

 
                 
                 
Total liabilities   $

758,402

    $

684,505

 
                 

 

8


 
 

The following table sets forth the components of discontinued operations:

 

         
     

Quarter Ended

September 30, 2011

 
Net sales   $ 2,626,608  
Cost of sales    

1,739,277

 
Gross profit     887,331  
Advertising expenses     315,551  
Other sales and marketing expenses     376,693  
General and administrative expenses     216,104  
Depreciation and amortization expenses    

5,011

 
Total operating expenses    

913,359

 
Operating loss     (26,028
Interest Expense     13  
Loss From Operations of Discontinued Operations    

(101,432

Loss from Discontinued Operations   $ 

(127,473

)

 

 

As of March 31, 2012, all amounts associated with WMI are reflected as discontinued operations.

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc.  Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

 

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements.  These consolidated condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s report on Form 10-K for the year ended June 30, 2011 filed on October 12, 2011.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the period reported.  Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary.  Actual results could differ from those estimates and assumptions.

 

9


 
 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Significant estimates in these consolidated financial statements include estimates of asset impairment, tax valuation reserves, loss contingencies, allowances for doubtful accounts, share-based compensation, and useful lives for depreciation and amortization.  Actual results could differ materially from these estimates.

 

Revenue Recognition     

 

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” (“SAB No. 104”).  SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.  The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

 

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company includes shipping and handling costs in cost of product sales.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

 

Allowance for Doubtful Accounts

 

 The allowance for doubtful accounts reflects management's best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. The Company reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. At March 31, 2012, accounts receivable totaled $813,795 net of $6,707 in the allowance for doubtful accounts. At June 30, 2011, accounts receivable totaled $710,780, net of $14,055 in the allowance for doubtful accounts.

  

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.

 

10


 
 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable.  As of March 31, 2012, substantially all of our cash and cash equivalents were managed by a single financial institution.  As of March 31, 2012, some of our cash and cash equivalents balances with this financial institution exceeded FDIC insured limits.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in the United States and Canada.

 

Fair Value of Financial and Derivative Instruments

 

The Company values its financial instruments in accordance with new accounting guidance on fair value measurements, which, for certain financial assets and liabilities, requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

    Level 1 - Observable prices in active markets for identical assets or liabilities.
       
    Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

    Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

At March 31, 2012, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other long-term debt. The fair values of these financial instruments approximated their carrying values based on either their short maturity or current terms for similar instruments.

 

Advertising Costs

 

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $15,217 at March 31, 2012 and $6,835 at June 30, 2011. Advertising expense for the three months ended March 31, 2012 and 2011 was $130,507 and $90,768, respectively.

 

Research and Development

 

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $19,255 for the three months ended March 31, 2012 and $34,493 for the three months ended March 31, 2011. Research and development costs are included in general and administrative expense.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated service lives for financial reporting purposes.

 

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

 

Impairment or Disposal of Long Lived Assets

 

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at March 31, 2012.

 

11


 
 

Operating Leases

 

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability, and the balance in this account at March 31, 2012 was $263,009. The rent expense under this lease for the three months ended March 31, 2012 and 2011 was $80,931. The Company also leases certain equipment under operating leases, as more fully described in Note 11 - Commitments and Contingencies .

 

Stock Based Compensation

 

We account for stock-based compensation in accordance with FASB ASC 718, Compensation - Stock Compensation. We measure the cost of each stock option at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period. The expense recognized reflects an estimated forfeiture rate for unvested awards of 25%. All of the Company’s stock options are service-based awards, and because the Company’s stock options are “plain vanilla,” as defined by the U. S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in Stockholders’ Equity and Compensation Expense accounts.

 

 

 

Segment Information

 

We have identified three reportable segments:  Direct, Wholesale and Other.  Direct includes product sales through our three 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 segment results for the Direct, Wholesale, and Other segments.  

 

                                 
    Quarter Ended     Three Quarters Ended  
   

March 31,

2012

    March 31, 2011     March 31, 2012     March 31, 2011  
       
Net Sales:                                
Direct   $ 1,308,859     $ 1,324,181     $ 3,964,646     $ 4,027,334  
Wholesale     2,353,379       1,765,863       6,321,329       4,844,642  
Other    

298,821

      463,093      

922,706

      1,002,890  
Total Net Sales   $ 3,961,059     $ 3,553,137     $ 11,208,681     $ 9,874,866  
                                 
Gross Margin:                                
Direct   $ 649,020     $ 607,235     $ 1,952,111     $ 1,839,253  
Wholesale     511,112       445,938       1,235,141       1,099,223  
Other    

91,474

      114,741      

185,747

      84,597  
Total Gross Margin   $ 1,251,606     $ 1,167,914     $ 3,372,999     $ 3,023,073  

 

 

Segment asset information is not prepared or used to assess segment performance.

 

12


 
 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period that includes the enactment date.

 

As a result of the implementation of accounting for uncertain tax positions effective July 1, 2008, the Company did not recognize a liability for unrecognized tax benefits and, accordingly, was not required to record any cumulative effect adjustment to beginning of year retained earnings. As of both the date of adoption and March 31, 2012, there was no significant liability for income tax associated with unrecognized tax benefits.

 

In evaluating a tax position for recognition, management evaluates whether it is more-likely-than-not that a position will be sustained upon examination, including resolution of related appeals or litigation processes, based on technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company's financial statements as the largest amount of tax benefit that, in management's judgment, is greater than 50% likely of being realized upon settlement.

 

The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its consolidated statements of operations. As of the date of adoption and during the three and nine month periods ended March 31, 2012 and 2011, there was no accrual for the payment of interest and penalties related to uncertain tax positions.

 

Recently Issued Accounting Pronouncements

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.   This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 removes certain presentation options and requires entities to report components of net income and comprehensive income in either one continuous statement of comprehensive income or two separate but consecutive statements. There is no change to the items that are reported in other comprehensive income. ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011. As these standards impact presentation requirements only, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 allows for assessment of qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether or it is necessary to perform the two-step goodwill impairment test required under current accounting standards. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not believe that the adoption of ASU 2011-08 will have a material impact on its consolidated financial statements.

 

13


 
 

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The update provides that an entity shall disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on its financial position. Required disclosures should be made separately for assets and liabilities and include (a) gross amounts of those assets and liabilities; (b) the amounts that have been offset; (c) the net amounts presented in the statement of financial position; and (d) the amounts subject to an enforceable master netting arrangement.  This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company will adopt this guidance for its first quarter in fiscal year 2014. The Company does not anticipate that the adoption of this update will have a significant impact on its results of operations or financial position.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The update defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. The amendments in this update are effective for the Company’s first quarter in fiscal year 2012. The Company does not believe that the adoption of this update has had, or anticipates that it will have in the future a significant impact on its results of operations or financial position.

 

Net Income (Loss) Per Share

The Company computes earnings per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Net earnings per common share is computed by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's outstanding warrants and options (calculated using the treasury stock method). Outstanding common stock equivalents of 39,055 have been included in the calculation of diluted earnings per share for the three months ended March 31, 2012, and 33,884 for the nine months ended March 31, 2012 as they are anti-dilutive, as a result of the Company’s losses and would decrease the net loss per common share.

 

 The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect:

 

   

Balance at March 31,

 
   

2012

 

2011

 
Common stock options   3,221,831   2,261,956  
Common stock warrants   2,712,393   2,712,393  
Convertible notes  

2,500,000

 

2,500,000

 
Total  

8,434,224

 

7,474,349

 

 

 

NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company acquired goodwill and certain identifiable intangible assets as part of the acquisition in January 2011. The Company’s goodwill and certain identifiable intangible assets were eliminated with the sale of Web Merchants Inc., effective October 1, 2011.

 

 

 

14


 
 

NOTE 5. STOCK-BASED COMPENSATION

 

Options

 

At March 31, 2012, the Company had the 2009 Stock Option Plan (the “Plan”), which is shareholder-approved and under which 5,000,000 shares are reserved for issuance until the Plan terminates on October 20, 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 March 31, 2012, the number of shares available for issuance under the Plan was 1,991,500.

 

 

The following table summarizes the Company’s stock option activities during the six months ended March 31, 2012:

 

 

 

   

Number of Shares

Underlying

Outstanding

Options

   

Weighted

Average

Remaining

Contractual

Life (Years)

   

Weighted

Average

Exercise

Price

   

Intrinsic

Value

 
Options outstanding as of June 30, 2011     2,130,956       2.5     $ .201     $ -  
Granted     1,488,000       4.6       .16       -  
Exercised     -       -       -       -  
Forfeited or expired    

(172,000

)    

-

     

.213

     

-

 
Options outstanding as of March 31, 2012    

3,446,956

     

3.5

    $

.183

    $

-

 
Options exercisable as of March 31, 2012    

980,581

     

1.9

    $

.218

    $

-

 
                                   

 

 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 $.17 for such day. 

 

A summary of the Company’s non-vested options for the nine months ended March 31, 2012 is presented below:

Non-vested Options

 

Shares

   

Weighted

Average

Grant-Date

Fair Value

 
Non-vested at June 30, 2011     1,501,000      $ .06    
Granted     1,488,000       .04  
Vested     (378,875 )     .06    
Forfeited    

(143,750

)    

.06

   
Non-vested at March 31, 2012     2,466,375     $ .05    

 

15


 
 

The following table summarizes the weighted average characteristics of outstanding stock options as of March 31, 2012:

 

      Outstanding Options     Exercisable Options  
Exercise Prices    

Number

of Shares

   

Remaining

Life (Years)

   

Weighted

Average Price

   

Number of

Shares

   

Weighted

Average Price

 
$ .15 to .16       2,368,500       4.3     $ .16     222,125     $ .15  
$ .228 to .25       1,078,456       1.7       .24       758,456       .24  
Total stock options       3,446,956       3.5     $ .183       980,581     $ .22  

 

Stock-based compensation

 

Stock-based employee compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company has no outstanding awards with market or performance conditions.

 

Stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and nine month periods ended March 31, 2012 and 2011 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Pre-vesting forfeitures are estimated to be approximately 25%, based on historical experience.

 

The following table summarizes stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plan:

 

   

Quarter Ended March 31,

 

Three Quarters Ended March 31,

 
   

2012

 

2011

 

2012

 

2011

 
Cost of Goods Sold   $ 2,267   $ 3,460   $ 6,399   $ 5,504  
Other Selling and Marketing   4,218   1,126   11,571   3,967  
General and Administrative  

3,077

 

1,877

 

8,499

 

3,141

 
Total   $

9,562

  $

6,463

  $

26,469

  $

12,612

 

 

As of March 31, 2012, the Company’s total unrecognized compensation cost was $335,789 which will be recognized over the vesting period of 3.4 years.

 

 

NOTE 6. INVENTORIES

 

Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. Market is defined as sales price less cost to dispose and a normal profit margin.  Inventories consisted of the following:

 

   

March 31, 2012

 

June 30, 2011

 
       
Raw materials   $ 399,571   $ 416,675  
Work in process   111,555   165,054  
Finished goods  

823,068

 

543,694

 
   

$

1,334,194

  $

1,125,423

 

 

16


 
 

 NOTE 7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, or the shorter of the remaining lease term or estimated useful lives for leasehold improvements.

 

 

Equipment and leasehold improvements consisted of the following:

 

 

March 31,

2012

 

June 30,

2011

 

Estimated

Useful Life 

Factory Equipment   $ 1,616,302     $ 1,571,532   7-10 years
Computer Equipment and Software     848,145       842,203   5-7 years
Office Equipment and Furniture     166,996       166,996   5-7 years
Leasehold Improvements    

330,961

     

330,961

  15 years
Subtotal     2,962,404       2,911,692    
Accumulated Depreciation    

(2,137,064

)

   

(1,979,454

)  
    $

825,340

    $

932,238

   

 

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the nine months ended March 31, 2012.

 

17


 
 

 

NOTE 8. NOTES PAYABLE

 

Notes payable consisted of the following:

 

   

March 31,

2012

   

June 30,

2011

 
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing July 22, 2011   $ -     $ 4,210  
                 
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing July 22, 2011      -       1,258  
                 
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing February 17, 2012     -       34,000  
                 
Unsecured note payable to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing December 23, 2011     -       62,986  
                 
Unsecured note payable to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing March 16, 2012     -       97,507  
                 
Unsecured note payable to an individual, with interest at 16%, principal and interest originally due on January 3, 2011, extended to May 1, 2012. Beginning May 31, 2011, the interest rate is increased to 20%, with interest due monthly, and the principal due in full on May 1, 2012  (see Note 17 – Subsequent Events)     200,000       200,000  
                 
Unsecured note payable to an individual, with interest at 20%, principal and interest originally due in full on  January 3, 2012; extended to January 3, 2013 with interest due monthly and principal due on maturity      300,000       300,000  
                 
Unsecured note payable to an individual with monthly interest payments at 20%, principal amount due in full on July 31, 2012     100,000       -  
                 
Unsecured note payable to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing January 11, 2013    

205,710

     

-

 
                 
Total Notes Payable    

805,710

     

699,961

 
Less: current portion    

(805,710

)    

(699,961

)
Long-term Note Payable   $ -     $ -  

 

18


 
 

 

NOTE 9. LINE OF CREDIT

 

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“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 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. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of March 31, 2012 the lenders Index Rate was 4.75%).  In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month. The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the facility. On March 31, 2012, the balance owed under this line of credit was $429,113.  On March 31, 2012, we were in substantial compliance with all of the material financial and other covenants required under this credit facility.

 

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 10. CREDIT CARD ADVANCE

 

On May 19, 2011, OneUp and Foam Labs entered into a receivable advance agreement with CC Funding, LLC (“Credit Cash”), a division of 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, by March 19, 2012.  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, and the Company’s CFO, Ronald P. Scott.  The loan was repaid in full on March 20, 2012.

 

 

19


 
 

NOTE 11. UNSECURED LINES OF CREDIT

 

The Company has drawn cash advances on three unsecured lines of credit that are in the name of the Company and Louis S. Friedman. The terms of these unsecured lines of credit call for monthly payments of principal and interest, with interest rates ranging from 5% to 12%. The aggregate amount owed on the three unsecured lines of credit was $48,266 at March 31, 2012 and $71,393 at June 30, 2011.

 

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires December 31, 2015. Lease payments are 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 March 31, 2012 was $263,009 and $296,192 at June 30, 2011. The rent expense under this lease for the three months ended March 31, 2012 and 2011 was $80,931.

 

The lease for the facility requires the Company to provide a standby letter of credit payable to the lessor in the amount of $225,000 until December 31, 2010. On December 31, 2010, the standby letter of credit for $225,000 was cancelled and a letter of credit in the amount of $25,000 in lieu of a security deposit was provided to the lessor.  This letter of credit is secured by an assignment by Leslie Vogelman, the Company’s Treasurer, to Fidelity Bank of a Certificate of Deposit in the amount of $25,000.

 

The Company leases certain material handling equipment under an operating lease.  The lease amount is $4,082 per month and expires September 2012.

 

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

 

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

 

Future minimum lease payments under non-cancelable operating leases at March 31, 2012 are as follows:

 

Year ending June 30,

     
2012 (three months)   $ 204,849  
2013     415,397  
2014     411,974  
2015     425,274  
2016     210,569  
Thereafter through 2017    

519

 
Total minimum lease payments   $

1,668,582

 

 

 

Capital Leases

 

The Company has acquired equipment under the provisions of long-term leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The leased properties under these capital leases have a total cost of $349,205. These assets are included in the fixed assets listed in Note 6 - Equipment and Leasehold Improvements and include computers, software, furniture, and equipment. The capital leases have stated or imputed interest rates ranging from 7% to 21%.

 

20


 
 

The following is an analysis of the minimum future lease payments subsequent to March 31, 2012:

 

Year ending June 30,

     
2012 (three months)    $ 8,445  
2013     27,178  
2014     7,601  
2015    

-

 
Total minimum lease payments     43,224  
Less amount representing interest    

(6,637

)
Present value of net minimum lease payments     36,587  
Less current portion    

(29,922

Long-term obligations under leases payable   $

6,665

 

 

Legal Proceedings

 

As of the date of this Quarterly Report on Form 10-Q, 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, except that on September 1, 2010, Donald Cohen, a former officer, director and independent sales representative of Liberator, Inc., commenced an action against the Company and other defendants including certain current officers and directors, under the caption  Cohen v. WES Consulting, Inc., OneUp Innovations, Inc., OneUp Acquisitions, Inc., Liberator, Inc., f/k/a Remark Enterprises, Inc., Remark Enterprises, Inc., Belmont Partners LLC, Louis Friedman, Ronald Scott and Leslie Vogelman, Civil Action File No. 100V10590-8. in the Superior Court of Dekalb County, Georgia.  On March 28, 2012, the Company paid the plaintiff $40,000 to settle the litigation, repaid the shareholder loan and accrued interest totaling $32,465, and the matter was dismissed with prejudice.

 

NOTE 13.  TAXES

 

There is no income tax provision (benefit) for federal or state income taxes as the Company has incurred operating losses since inception. Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

 Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company may have experienced a change of control that could result in a substantial reduction to the previously reported net operating loss carryforwards at June 30, 2011; however, the Company has not performed a change of control study and, therefore, has not determined if such change has taken place and if such a change has occurred the related reduction to the net operating loss carryforwards.  As of March 31, 2012, the net operating loss carryforwards continue to be fully reserved and any reduction in such amounts as a result of this study would also reduce the related valuation allowances resulting in no net impact to the financial results of the Company.

 

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48 (“FIN 48”) Accounting for Uncertainty in Income Taxes, an interpretation of “FASB Statement No. 109.”  As of March 31, 2012, there was no significant liability for income tax associated with unrecognized tax benefits. 

 

With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examination by tax authorities for tax years before 2008.

 

21


 

 
 

NOTE 14. EQUITY

 

Common Stock- The Company’s authorized common stock was 175,000,000 shares at March 31, 2012 and June 30, 2011.  Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At March 31, 2012, the Company had reserved the following shares of common stock for issuance:

 

     
(in shares)   March 31, 2012
Non-qualified stock options     438,456
Shares of common stock subject to outstanding warrants     2,712,393
Shares of common stock reserved for issuance under the 2009 Stock Option Plan     5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock     4,300,000
Shares of common stock issuable upon conversion of Convertible Notes    

2,500,000

Total shares of common stock equivalents    

14,950,849

 

Preferred Stock - In connection with the Merger and pursuant to the Merger Agreement, each Old Liberator Preferred Share was to be converted into one share of Liberator Preferred Stock with the provisions, rights, and designations set forth in the Merger Agreement. However, on the execution date of the Merger Agreement, the Company was not authorized to issue any preferred stock, and, therefore, the parties agreed that the Company would take the appropriate steps to file an amendment to its Articles of Incorporation authorizing the issuance of the Liberator Preferred Stock, and at such time the Old Liberator Preferred Stock would be exchanged pursuant to the terms of the Merger Agreement.  

 

On February 18, 2011, the Company filed an amendment to its Articles of Incorporation, effective February 9, 2011, authorizing the issuance of the Liberator Preferred Stock and the Company now has 10,000,000 authorized shares of preferred stock, par value $.0001 per share, of which 4,300,000 shares have been designated and issued as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into one share of common stock and has a liquidation preference of $.2325 ($1,000,000 in the aggregate). Liquidation payments to the preferred holders have priority and are made in preference to any payments to the holders of common stock. In addition, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the Company (the “Common Shares”) issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Shares issued and outstanding at the time of such vote. At each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including the election of directors, holders of Series A Convertible Preferred Shares shall vote together with the holders of Common Shares as a single class. On February 18, 2011, the Company issued 4,300,000 shares of Series A Convertible Preferred Stock in satisfaction of its obligation under the Merger Agreement.

 

 

 Warrants - As of March 31, 2012, outstanding warrants to purchase approximately 2,712,393 shares of common stock at exercise prices of $.25 to $1.00 will expire at various dates within four years of December 31, 2011.

 

There are warrants to purchase 2,462,393 shares of Liberator Common Stock outstanding that were issued during fiscal 2009 in conjunction with the reverse merger between Old Liberator and OneUp Innovations. All of these warrants are exercisable immediately and expire on June 26, 2014, which is five years from the date of issuance. These warrants were valued using a volatility rate of 25% and a risk-free interest rate of 4.5%, as more fully described below:

 

1.   Warrants to purchase a total of 1,462,393 shares of Liberator Common Stock were issued for services rendered by a placement agent in a private placement that closed on June 26, 2009. These warrants have fixed exercise prices of $.50 per share (292,479 warrants), $.75 per share (292,479 warrants), and $1.00 per share (877,435 warrants.) The Company valued these warrants at $8,716 using the above assumptions, and the expense was fully recognized during fiscal 2009.

 

22


 
 

 

2.   Warrants to purchase a total of 1,000,000 shares of Liberator Common Stock were issued to Hope Capital, Inc. at a fixed exercise price of $.75. The Company valued the warrants at $4,500 using the above assumptions, and the expense was fully recognized during fiscal 2009.

 

On September 2, 2009, the Company issued warrants to purchase 250,000 shares of Liberator Common Stock to Belmont Partners LLC in conjunction with the purchase of majority control by Old Liberator at a fixed price of $.25 per share. The warrants were fully vested when granted and expire on September 2, 2012.  These warrants were valued using a volatility rate of 25%, a risk-free interest rate of 4.5%, and a fair market value on the date of grant of $.25.  The warrants were valued at $14,458 and were expensed as an expense related to the purchase of majority control by Old Liberator during the three months ended September 30, 2009.

 

NOTE 15. RELATED PARTIES

 

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 8 - Line of Credit).  In addition, Liberator, Inc. has provided their corporate guarantees of the credit facility.  On March 31, 2012, the balance owed under this line of credit was $339,555.  On March 31, 2012, we were in substantial compliance with all of the material financial and other covenants required under this credit facility.

  

Repayment of the loan from Credit Cash (see Note 9 - 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, and the Company’s CFO, Ronald P. Scott. The loan was repaid in full on March 20, 2012.

 

On January 13, 2012, the Company issued an unsecured promissory note to Hope Capital 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 11, 2013. Mr. Friedman personally guaranteed the repayment of the loan obligation.

 

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. Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

 

On March 17, 2011, the Company issued an unsecured promissory note to Hope Capital, Inc. for $130,000. Hope Capital is a shareholder of the Company and was the majority shareholder of Old Liberator before the merger with OneUp Innovations. Terms of the note call for bi-weekly principal and interest payments of $5,536 with the note due in full on March 16, 2012. Mr. Friedman personally guaranteed the repayment of the loan obligation.  This note was fully repaid on March 16, 2012.

 

On December 23, 2010, the Company issued an unsecured promissory note to Hope Capital for $120,000. Terms of the note call for bi-weekly principal and interest payments of $5,110 with the note due in full on December 23, 2011. Mr. Friedman personally guaranteed the repayment of the loan obligation.  This note was fully repaid on December 23, 2011.

 

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the loan will accrue at the prevailing prime rate (which was 3.25% on June 30, 2011) until paid and totaled $1,624 as of March 31, 2012. This note is subordinate to all other credit facilities currently in place.

 

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of September 2, 2012. As of March 31, 2012, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $12,852.  This amount will be amortized over the remaining life of the note as additional interest expense.

 

23


 
 

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share.  At March 31, 2012, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $14,875.  This amount will be amortized over the remaining life of the note as additional interest expense.

 

On June 30, 2008, the Company had a subordinated note payable to the majority shareholder and CEO in the amount of $310,000 and the majority shareholder’s wife in the amount of $395,000. During fiscal 2009, the majority shareholder loaned the Company an additional $91,000 and a director loaned the Company $29,948 (which was repaid as part of the litigation settlement ”“ see Note 12 ”“ Commitments and Contingencies).  In connection with the Company’s June 26, 2009 merger, the majority shareholder and his wife agreed to convert $700,000 of principal balance and $132,120 of accrued but unpaid interest to Series A Convertible Preferred Stock.  Interest on the notes during fiscal 2010 and 2011 was accrued by the Company at the prevailing prime rate (which is currently at 3.25%) and totaled $3,607 and $3,443, respectively.  The accrued interest balance on these notes, as of March 31, 2012 and June 30, 2011, was $6,965 and $7,954, respectively. These notes are subordinate to all other credit facilities currently in place.

 

 

NOTE 16. CONVERTIBLE NOTES PAYABLE - SHAREHOLDER

 

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. As of December 31, 2011, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $14,875.  This amount will be amortized over the remaining life of the note as additional interest expense. On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of September 2, 2012. As of March 31, 2012, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $12,852.  This amount will be amortized over the remaining life of the note as additional interest expense.

 

NOTE 17. SUBSEQUENT EVENTS

 

In May 2012, the unsecured note payable originally due May 1, 2012 was extended until May 1, 2013 under the same terms.

On April 2, 2012, the Company issued an unsecured promissory note to Hope Capital, Inc. for $130,000. Hope Capital is a shareholder of the Company and was the majority shareholder of Old Liberator before the merger with OneUp Innovations. Terms of the note call for bi-weekly principal and interest payments of $5,535.80 with the note due in full on April 2, 2013. Mr. Friedman personally guaranteed the repayment of the loan obligation.

 

Pursuant to a private placement memorandum and subscription agreement, on April 30, 2012, we issued 3,500,000 shares of our common stock to 10 individuals and entities in the aggregate amount of $350,000.  

 

Pursuant to an engagement letter with Brookville Capital Partners, LLC, on April 30, 2012, we issued 650,000 shares of our common stock to Brookville Capital Partners, LLC with respect to investment banking and financial services performed by Brookville Capital Partners, LLC in connection with the above private placement. Such securities were not registered under the Securities Act of 1933. In addition, we paid Brookville Capital Partners, LLC a fee of $25,000 from the gross proceeds, plus $10,000 in non-accountable legal expenses.

24


 
 

ITEM 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations

 

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

 

    Quarter Ended  
    March 31,  
   

2012

   

2011

 
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold    

68.4

%    

67.1

%
Gross Margin     31.6 %     32.9 %
                 
Selling, General and Administrative Expenses    

28.9

%    

32.7

%
                 
Loss From Continuing Operations     2.7 %     0.20 %

 

    Three Quarters Ended  
    March 31,  
   

2012

   

2011

 
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold    

69.9

%    

69.4

%
Gross Margin     30.1 %     30.6 %
                 
Selling, General and Administrative Expenses    

27.5

%    

34.2

%
                 
Loss From Continuing Operations     2.6 %     (3.6) %

 

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

 

Net sales. Net sales for the three months ended March 31, 2012 increased from the comparable prior year period by $407,922, or 11%.   As a result of a continued focus on our Wholesale business, sales to Wholesale customers during the third quarter increased approximately 33% from the prior year.  The Wholesale category 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. Combined sales of Tenga products during the third quarter of fiscal 2012, of which 97% were sold through the Wholesale channel, accounted for 23% of total net sales.

 

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation.  Total gross profit for the three months ended March 31, 2012 increased to $1,251,606 from $1,167,914, (an increase of 7%) in the comparable prior year period. Gross profit as a percentage of sales decreased slightly to 31.6% for the three months ended March 31, 2012 from 32.9% in the comparable prior year period and primarily resulted from a decrease in the Wholesale margin (25.3% to 21.7%) and was partially offset by an improvement in the Direct margin (45.9% to 49.6%). Gross profit from the Other sales channel (which consists principally of shipping and handling fees derived from our Direct sales channel) decreased from 24.8% to 22.9% of Other sales revenue.  

 

25


 
 

Operating expenses. Total operating expenses for the three months ended March 31, 2012 were 29% of net sales, or $1,145,708, compared to 30% of net sales, or $1,080,749, for the same period in the prior year (excluding acquisition-related costs in 2011).  The slight increase in operating expenses was primarily the result of higher general and administrative expense, higher advertising and promotion expense, offset in part by lower other selling and marketing expense.. The major changes in general and administrative expense were higher investor relations spending ($98,069), offset in part by lower legal expense ($71,319). Advertising and promotion expense increased from $90,768 to $130,507, or 44%. Sales and Marketing expense decreased from $385,834 to $366,410, or 5%, as a result of a decrease in the number of national trade shows attended for marketing purposes.

 

 Other income (expense). Other income (expense) increased from an expense of $102,711 in fiscal 2011 to an expense of $107,863 in fiscal 2012.  Interest expense and financing costs in the current and prior year quarter included $12,257 from the amortization of the debt discount on the convertible notes. Interest expense increased from $90,771 in the prior year third quarter to $95,820 in the current year quarter, as a result of higher average debt balances.

 

Income taxes. Income taxes expense of $0 was recorded in the three months ended March 31, 2012 and 2011.  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.

 

Three Quarters Ended March 31, 2012 Compared to Three Quarters Ended March 31, 2011

 

Net sales. Net sales for the nine months ended March 31, 2012 increased from the comparable prior year period by $1,333,815, or 13.5%.  The increase in net sales was primarily due to higher sales through the Wholesale channel. As a result of a continued focus on our Wholesale business, sales to Wholesale customers during the first nine months of fiscal 2012 increased approximately 30% from the prior year.  The Wholesale category 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. Combined sales of Tenga products during the first three quarters of fiscal 2012, of which 97% were sold through the Wholesale channel, accounted for 21% of total net sales.

 

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation.  Total gross profit for the nine months ended March 31, 2012 increased to $3,372,999 from $3,023,073 (an increase of 12%) in the comparable prior year period. Gross profit as a percentage of sales decreased slightly to 30.1% for the nine months ended March 31, 2012 from 30.6% in the comparable prior year period. Gross profit as a percentage of sales for the Direct category increased from 45.7% in fiscal 2011 to 49.2% in the current year nine-month period, primarily due to a change in product mix. The gross margin percentage for the Wholesale sales category decreased from 22.7% last fiscal year to 19.5% in the current fiscal year, primarily as a result of increased sales to distributors. Gross profit from the Other sales channel (which consists principally of shipping and handling fees derived from our Direct sales channel) improved from 8.4% to 20.1% of Other sales revenue.  

 

Operating expenses. Total operating expenses for the nine months ended March 31, 2012 were 27.5% of net sales, or $3,085,747, compared to 33.4% of net sales, or $3,294,576 (excluding acquisition related costs of $81,185 in 2011), for the same period in the prior year and represents a decrease of 6.3%.  The decrease in operating expenses was primarily the result of lower legal expense ($119,127), lower rent expense as a result of the sub-lease agreement with WMI ($72,000), offset in part by higher investor relations expense ($138,696).

 

 Other income (expense). Other income (expense) decreased from an expense of $295,576 in fiscal 2011 (excluding merger related expenses of $52,500) to an expense of $294,729 in fiscal 2012.  Interest expense and financing costs in the current and prior year quarter included $12,257 from the amortization of the debt discount on the convertible notes. Interest expense decreased slightly from $259,321 in the nine months of the prior fiscal year to $258,493 in the current comparable year period.

26


 
 

Income taxes. Income taxes expense of $0 was recorded in the nine months ended March 31, 2012 and 2011.  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.

 

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

 

     The following table summarizes our cash flows:                  
    Three Quarters Ended  
    March 31,  
    2012     2011  
Cash flow data:                
Cash used in operating activities - continuing operations   $ (96,496   $ (135,716
Cash used in investing activities - continuing operations     (50,712 )     (37,479 )
Cash (used in) provided by financing activities - continuing operations     (396,050 )     463,774  

    

 As of March 31, 2012, our cash and cash equivalents totaled $642,005, compared to $615,489 in cash and cash equivalents as of March 31, 2011.

 

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. Our principal sources of liquidity are our cash flow that we generate from our operations, availability of borrowings under our line of credit and cash raised through equity and debt financings.

 

Operating Activities

 

  Net cash used in operating activities from continuing operations primarily consists of net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, and the effect of changes in working capital. Net cash used in operating activities from continuing operations was $96,496 for the nine months ended March 31, 2012 compared to cash used in operating activities of $135,716 for the nine months ended March 31, 2011. The primary reasons for the improvement was the reduced net loss ($693,287), a reduced increase in inventory levels ($90,664) offset by an increase in accounts receivable ($170,509).

 

Investing Activities

 

Cash used in investing activities from continuing operations was $50,712 in the nine months ended March 31, 2012 compared to $37,479 in the comparable prior year period. Cash provided by investing activities from discontinued operations was primarily attributable to the sale of Web Merchants Inc. in November 2011.

 

27


 
 

Financing Activities

 

Cash used in financing activities from continuing operations during the nine months ended March 31, 2012 was $396,050 and was primarily attributable to the repayment of debt obligations, partially offset by borrowings under the line of credit and the issuance of a short-term note.

 

Cash provided by financing activities from continuing operations in the nine months ended March 31, 2011 was $463,774 and was primarily attributable to the borrowings under the line of credit and credit card advance.

 

 

Inflation

 

We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and transportation costs.  We attempt to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs.

 

 Sufficiency of Liquidity

 

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We incurred a net loss of $134,950 for the nine months ended March 31, 2012 and a net loss of $501,959 for the nine months ended March 31, 2011. As of March 31, 2012, we have an accumulated deficit of $7,141,569 and a working capital deficit of $1,290,438.

 

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 gross profit margins through improved production controls and reporting. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels.  Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational plans we have identified will require approximately $2,000,000 of funding, primarily for working capital. We will also be exploring the opportunity to acquire other compatible and related businesses.

 

We plan to finance the required $2,000,000 with a combination of anticipated cash flows from operations over the next twelve months as well as cash on hand and cash we are able to obtain through equity and debt financings.

 

 

Capital Resources

 

We do not currently have any material commitments for capital expenditures. We expect total capital expenditures for the remainder of fiscal 2012 to be under $75,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit. This includes capital expenditures that we may incur in conjunction with initiatives to further upgrade our e-commerce platform and our computer network infrastructure.

 

28


 
 

 

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.

 

At March 31, 2012, we had $429,113 outstanding on our line of credit, compared to an outstanding balance of $460,758 at June 30, 2011.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION.

 

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements. Those statements include, but may not be limited to, all statements regarding management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

 

Non-GAAP Financial Measures

 

Reconciliation of net loss to Adjusted EBITDA loss for the nine months ended March 31, 2011 and 2012: 

 

    Three Quarters ended March 31,  
    2012     2011  
Net loss   $ (134,950 )   $ (501,959 )
                 
Less interest income     (535 )     (516 )
                 
Plus interest expense     258,493       259,321  
                 
Plus depreciation and amortization expense     157,611       162,687  
                 
Plus stock-based compensation     26,469       12,612  
                 
Plus amortization of debt issuance costs     36,771       36,771  
                 
Adjusted EBITDA income (loss)   $

343,859

    $

(31,084

)

  

 

29


 
 

As used herein, Adjusted EBITDA represents income (loss) before interest income, interest expense, income taxes, depreciation, amortization, amortization of debt issuance costs and stock-based compensation expense. 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 expense, stock-based compensation, as it does 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 (Generally Accepted Accounting Principles). 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 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 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 and stock-based compensation expense.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to the management, including CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II.      OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

From time to time the Company is engaged in legal proceeding in the ordinary course of business. We do not believe any current legal proceedings are material to our business.

 ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuance of Restricted Common Stock for Services

 

On January 3, 2012, February 1, 2012 and March 1, 2012, we issued 100,000 shares of common stock (for a total of 300,000 shares) with a recorded value of $30,000 to Trilogy Capital Partners for investor relations services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.

 

 

Private Placement of Common Stock

 

Pursuant to a private placement memorandum and subscription agreement, on April 30, 2012, we issued 2,850,000 shares of our common stock to 10 individuals and entities in the aggregate amount of $350,000.  All of the shares were sold to “accredited investors” as defined in 501(a) of the Securities Act.   Pursuant to Rule 506, all shares purchased in the Regulation D Rule 506 offering were restricted in accordance with Rule 144 of the Securities Act of 1933. In addition, each of these shareholders was accredited as defined in Rule 501 (a) of Regulation D promulgated under the Securities Act.

 

Pursuant to an engagement letter with Brookville Capital Partners, LLC, on April 30, 2012, we issued 650,000 shares of our common stock to Brookville Capital Partners, LLC with respect to investment banking and financial services performed by Brookville Capital Partners, LLC in connection with the above private placement. Such securities were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. In addition, we paid Brookville Capital Partners, LLC a fee of $25,000 from the gross proceeds, plus $10,000 in non-accountable legal expenses.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 ITEM 5. OTHER INFORMATION

None

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ITEM 6.           Exhibits

 

Exh. No.   Description
     
10.1   Stock Issuance Agreement between Trilogy Capital Partners, Inc. and Liberator, Inc., dated November 16, 2011 **
10.2   Form of Subscription Agreement **
10.3   Engagement letter between Brookville Capital Partners LLC and Liberator, Inc., dated April 12, 2012 **
31.1   Section 302 Certification by the Corporation’s Principal Executive Officer **
31.2   Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer **
32.1   Section 906 Certification by the Corporation’s Principal Executive Officer **
32.2   Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer **
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*

 

 

 

 **

In accordance with Rule  406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing.

Filed herewith.

   
   

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      LIBERATOR, INC.
      (Registrant)
       
       
May 14, 2012   By:   /s/ Louis S. Friedman
(Date)     Louis S. Friedman
     

President and Chief Executive Officer

(Principal Executive Officer)

       
       
May 14, 2012   By:   /s/ Ronald P. Scott
(Date)     Ronald P. Scott
     

Chief Financial Officer and Secretary

(Principal Financial & Accounting Officer)

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

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