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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2009
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-53514
LIBERATOR, INC.
(Exact name of registrant as specified in this charter)

Nevada
26-3213475
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
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 þ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 þ
   
(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 ¨ No þ

As of February 18, 2010 there were 63,015,981 shares of the registrant’s common stock outstanding.

 

 
 
LIBERATOR, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

     
Page
 
PART I.  FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements (unaudited)
 
3
 
Consolidated Condensed Balance Sheets as of  December 31, 2009 and June 30, 2009
 
3
 
Consolidated Condensed Statements of Operations for the three and six month periods ended December 31, 2009 and 2008
 
4
 
Consolidated Condensed Statements of Cash Flows for the six month periods ended December 31, 2009 and 2008
 
5
 
Notes to Consolidated Condensed Financial Statements
 
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
22
Item 4.
Controls and Procedures
 
23
 
PART II.  OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
23
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
23
Item 3.
Defaults upon Senior Securities
 
23
Item 4.
Submission of Matters to a Vote of Security Holders
 
23
Item 5.
Other Information
 
23
Item 6.
Exhibits
 
23
SIGNATURES
 
24

 
2

 

PART I: FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

LIBERATOR, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

   
December 31,
   
June 30,
 
   
2009
   
2009
 
   
(unaudited)
       
ASSETS
               
Current assets:
               
Cash and cash equivalents
 
$
206,301
   
$
1,815,663
 
Accounts receivable, net of allowance for doubtful accounts of $15,178 at December 31, 2009 and $5,740 at June 30, 2009
   
528,042
     
346,430
 
Inventories
   
889,957
     
700,403
 
Prepaid expenses
   
131,629
     
95,891
 
Total current assets
   
1,755,929
     
2,958,357
 
                 
Equipment and leasehold improvements, net
   
1,147,710
     
1,135,517
 
Other assets
   
     
 
Total assets
 
$
2,903,639
   
$
4,093,874
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts Payable
 
$
1,875,613
   
$
2,247,845
 
Accrued compensation
   
121,734
     
154,994
 
Accrued expenses and interest
   
60,583
     
145,793
 
Revolving line of credit
   
243,967
     
171,433
 
Current portion of long-term debt
   
124,598
     
145,481
 
Credit card advance
   
     
198,935
 
Total current liabilities
   
2,426,495
     
3,064,481
 
Long-term liabilities:
               
Note payable – equipment
   
43,092
     
72,812
 
Leases payable
   
180,933
     
225,032
 
Notes payable – related party
   
105,948
     
125,948
 
Convertible notes payable – shareholder, net of discount
   
499,218
     
285,750
 
Unsecured lines of credit
   
112,790
     
124,989
 
Deferred rent payable
   
346,599
     
356,308
 
Less: current portion of long-term debt
   
(124,598
)
   
(145,481
)
Total long-term liabilities
   
1,163,982
     
1,045,358
 
Total liabilities
   
3,590,477
     
4,109,839
 
                 
Commitments and contingencies
   
  
         
Stockholders’ Equity:
               
Preferred stock, $.0001 par value, 10,000,000 shares Authorized, 4,300,000 shares issued and outstanding on December 31 and June 30, 2009, liquidation preference of $1,000,000
   
430
     
430
 
Common stock of $0.0001 par value, shares authorized 250,000,000; 61,915,981 shares  issued and outstanding at December 31, 2009 and 60,932,981 shares issued and outstanding at June 30,2009
   
6,192
     
6,093
 
Additional paid-in capital
   
5,286,871
     
5,286,970
 
Accumulated deficit
   
(5,980,331
)
   
(5,309,458
)
Total stockholders’ equity (deficit)
   
(686,838
)
   
(15,965
     
  
     
  
 
Total liabilities and stockholders’ equity
 
$
2,903,639
   
$
4,093,874
 

See accompanying notes to unaudited condensed consolidated financial statements.

 
3

 

LIBERATOR, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

     
Three Months Ended
     
Six Months Ended
 
     
December 31,
     
December 31,
 
     
2009
     
2008
     
2009
     
2008
 
     
(unaudited)
   
(unaudited)
 
                                 
NET SALES
 
$
3,034,664
   
$
2,705,471
   
$
5,069,656
   
$
5,351,294
 
COST OF GOODS SOLD
   
1,958,032
     
1,663,100
     
3,334,848
     
3,492,088
 
Gross profit
   
1,076,632
     
1,042,371
     
1,734,808
     
1,859,206
 
OPERATING EXPENSES:
                               
Advertising and Promotion
   
239,871
     
290,454
     
418,002
     
551,234
 
Other Selling and Marketing
   
295,934
     
290,949
     
547,493
     
596,010
 
General and administrative
   
570,655
     
495,579
     
1,006,404
     
955,983
 
Depreciation
   
75,930
     
75,930
     
134,679
     
151,860
 
Total operating expenses
   
1,182,390
     
1,152,912
     
2,106,578
     
2,255,087
 
     
  
     
  
     
  
     
  
 
Operating loss
   
(105,758
   
(110,541
)
   
(371,770
   
(395,881
)
                                 
OTHER INCOME (EXPENSE)
                               
Interest income
   
133
     
347
     
3,522
     
1,469
 
Interest expense and financing costs
   
(50,491
   
(73,363
)
   
(110,458
   
(136,251
)
Cost to acquire majority control of WES Consulting, Inc.
   
     
     
(192,167
)
   
 
Total other expense, net
   
(50,358 
   
(73,016 
   
(299,103
   
(134,782 
                                 
Loss from continuing operations before income taxes
   
(156,116
)
   
(183,557
)
   
(670,873
)
   
(530,663
)
PROVISION (BENEFIT) FOR INCOME TAXES
   
     
     
     
 
     
  
     
  
     
  
     
  
 
NET LOSS
 
$
(156,116
 
$
(183,557
)
 
$
(670,873
 
$
(530,663
)
                                 
NET LOSS PER SHARE:
                               
Basic
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.01
)
Diluted
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.01
)
                                 
SHARES USED IN CALCULATION OF NET LOSS PER SHARE:
                               
Basic
   
61,915,981
     
45,000,000
     
60,932,981
     
45,000,000
 
Diluted
   
61,915,981
     
45,000,000
     
60,932,981
     
45,000,000
 

See accompanying notes to unaudited condensed consolidated financial statements.

 
4

 

LIBERATOR, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

   
Six Months Ended
 
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
 
$
(670,873
 
$
(530,663
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Depreciation and amortization
   
134,679
     
151,860
 
Amortization of debt discount
   
21,305
     
 
Cost to acquire majority control of WES Consulting, Inc.
   
192,163
     
 
Deferred rent payable
   
(9,709
)
   
28,862
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(181,612
   
(148,303
 )
Inventories
   
(189,554
)
   
(143,492
 )
Prepaid expenses and other assets
   
(35,738
)
   
10,444
 
Accounts payable
   
(372,232
   
286,351
 
Accrued compensation
   
(33,260
   
(95,683
 )
Accrued expenses and interest
   
(85,210
)
   
43,925
 
Net cash used in operating activities
   
(1,230,041
   
(396,699
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investment in equipment and leasehold improvements
   
(146,872
)
   
(42,220
)
Cash used in investing activities
   
(146,872
)
   
(42,220
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayments under revolving line of credit
   
(1,426,705
   
(1,002,687
Borrowings under revolving line of credit
   
1,499,239
     
1,147,778
 
Proceeds from credit card cash advance
   
     
350,000
 
Repayment of credit card cash advance
   
(198,935
)
   
(159,530
)
Repayment of unsecured line of credit
   
(12,199
)
   
(10,697
)
Repayment of loans from related parties
   
(20,000
)
   
 
Borrowings from related party loans
   
     
193,948
 
Proceeds from short-term note payable
   
     
100,000
 
Principal payments on notes payable and capital leases
   
(73,819
)
   
(99,006
)
Cash (used in) provided by financing activities
   
(232,419
)
   
519,806
 
                 
Net (decrease) increase in cash and cash equivalents
   
(1,609,332
   
80,887
 
Cash and cash equivalents at beginning of period
   
1,815,633
     
89,519
 
Cash and cash equivalents at end of period
 
$
206,301
   
$
170,406
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
   
88,138
     
137,447
 
Income taxes
   
     
 

See accompanying notes to unaudited condensed consolidated financial statements.

 
5

 

LIBERATOR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
As of December 31, 2009
(Unaudited)
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Overview Liberator, Inc. (the “Company”) was incorporated in the State of Nevada on October 31, 2007 under the name Remark Enterprises, Inc. On April 3, 2009, we entered into a Stock Purchase and Recapitalization Agreement with OneUp Innovations, Inc., a privately held Georgia corporation (“OneUp”), and One Up Acquisition, Inc. (“Subsidiary”), our wholly owned Georgia subsidiary. On June 26, 2009, we consummated the transactions contemplated by the agreement. Pursuant to the agreement, the Subsidiary and OneUp merged, and all of the issued and outstanding common stock of OneUp was exchanged for an aggregate of 45,000,000 shares of the Company’s common stock (90% of the total issued and outstanding shares of common stock of the Company). In addition, all of the issued and outstanding shares of preferred stock of OneUp was exchanged for 4,300,000 shares of preferred stock of the Company. After the merger, OneUp became our wholly owned subsidiary, and our business operations were conducted through OneUp. On July 2, 2009, we changed our name to “Liberator, Inc.” References to the “Company” include Liberator, Inc. and the Company’s subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc.

On September 2, 2009, we acquired the majority of the issued and outstanding common stock of WES Consulting, Inc., a Florida corporation (“WES”)  in accordance with a common stock purchase agreement by and among the Company and Belmont Partners, LLC, a Virginia limited liability company (“Belmont”) and WES.  Pursuant to the terms of the purchase agreement, the Company acquired 972,000 shares (81%) of WES from Belmont for a total of two hundred forty thousand five hundred dollars ($240,500) in addition to the issuance by WES of two hundred fifty thousand (250,000) warrants to Belmont to purchase an equal number of shares of WES’ common stock with an exercise price of twenty five cents ($0.25), and the issuance by WES of a total of one million five hundred thousand (1,500,000) shares of WES’ common stock with seven hundred fifty thousand (750,000) shares delivered on September 2, 2009 and the balance of seven hundred fifty thousand (750,000) shares to be delivered on September 2, 2010.

  On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with WES Consulting, Inc., a Florida corporation (“WES”).  Pursuant to the Agreement, the Company merged with and into WES, with the WES surviving as the sole remaining entity (the “Merger”).

As a result of the Merger, each issued and outstanding share of the common stock of the Company (the “Liberator Common Shares”) were converted, into one share of the WES’ common stock, $0.01 par value, which, after giving effect to the Merger, equaled, in the aggregate, 98.4% of the total issued and outstanding common stock of the WES (the “WES Common Stock”).  Pursuant to the Merger Agreement, each issued and outstanding share of preferred stock of the Company (the “Liberator Preferred Shares”) were to be converted into one share of the WES’ preferred stock with the provisions, rights, and designations set forth in the Merger Agreement (the “WES Preferred Stock”).  On the execution date of the Merger Agreement, WES was not authorized to issue any preferred stock, and the parties agreed that WES will file an amendment to its Articles of Incorporation authorizing the issuance of the WES Preferred Stock, and at such time the WES Preferred Stock will be exchanged pursuant to the terms of the Merger Agreement.  As of the execution date of the Merger Agreement, the Company owned eighty-one point seven (80.7%) percent of the issued and outstanding shares of the WES common stock.  Upon the consummation of the Merger, the WES Common Stock owned by the Company prior to the Agreement was cancelled.

The Company’s executive offices are located at 2745 Bankers Industrial Drive, Atlanta, Georgia 30360.  The Company is a Georgia-based sexual wellness retailer, providing goods and information to customers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life. 

Going Concern – The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company incurred a net loss of $156,116 and $183,557 for the three months ended December 31, 2009 and 2008, respectively, and a net loss of $670,873 and $530,663 for the six months ended December 31, 2009 and 2008, respectively. As of December 31, 2009, the Company has an accumulated deficit of $686,838 and a working capital deficit of $670,566.

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.

 
6

 

These actions include initiatives to increase gross profit margins through improved production controls and reporting. To that end, the Company recently implemented a new Enterprise Resource Planning (ERP) software system. We also plan to reduce discretionary expense levels to be better aligned with current revenue levels.  Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic development plans we have identified will require approximately $2,300,000 of funding. We expect to invest approximately $500,000 for additional inventory of sexual wellness products and $1,800,000 on sales and marketing programs, primarily sexual wellness advertising in magazines and on cable television. We will also be exploring the opportunity to acquire other compatible businesses.
 
We plan to finance the required $2,300,000 with a combination of anticipated cash flow from operations over the next twelve months as well as cash on hand and cash raised through equity and debt financings.

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. 
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the period reported.  Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary.  Actual results could differ from those estimates and assumptions.

Use of Estimates

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

Revenue Recognition     

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

 
7

 
 
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 December 31, 2009, accounts receivable totaled $528,042 net of $15,178 in the allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose and a normal profit margin.  Inventory costs include materials, labor, depreciation, and overhead.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable.  As of December 31, 2009, substantially all of our cash and cash equivalents were managed by a number of financial institutions.  As of December 31, 2009, our cash and cash equivalents with certain of these financial institutions exceed FDIC insured limits.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in the United States and Canada.

Fair Value of Financial and Derivative Instruments

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

 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
Level 2 — Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

At December 31, 2009, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other long-term debt.

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

 
8

 

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 $61,233 at December 31, 2009 and $57,625 at June 30, 2009. Advertising expense for the three months ended December 31, 2009 and 2008 was $239,871 and $290,454, respectively.

Research and Development

Research and development expenses for new products are expensed as they are incurred.  Expenses for new product development totaled $37,580 for the three months ended December 31, 2009 and $68,375 for the three months ended December 31, 2008. Research and development costs are included in general and administrative expense.

Shipping and Handling

Net sales for the three months ended December 31, 2009 and 2008 includes amounts charged to customers of $302,715 and $294,807, respectively, for shipping and handling charges.

Property and Equipment

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

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

Operating Leases

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires December 31, 2015.  The lease is on an escalating schedule with the final year on the lease at $34,358 per month.  The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at December 31, 2009 was $346,599.  The Rent expense under this lease for the three months ended December 31, 2009 and 2008 was $80,931.

Income Taxes

The Company accounts for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards measured by applying currently enacted tax laws. A valuation allowance is provided to reduce net deferred tax assets to an amount that is more likely than not to be realized. The amount of the valuation allowance is based on the Company’s best estimate of the recoverability of its deferred tax assets. On January 1, 2007, the Company adopted new accounting guidance for the accounting for uncertainty in income tax positions. This guidance seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes and provide guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. The accounting guidance requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position.

Segment Information

During the three and six months ended December 31, 2009 and 2008, the Company only operated in one segment; therefore, segment information has not been presented.

New Accounting Pronouncements

In May 2009, the FASB issued SFAS No. 165, “Subsequent events”, (now known as ASC 855). The objective of this Statement is to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1. the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, 2. the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and 3. the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company adopted ASC 855 during the first quarter of fiscal 2010. The adoption of ASC 855 did not have a material impact on the Company’s financial statements or condition. In accordance with ASC 855, management has evaluated subsequent events through the date and time the financial statements were issued on February 22, 2010, and has disclosed such subsequent events in Note 16.

 
9

 
 
In June 2009, the FASB issued Accounting Standards Update No. 2009-01, which amends ASC 105, Generally Accepted Accounting Principles. This guidance states that the ASC will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Once effective, the Codification’s content will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We have incorporated the new Codification citations in place of the corresponding references to legacy accounting pronouncements. Our adoption of the codification did not impact our financial position or results of operations.

On October 1, 2009, we adopted ASU No. 2010-02, “Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification,” as codified in ASC 810, “Consolidation.” ASU No. 2010-02 applies retrospectively to April 1, 2009, our adoption date for ASC 810-10-65-1. This ASU clarifies the applicable scope of ASC 810 for a decrease in ownership in a subsidiary or an exchange of a group of assets that is a business or nonprofit activity. The ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect future divestitures of subsidiaries or groups of assets within its scope.
 
On October 1, 2009, we adopted ASU No. 2010-01, “Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force,” as codified in ASC 505, “Equity.” ASU No. 2010-01 clarifies the treatment of certain distributions to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect any future stock distributions.
 
On October 1, 2009, we adopted ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” as codified in ASC 820-10, “Fair Value Measurements and Disclosures—Overall.” ASU No. 2009-12 permits a reporting entity to measure the fair value of certain alternative investments that do not have a readily determinable fair value on the basis of the investments’ net asset value per share or its equivalent. This ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may impact the valuation of our future investments.

Earnings (Loss) Per Share of Common Stock 

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding.  Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options and warrants using the “treasury stock” method and convertible securities using the “if-converted” method.

The Company reports earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following table sets forth the computation of basic and diluted earnings per common share:

   
Six Months Ended December 31,
   
2009
 
2008
                 
Numerator:
               
Net loss
 
$
(670,873
)
 
$
(530,663
)
                 
Denominator:
               
Denominator for earnings per share (basic and diluted) — weighted average shares
   
60,932,981
     
45,000,000
 
                 
Loss per common share (basic and diluted):
 
$
(0.01
)
 
$
(0.01
)

 
10

 

   
Three Months Ended December 31,
   
2009
 
2008
                 
Numerator:
               
Net loss
 
$
(156,116
)
 
$
(183,557
)
                 
Denominator:
               
Denominator for earnings per share (basic and diluted) — weighted average shares
   
61,915,981
     
45,000,000
 
                 
Income (loss) per common share (basic and diluted):
 
$
(0.00
 
$
(0.00
)

Basic and diluted earnings per share are the same in periods of a net loss, thus there is no effect of dilutive securities when a net loss is recorded.  There were approximately 5,650,849 and 438,456 securities excluded from the calculation of diluted loss per share because their effect was anti-dilutive for the six months ended December 31, 2009 and 2008, respectively.

Seasonality

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

NOTE 3 –  STOCK-BASED COMPENSATION

Options

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 awards with market or performance conditions.

Stock-based compensation expense recognized in the condensed consolidated statements of operations for the six-month periods ended December 31, 2009 and 2008 was zero.

The following table summarizes the Company’s stock option activities for the six months ended December 31, 2009:
 
   
Number of
Shares
Underlying
Outstanding
Options
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
Weighted
Average
Exercise
Price
   
Intrinsic
Value
 
Options outstanding as of June 30, 2009
    438,456       1.9     $ .228     $ 9,646  
Granted
              $     $  
Exercised
                $        
Forfeited
                $        
Options outstanding as of December 31, 2009
    438,456        1.9     $ .228     $ 9,646  
Options exercisable as of December 31, 2009
    438,456       1.9     $ .228     $ 9,646  
 
The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount optionees would have received if all options had been exercised on the last business day of the period indicated. Since the Company’s stock has no significant trading volume, the stock price is assumed to be $.25 per share.

 
11

 

Options outstanding by exercise price at December 31, 2009 were as follows:
 
         
Options Outstanding
       
Exercise Price 
 
Number of Shares
Underlying
Outstanding
Options
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
Options Exercisable
 
 
Number of Shares
Underlying
Vested and
Exercisable
Options
   
Weighted
Average
Exercise Price
 
$  0.228
    438,456     $ 0.228       1.9       438,456     $ 0.228  
 
NOTE 4 –  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:
 
   
December 31, 2009
   
June 30, 2009 
 
       
Raw materials
  $ 410,778     $ 366,355  
Work in process
    275,694       176,637  
Finished goods
    203,485       157,411  
                 
    $ 889,957     $ 700,403  

NOTE 5 – EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, or the shorter of the remaining lease term or estimated useful lives for leasehold improvements.
 
Factory Equipment
 
7 to 10 years
 
Furniture and fixtures, computer equipment and software
 
5 to 7 years
 
Leasehold improvements
 
7 to 10 years
 
 
Equipment and leasehold improvements consisted of the following:
 
   
December 31, 2009 
   
June 30, 2009 
 
       
Factory Equipment
  $ 1,522,479     $ 1,506,147  
Computer Equipment and Software
    790,075       665,135  
Office Equipment and Furniture
    166,996       166,996  
Leasehold Improvements
    318,033       312,433  
      2,797,583       2,650,711  
Less accumulated depreciation and amortization
    (1,649,873 )     (1,515,194 )
Construction-in-progress
    -       -  
Equipment and leasehold improvements, net
  $ 1,147,710     $ 1,135,517  
 
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the three months ended December 31, 2009.

 
12

 

NOTE 6 – NOTE PAYABLE - EQUIPMENT

Note payable – equipment consisted of the following:

   
December 31, 2009 
   
June 30, 2009 
 
Note payable to Fidelity Bank in monthly installments of $5,364 including interest at 8%, maturing October 25, 2010, secured by equipment
  $ 43,092     $ 72,812  
Less: Current Portion
    (43,092     (61,244
Long-term Note Payable
  $     $ 11,568  
 
The schedule of minimum maturities of the note payable for fiscal years subsequent to June 30, 2009 is as follows:
 
Year ending June 30,
     
2010 (six months)
 
$
31,232
 
2011
   
11,860
 
Total note payments
 
$
43,092
 

NOTE 7  –  REVOLVING LINE OF CREDIT

On November 10, 2009, the Company entered into a loan agreement for a revolving line of credit with a commercial finance company that provides credit to 80% of domestic accounts receivable aged less than 90 days up to $250,000. Borrowings under the agreement bear interest at Prime rate plus six percent (9.25 percent as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as defined in the agreement.  On December 31, 2009, the balance owed under this revolving line of credit was $243,967.

On March 19, 2008, the Company entered into a loan agreement for a revolving line of credit with a commercial finance company that provides credit to 85% of accounts receivable aged less than 90 days up to $500,000 and eligible inventory (as defined in the agreement) up to a sub-limit of $220,000, such inventory loan not to exceed 30% of the accounts receivable loan. Borrowings under the agreement bear interest at the Prime rate plus two percent (5.25 percent at June 30, 2009), payable monthly, plus a monthly service charge of 1.25% to 1.5%, depending on the underlying collateral.  On June 30, 2009, the balance owed under this revolving line of credit was $171,433, and the loan was fully repaid on August 11, 2009.

Management believes cash flows generated from operations, along with current cash and borrowing capacity under the line of credit should be sufficient to finance operating and capital requirements during the next 12 months. If new business opportunities do arise, additional outside funding may be required.

NOTE 8 – CREDIT CARD ADVANCE

On July 2, 2008, the Company received $350,000 from a finance company under the terms of a credit facility that is secured by the Company's future credit card receivables.  Terms of the credit facility require repayment on each business day of principal and interest at a daily rate of $1,507 over a twelve month period. The credit facility had a financing fee of 12% (equal to $42,000) on the principal amount, which equates to an effective annual interest rate of 21.1%.  The credit facility is personally guaranteed by the Company's CEO and majority shareholder, Louis Friedman.  On June 3, 2009, the Company borrowed an additional $200,000 under this credit facility. Terms of the current loan require repayment on each business day of principal and interest at a daily rate of $1,723.08 over a six month period. The current loan has a financing fee of 12% (equal to $24,000) on the principal amount, which equates to an effective annual interest rate of 43.2%.  The amount owed on the credit card advance was $0 at December 31, 2009 and $198,935 at June 30, 2009.

NOTE 9 – UNSECURED LINES OF CREDIT

The Company has drawn cash advances on three unsecured lines of credit that are in the name of the Company and Louis S. Friedman. The terms of these unsecured lines of credit call for monthly payments of principal and interest, with interest rates ranging from 12% to 18%. The aggregate amount owed on the three unsecured lines of credit was $112,790 at December 31, 2009 and $124,989 at June 30, 2009.

 
13

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability, and the balance in this account at December 31, 2009 was $346,599 and $337,155 at June 30, 2009. The rent expense under this lease for the three months ended December 31, 2009 and 2008 was $80,931 and for the six months ended December 31, 2009 and 2008 was $161,862.

The lease for the facility requires the Company to provide a standby letter of credit payable to the lessor in the amount of $225,000 until December 31, 2010. The majority shareholder agreed to provide this standby letter of credit on the Company's behalf.  Upon expiration of the initial letter of credit, a letter of credit in the amount of $25,000 in lieu of a security deposit is required to be provided.

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

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

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

Future minimum lease payments under non-cancelable operating leases at December 31, 2009 are as follows:

Year ending June 30,
     
2010 (six months)
 
$
205,241
 
2011
   
413,263
 
2012
   
420,348
 
2013
   
395,798
 
2014
   
391,685
 
Thereafter through 2016
   
1,002,816
 
       
Total minimum lease payments
 
$
2,829,151
 

Capital Leases

The Company has acquired equipment under the provisions of long-term leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The leased properties under these capital leases have a total cost of $349,205. These assets are included in the fixed assets listed in Note 5 and include computers, software, furniture, and equipment. The capital leases have stated or imputed interest rates ranging from 7% to 21%.

The following is an analysis of the minimum future lease payments subsequent to the year ended June 30, 2009:

Year ending June 30
     
2010 (six months)
  $ 40,184  
2011
    77,010  
2012
    33,974  
2013
    22,930  
2014
    6,835  
Present value of capital lease obligations
  $ 180,933  
Imputed interest
    34,134  
Future minimum lease payments
  $ 215,067  

 
14

 

Common Stock Issuance

On September 2, 2009, the Company acquired the majority of the issued and outstanding common stock of  the WES Consulting in accordance with a common stock purchase agreement (the “Stock Purchase Agreement”) by and among the Company and Belmont Partners, LLC, a Virginia limited liability company (“Belmont”) and WES Consulting, Inc. (“WES”).  At closing, the Company acquired 972,000 shares (80.7%) of WES from Belmont for a total of two hundred and forty thousand and five hundred dollars ($240,500) in addition to the issuance by WES of two hundred and fifty thousand (250,000) warrants to Belmont purchase an equal number of shares of WES’ common stock with an exercise price of twenty five cents ($0.25), the issuance by WES to Belmont of a total of one million  five hundred thousand (1,500,000) shares of WES’ common stock with seven hundred and fifty thousand (750,000) shares delivered at closing and the balance of seven hundred fifty thousand (750,000) shares to be delivered on the one (1) year anniversary of the closing.

WES will deliver the balance 750,000 shares of common stock provided, however, that in the event that WES or the Company makes a claim for indemnification pursuant to Section 7(a) of the Stock Purchase Agreement prior to the one (1) year anniversary, the number of balance shares will be reduced by the result of the following amount: (a) the amount of the indemnity claim pursuant to Section 7(a); divided by (b) the five (5) day average price per share of WES’ common stock as quoted on the Over-the-Counter Bulletin Board or other electronic quotation system.

NOTE 11–  INCOME TAXES
 
There is no income tax provision (benefit) for federal or state income taxes as the Company has incurred operating losses since inception. Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company may have experienced a change of control that could result in a substantial reduction to the previously reported net operating losses at June 30, 2009; however, the Company has not performed a change of control study and therefore has not determined if such change has taken place and if such a change has occurred the related reduction to the net operating loss carryforwards.  As of December 31, 2009, the net operating loss carryforwards continue to be fully reserved and any reduction in such amounts as a result of this study would also reduce the related valuation allowances resulting in no net impact to the financial results of the Company.

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”  As of December 31, 2009, there was no significant liability for income tax associated with unrecognized tax benefits. 

With few exceptions, the Company is no longer subject to U.S. federal, state and local, and non-U.S. income tax examination by tax authorities for tax years before 2003.

NOTE 12 – EQUITY

Common Stock– The Company’s authorized common stock was 250,000,000 shares at December 31, 2009 and June 30, 2009.  Common stockholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At December 31, 2009 and June 30, 2009, the Company had reserved the following shares of common stock for issuance:
   
December 31,
   
June 30,
 
(in shares)
 
2009
   
2009
 
Non-qualified stock options
   
438,456
     
438,456
 
Shares of common stock subject to outstanding warrants
   
2,712,393
     
2,462,393
 
Share of common stock issuance upon conversion of the Preferred Stock (convertible after July 1, 2011)
   
4,300,000
     
4,300,000
 
Shares of common stock issuable upon conversion of Convertible Notes
   
2,500,000
     
1,500,000
 
Total shares of common stock equivalents
   
9,950,849
     
8,700,849
 

 
15

 

Preferred Stock – On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with WES Consulting, Inc., a Florida corporation (“WES”).  Pursuant to the Merger Agreement, the Company merged with and into WES, with WES surviving as the sole remaining entity (the “Merger”).

Pursuant to the Merger Agreement, each share of preferred stock of the Company (the “Liberator Preferred Shares”) were to be converted into one share of WES’ preferred stock with the provisions, rights, and designations set forth in the Agreement (the “WES Preferred Stock”).  On the execution date of the Merger Agreement, WES was not authorized to issue any preferred stock, and the parties agreed that within ten (10) days of the closing of the Merger WES will take the appropriate steps to file an amendment to its Articles of Incorporation authorizing the issuance of the WES Preferred Stock, and at such time the WES Preferred Stock will be exchanged pursuant to the terms of the Merger Agreement.  The WES Preferred Stock will have similar rights and preferences as the Liberator Preferred Shares and will be convertible into 4,300,000 shares of common stock after July 1, 2011.

At such time as WES has filed an amendment to its Articles of Incorporation authorizing the issuance of the WES Preferred Stock, WES will have 10,000,000 authorized shares of preferred stock, par value $.0001 per share, of which 4,300,000 shares will be designated as Series A Convertible Preferred Stock.

Warrants – As of September 30, 2009, 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 five years of December 31, 2009.

The Company issued 2,462,393 warrants during fiscal 2009 in conjunction with the reverse merger with OneUp Innovations. All of these warrants are exercisable immediately and expire five years from the date of issuance, June 26, 2014. These warrants were valued using a volatility rate of 25% and a risk-free interest rate of 4.5%, as more fully described below:

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

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

NOTE 13 – RELATED PARTIES

On June 30, 2008, the Company had a subordinated note payable to its majority shareholder and CEO in the amount of $310,000 and its majority shareholder's wife in the amount of $395,000. During fiscal 2009, the majority shareholder loaned the Company an additional $91,000, and a director loaned the Company $29,948.  On June 26, 2009, in connection with the merger between OneUp and the Company, the majority shareholder and his wife agreed to convert $700,000 of principal balance and $132,120 of accrued but unpaid interest to preferred stock.  Interest during fiscal 2009 was accrued at the prevailing prime rate (which is currently at 3.25%) and totaled $34,647. The interest accrued on these notes for the year ended June 30, 2008 was $47,576. The accrued interest balance on these notes, as of June 30, 2009, was $8,210. The notes are subordinate to all other credit facilities currently in place.  As of December 31, 2009, the Company owes a director $29,948 and the majority shareholder’s wife (who is also an officer of the Company) $76,000.

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company, then named “Remark Enterprises, Inc.,” before the Company’s merger with OneUp.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the issuer has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. As of December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $74,375.  This amount will be amortized over the remaining life of the note as additional interest expense.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company, then named “Remark Enterprises, Inc.,” before the Company’s merger with OneUp.  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 December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $51,407.  This amount will be amortized over the life of the note as additional interest expense.

 
16

 

NOTE 14 – CONVERTIBLE NOTES PAYABLE - SHAREHOLDER

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the Company’s majority shareholder, then named “Remark Enterprises, Inc.,” before the Company’s merger with OneUp Innovations.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the issuer has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. As of December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $74,375.  This amount will be amortized over the remaining life of the note as additional interest expense.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. Hope Capital is a shareholder of the Company and was the Company’s majority shareholder, then named “Remark Enterprises, Inc.,” before the Company’s reverse merger with OneUp.  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 December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $51,407.  This amount will be amortized over the life of the note as additional interest expense.

NOTE 15 – MERGER COSTS

Expenses related to purchase of majority control of WES during the first quarter of fiscal 2010 totaled $192,167.  This item consists of $192,167 for the discounted face value of the $250,000 convertible note payable to Hope Capital.

NOTE 16 – SUBSEQUENT EVENTS

On February 17, 2010, OneUp Innovations, Inc. (“OneUp”), the indirect wholly owned subsidiary of the Company, entered into a Distributorship Agreement with TENGA Co., Ltd (“TENGA”).  Pursuant to the terms of the agreement, OneUp will exclusively distribute TENGA’s products in the United States for a period of three years.  The agreement will be renewed and extended for one additional year upon consultation and acceptance by both parties.  The purchase price of the products to be distributed will be determined by mutual written consent under the pricing schedule provided to OneUp by TENGA.  OneUp’s estimated minimum purchase obligations are as follows: (i) between 200,000,000 Yen (approximately $2.2 million) to 300,000,000 Yen (approximately $3.3 million) in the first year, (ii) between 400,000,000 Yen (approximately $4.4 million) to 600,000,000 Yen (approximately $6.6 million) in the second year, and (iii) between 900,000,000 (approximately $9.9 million) Yen to 1,000,000,000 Yen (approximately $11 million) in the third year.  Delivery must be made within seventy days of TENGA confirming the purchase order.  OneUp must maintain product liability insurance with coverage against personal and property damage for at least $2 million.  Either party may terminate the agreement with thirty days’ prior written notice if the non-terminating party fails to fulfill the conditions set forth in the agreement.  TENGA provides a one (1) year warranty for its products.

ITEM 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD LOOKING STATEMENTS
 
Certain statements in this Management’s Discussion and Analysis section, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the “Risk Factors” section of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 
17

 
 
As used in this report, unless the context requires otherwise, “we” or “us” or the “Company” or “Liberator” means Liberator, Inc., a Nevada corporation, and its subsidiaries.

Overview
 
Comparisons of selected consolidated statements of operations data as reported herein follow for the periods indicated:
 
Total:
 
Three Months Ended
December 31, 2009
   
Three Months Ended
December 31, 2008
   
Change
 
                   
Net sales:
  $ 3,034,664     $ 2,705,471       12 %
Gross profit
  $ 1,076,632     $ 1,042,371       3 %
Loss from operations
  $ (105,758 )   $ (110,541 )     61 %
Diluted (loss) per share
  $ (0.00 )   $ (0.00 )      

 Net Sales by Channel:
 
Three Months Ended
December 31, 2009
   
Three Months Ended
December 31, 2008
   
Change
 
                   
Direct
  $ 1,381,818     $ 1,261,141       10 %
Wholesale
  $ 1,347,777     $ 1,136,165       19 %
Other
  $ 305,069     $ 308,165       (1 )%
 Total Net Sales
  $ 3,034,664     $ 2,705,471       12 %
 
Other revenues consist principally of shipping and handling fees derived from our Direct business.

 Gross Profit by Channel:
 
Three Months Ended
December 31, 2009
   
Margin
%
   
Three Months Ended
December 31, 2008
   
Margin
%
   
Change
 
                               
Direct
  $ 724,040       52 %   $ 590,317       47 %     23 %
Wholesale
  $ 352,792       26 %   $ 393,068       35 %     (10 )%
Other
  $ (200 )     0 %   $ 58,986       19 %     (100 )%
 Total Gross Profit
  $ 1,076,632       35 %   $ 1,042,371       39 %     3 %

Comparison of Three Months Ended December 31, 2009 and Three Months Ended December 31, 2008

Net sales for the three months ended December 31, 2009 increased from the comparable prior year period by $329,193, or 12%.  The increase in sales was the result of higher sales in the Direct and Wholesale channels. Direct sales (which includes product sales through our three e-commerce site and our retail store) increased from $1,261,141 in the second quarter of fiscal 2009 to $1,381,818 in the second quarter of fiscal 2010, an increase of approximately 12%, or $120,677.  We attribute this improvement to a general improvement in the economy resulting in overall increases in consumer online spending during the quarter, leading to consumers to purchase more of our products, as our products are typically a discretionary purchase. According to a comScore, Inc. report, online consumer spending in the United States increased 3% during the quarter ended December 31, 2009, reversing a 3% decline from the prior year-over year period. As a result of an increased focus on our Wholesale business, sales to wholesale customers increased approximately 19% from the prior year. Sales to Wholesale customers was expected to increase during the second quarter of fiscal 2010 (the three months ended December 31, 2009) as a result of new accounts being added and as Wholesale customers increased their inventory levels prior to the Christmas holiday. Wholesale customers include Liberator products sold to distributors and retailers and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customer, and which, to date, has not been a material part of our business.

One of the most frequent consumer discount offers during the three months ended December 31, 2009 was “free” or significantly reduced shipping and handling, which accounts for the decrease in the Other category revenue and gross profit from the prior year comparable period.  In the current economic environment, we anticipate the need to continue to offer “free” or reduced shipping and handling to consumers as a promotional tool.

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Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead, and depreciation.  Gross margin as a percentage of sales decreased to 35% for the three months ended December 31, 2009 from 39% in the comparable prior year period.  This is primarily the result of a decrease in the margin on Wholesale sales during the quarter (from 35% to 26%) and a decrease in the Other margin to slightly less than zero. This was offset to some extent by the increase in the Direct margin to 52% from 47% in the comparable prior year period.   We attribute the decrease in the Wholesale margin to an increase in private label manufacturing, which has a slightly lower margin than Liberator products sold to distributors and retailers. The improvement in the Direct margin was the result of a price increase that was implemented earlier this year and a slight decrease in certain raw material costs.

Total operating expenses for the three months ended December 31, 2009 were 39% of net sales, or $1,182,390, compared to 43% of net sales, or $1,152,912, for the same period in the prior year.  This 3% increase in operating expenses was primarily the result of lower advertising and promotion costs, offset by slightly higher Other Selling and Marketing expense and General and Administrative expense.

Other income (expense) during the second quarter decreased from expense of ($73,016) in fiscal 2009 to expense of ($50,358) in fiscal 2010.  Interest expense and financing costs in the current quarter included $15,947 from the amortization of the debt discount on the convertible notes.

No expense or benefit from income taxes was recorded in the three months ended December 31, 2009 or 2008.  We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

We had a net loss of $156,116, or ($0.00) per diluted share, for the three months ended December 31, 2009 compared with a net loss of $183,557, or ($0.00) per diluted share, for the three months ended December 31, 2008.

Comparison of Six Months Ended December 31, 2009 and Six Months Ended December 31, 2008

Comparisons of selected consolidated statements of operations data as reported herein follow for the periods indicated:
 
 Total:
 
Six Months Ended
December 31, 2009
   
Six Months Ended
December 31, 2008
   
Change
 
                   
Net sales:
  $ 5,069,656     $ 5,351,294       (5 )%
Gross profit
  $ 1,734,808     $ 1,859,206       (7 )%
Loss from operations
  $ (371,770 )   $ (395,881 )     22 %
Diluted (loss) per share
  $ (0.00 )   $ (0.00 )      

Net Sales by Channel:
 
Six Months Ended
December 31, 2009
   
Six Months Ended
December 31, 2008
   
Change
 
                   
Direct
  $ 2,551,606     $ 2,648,368       (4 )%
Wholesale
  $ 2,033,140     $ 2,086,888       (3 )%
Other
  $ 484,910     $ 616,038       (21 )%
 Total Net Sales
  $ 5,069,656     $ 5,351,294       (5 )%
 
Other revenues consist principally of shipping and handling fees derived from our Direct business.

 Gross Profit by Channel:
 
Six Months Ended
December 31, 2009
   
Margin
%
   
Six Months Ended
December 31, 2008
   
Margin
%
   
Change
 
                               
Direct
  $ 1,225,924       48 %   $ 1,155,551       44 %     6 %
Wholesale
  $ 536,507       26 %   $ 586,695       28 %     (9 )%
Other
  $ (27,623 )     (6 )%   $ 116,960       19 %     (124 )%
 Total Gross Profit
  $ 1,734,808       34 %   $ 1,859,206       35 %     (7 )%

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Net sales for the six months ended December 31, 2009 decreased from the comparable prior year period by $281,638, or 5%.  The decrease in sales was experienced in all sales channels. Consumer sales decreased from $2,648,368 in the first six months of fiscal 2009 to $2,551,606 in the first six months of fiscal 2010, a decrease of approximately 4%, or $96,762.  One of the most frequent consumer discount offers during the three months ended September 30, 2009 was “free” or significantly reduced shipping and handling, which accounted for the decrease in the Other category revenue and gross profit from the prior year comparable six month period.  Sales to Wholesale customers during the six months ended December 31, 2009 was essentially flat from the prior year comparable period, with a 3% decrease.  Sales to Direct and Wholesale customers is expected to increase during the remainder of fiscal 2010, as the Company introduces new product lines for consumers and wholesale distribution (see Footnote 16 - Subsequent Events) and general economic conditions continue to improve.

Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead, and depreciation.  Gross margin as a percentage of sales decreased slightly to 34% for the six months ended December 31, 2009 from 35% in the comparable prior year period.  This is primarily the result of a decrease in the margin on Wholesale sales during the second quarter (from 35% to 26%) and a decrease in the Other margin to slightly less than zero. This was offset to some extent by the increase in the Direct margin to 44% from 48% in the six month period from the comparable prior year period.   We attribute the decrease in the Wholesale margin to an increase in private label manufacturing during the quarter ended December 31, 2009, which has a slightly lower margin than Liberator products sold to distributors and retailers. The gross profit on the Other category decreased from a positive $116,960 to a negative margin of $27,623 as a result of the “free” or reduced shipping and handling charge promotions that were offered during the first and second quarters of fiscal 2010.  In the current economic environment, we anticipate the need to continue to offer “free” or reduced shipping and handling to consumers as a promotional tool.

Total operating expenses for the six months ended December 31, 2009 were 42% of net sales, or $2,106,578, compared to 42% of net sales, or $2,255,087, for the same period in the prior year.  This 7% decrease in operating expenses was the result of lower expenses in the categories including advertising and promotion costs, other selling and marketing costs, and depreciation expense.

Advertising and promotion expenses decreased by 24% (or $133,232) from $551,234 in the first six months of fiscal 2009 to $418,002 in the first six months of fiscal 2010.  Advertising and promotion expenses were reduced during the first half of fiscal 2010 as part of an on going program to improve the targeting, timing and effectiveness of advertising spending.  Other Selling and Marketing costs decreased 8% (or $48,517) from the first half of fiscal 2009 to the first half of fiscal 2010, primarily as a result of lower professional fees, salaries, and graphic services cost, which was partially offset by higher trade show and travel costs.

Other income (expense) during the first six months increased from expense of $134,782 in fiscal 2009 to expense of $299,103 in fiscal 2010.  Interest (expense) and financing costs in the six months ended December 31 included $21,301 from the amortization of the debt discount on the convertible notes. Expenses related to the merger with WES Consulting, Inc. during the first quarter of fiscal 2010 totaled $192,167.  This item consists of the discounted face value of the $250,000 convertible note payable to Hope Capital by the Company, who is the acquirer pursuant to ASC Topic 805 (formerly SFAS 141(revised)).  The expense related to the merger included in other income (expense) are non-cash expenses.

No expense or benefit from income taxes was recorded in the six months ended December 31, 2009 or 2008.  We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

We had a net loss of $670,873, or ($0.01) per diluted share, for the six months ended December 31, 2009 compared with a net loss of $530,663, or ($0.01) per diluted share, for the six months ended December 31, 2008.

Variability of Results
 
We have experienced significant quarterly fluctuations in operating results and anticipates that these fluctuations may continue in future periods. As described in previous paragraphs, operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, costs associated with new product introductions, and increases in raw material costs. In addition, future operating results may fluctuate as a result of factors beyond 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.

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Financial Condition
 
Cash and cash equivalents decreased $1,609,332 to $206,301 at December 31, 2009 from $1,815,633 at June 30, 2009. This decrease in cash resulted from cash used in operating activities of $1,230,041, cash used in investing  activities of $146,872, and by cash used in financing activities of $232,419, as more fully described below.

Cash used in operating activities for the six months ended December 31, 2009 represents the results of operations adjusted for non-cash depreciation ($134,679) and the non-cash deferred rent accrual reversal of $9,709, the non-cash expenses related to the merger of $192,163, and amortization of the debt discount on the convertible notes of $21,305. Changes in operating assets and liabilities include an increase in accounts receivable of $181,612, an increase in inventory of $189,554 and an increase in prepaid expenses and other assets of $35,738.  Additional cash was used to reduce accounts payable by $372,232 during the six months ended December 31, 2009, and reduce accrued compensation and accrued expenses and interest by $33,260 and $85,210, respectively.

Cash flows used in investing activities reflects capital expenditures during the six months ended December 31, 2009. The largest component of capital expenditures during the period was our project to upgrade its e-commerce platform and ERP system. Expenditures on the e-commerce platform and ERP system, as of December 31, 2009, total approximately $397,337 and the systems were operational and in use as of September 1, 2009.

Cash flows used in financing activities are attributable to the repayment of the revolving line of credit of $1,426,705, repayment of the credit card cash advance of $198,935, and principal payments on notes payable and capital leases totaling $73,819.

As of December 31, 2009, our net accounts receivable increased by $181,612, or 52%, to $528,042 from $346,430 at June 30, 2009. The increase in accounts receivable is primarily the result of increased sales to certain wholesale accounts during December 2009 as these customers typically increase their purchases in advance of Christmas and Valentine’s Day. Management believes that our accounts receivable are collectible net of the allowance for doubtful accounts of $15,178 at December 31, 2009.

Our net inventory increased by $189,554, or 27%, to $889,957 as of December 31, 2009 compared to $700,403 as of June 30, 2009. The increase reflects an increase in finished goods inventory in anticipation of increased product sales during the three months ended March 31, 2010.

Accounts payable decreased by $672,232, or 17%, to $1,875,613 as of December 31, 2009 compared to $2,247,845 as of June 30, 2009. The decrease in accounts payable was the result of our improved working capital position that resulted from the net proceeds of the private placement of our common stock that closed on June 26, 2009. 

Liquidity and Capital Resources
 
At December 31, 2009, our working capital deficiency was $670,566, a decrease of $564,442 compared to the deficiency of $106,124 at June 30, 2009.  Cash and cash equivalents at December 31, 2009 totaled $206,301, a decrease of $1,609,332 from $1,815,633 at June 30, 2009.

On November 10, 2009, the Company’s subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc. entered into a loan agreement for a revolving line of credit with a commercial finance company that provides credit to 80% of domestic accounts receivable aged less than 90 days up to $250,000. Borrowings under the agreement bear interest at Prime rate plus six percent (9.25 percent as of February 16, 2010) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as defined in the agreement.  The unpaid balance on this revolving line of credit was $243,967 as of December 31, 2009.

Management believes anticipated cash flows generated from operations during the third quarter of fiscal 2010, along with current cash and cash equivalents as well as borrowing capacity under the line of credit should be sufficient to finance working capital requirements required by operations during the next twelve months. However, if product sales are less than anticipated during the three months ended March 31, 2010, we will need to raise additional funding in the near term to meet its working capital requirements. If we raise additional capital by issuing equity securities, our existing stockholders’ ownership will be diluted.  We cannot provide assurance that additional financing will be available in the near term when needed, particularly in light of the current economic environment and adverse conditions in the financial markets, or that, if available, financing will be obtained on terms favorable to the Company or to our stockholders.  If we require additional financing in the near-term and are unable to obtain it, this will adversely affect our ability to operate as a going concern and may require the Company to substantial scale back operations or cease operations altogether.
 
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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 $670,873 for the six months ended December 31, 2009 and a net loss of $3,754,982 for the year ended June 30, 2009. As of December 31, 2009, we have an accumulated deficit of $686,838 and a working capital deficit of $670,566.

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

These actions include initiatives to increase gross profit margins through improved production controls and reporting. To that end, we recently implemented a new Enterprise Resource Planning (ERP) software system. We also plan to reduce discretionary expense levels to be better in line with current revenue levels. Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic development plans we have identified will require approximately $2,300,000 of funding. We expect to invest approximately $500,000 for additional inventory of sexual wellness products and $1,800,000 on sales and marketing programs, primarily sexual wellness advertising in magazines and on cable television. We will also be exploring the opportunity to acquire other compatible businesses.

We plan to finance the required $2,300,000 with a combination of cash flow from operations as well as cash on hand and cash raised through equity and debt financings.

Capital Resources

We do not currently have any material commitments for capital expenditures. We expect total capital expenditures for the remainder of fiscal 2010 to be under $50,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the revolving line of credit. This includes capital expenditures in support of our normal operations, and expenditures that we may incur in conjunction with initiatives to further upgrade our e-commerce platform and enterprise resource planning system (ERP system.)

If our business plans and cost estimates are inaccurate and our operations require additional cash or if we deviate from our current plans, we could be required to seek additional debt financing for particular projects or for ongoing operational needs.  This indebtedness could harm our business if we are unable to obtain additional financing on reasonable terms.  In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business.  If we do not comply with such covenants, our lenders could accelerate repayment of our debt or restrict our access to further borrowings, which in turn could restrict our operating flexibility and endanger our ability to continue operations.
 
ITEM 3.        Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.

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ITEM 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to the management, including CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

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.
 
 
 
There have been no material developments during the quarter ended December 31, 2009 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.
 
 
There were no unregistered sales of equity securities during the quarter ended December 31, 2009 to report that have not already been disclosed in a Current Report on Form 8-K.
 
 
None.
 
 
None.
 
 
(a)           None.

(b)           There were no changes to the procedures by which security holders may recommend nominees to our board of directors.
 
 
Exh. No.
 
Description
     
3.1
 
Articles of Incorporation (1)
3.2
 
Amended and Restated Certificate of Incorporation (1)
3.3
 
Bylaws (1)
31.1
 
Section 302 Certification by the Corporation’s Principal Executive Officer *
31.2
 
Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer *
32.1
 
Section 906 Certification by the Corporation’s Principal Executive Officer *
32.2
 
Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer *
_________________________
*
Filed herewith.
(1)
Filed on December 3, 2008 as an exhibit to our Registration Statement on Form 10, and incorporated herein by reference.
 
 
23

 

 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
LIBERATOR, INC.
     
(Registrant)
       
February 22, 2010
 
By:  
/s/ Louis S. Friedman
(Date)
   
Louis S. Friedman
     
President and Chief Executive Officer
(Principal Executive Officer)
       
February 22, 2010
 
By:  
/s/ Ronald P. Scott
(Date)
   
Ronald P. Scott
     
Chief Financial Office and Secretary
(Principal Financial & Accounting Officer)
 
 
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