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EX-99.2 - Luvu Brands, Inc. | v178277_ex99-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K/A
Amendment No.
2
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of
Report (date of earliest event reported): June 30, 2010 (October 19,
2009)
WES
Consulting, Inc.
(Exact
name of registrant as specified in charter)
Florida
(State or
other jurisdiction of incorporation)
333-141022
|
|
59-3581576
|
(Commission
File Number)
|
(IRS
Employer Identification No.)
|
2745
Bankers Industrial Drive
Atlanta,
GA 30360
(Address
of principal executive offices and zip
code)
|
(770)
246-6400
|
(Registrant’s
telephone number including area
code)
|
(Former
Name and Former
Address)
|
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
o Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
1
EXPLANATORY
NOTE
This
Amendment No. 2 to our current report on Form 8-K (“Form 8-K/A”) is filed to
provide a general update or discussion of developments of the registrant, WES
Consulting, Inc. (the “Company”), subsequent to the original filing of the Form
8-K on October 22, 2009. The filing of this Form 8-K/A shall not be deemed
an admission that the original filing, when made, included any untrue statement
of material fact or omitted to state a material fact necessary to make a
statement not misleading.
NOTE
REGARDING WEBSITE ADDRESSES
This
Current Report on Form 8-K contains references to certain website addresses. The
reader is advised that the URL’s for such websites are included in this Current
Report on Form 8-K as inactive textual references only.
2
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 8-K and other reports
filed by the Registrant from time to time with the Securities and Exchange
Commission (collectively, the “Filings”) contain or may contain forward looking
statements and information that is based upon beliefs of, and information
currently available to, Registrant’s management as well as estimates and
assumptions made by Registrant’s management. When used in the Filings the words
“anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the
negative of these terms and similar expressions as they relate to Registrant or
Registrant’s management identify forward looking statements. Such statements
reflect the current view of Registrant with respect to future events and are
subject to risks, uncertainties, assumptions and other factors (including the
risks contained in the section of this report entitled “Risk Factors”) relating
to Registrant’s industry, Registrant’s operations and results of operations.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended or
planned.
Except
as required by applicable law, including the securities laws of the United
States, Registrant does not intend to update any of the forward-looking
statements to conform these statements to actual results. The following
discussion should be read in conjunction with Registrant’s audited financial
statements for the fiscal years ended December 31, 2007 and 2008 and the related
notes thereto, the unaudited financial statements for the three and six months
ended June 30, 2009 and the related notes thereto, and the pro forma financial
statements and the related notes filed with this Form 8-K.
In
this Form 8-K, references to “we,” “our,” “us,” “WES Consulting,” or “WES” refer
to WES Consulting, Inc., a Florida corporation, and its
subsidiaries.
3
Item
1.01 Entry Into a Material Definitive Agreement.
On
October 19, 2009, WES entered into a Merger and Recapitalization Agreement with
Liberator, Inc., a Nevada corporation (“Liberator”). Pursuant to the
agreement, Liberator merged with and into the Company, with the Company
surviving as the sole remaining entity. The description of the material terms
and conditions of the merger are set forth below under Item 2.01 and such
description is incorporated herein by reference.
Item
2.01 Completion of Acquisition or Disposition of Assets.
MERGER
On
October 19, 2009, WES entered into a Merger and Recapitalization Agreement with
Liberator Pursuant to the agreement, Liberator merged with and into the
Company, with the Company surviving as the sole remaining entity. As a result of
the merger, Liberator’s wholly owned subsidiary, OneUp Innovations, Inc.
(“OneUp”), a Georgia corporation, became the wholly owned subsidiary of
WES. OneUp wholly owns, Foam Labs, Inc., a Georgia
corporation.
As a
result of the merger, each issued and outstanding share of the common stock of
Liberator (the “Liberator Common Shares”) were converted, into one share of the
Company’s common stock, $0.01 par value, which, after giving effect to the
merger, equaled, in the aggregate, 98.4% of the total issued and outstanding
common stock of the Company (the “WES Common Stock”). Pursuant to the
agreement, each issued and outstanding share of preferred stock of Liberator
(the “Liberator Preferred Shares”) were to be converted into one share of the
Company’s preferred stock with the provisions, rights, and designations set
forth in the agreement (the “WES Preferred Stock”). On the execution date
of the agreement, the Company was not authorized to issue any preferred stock
and the parties agreed that the Company will file an amendment to its Articles
of Incorporation authorizing the issuance of the WES Preferred Stock, and at
such time the WES Preferred Stock will be exchanged pursuant to the terms of the
agreement. As of the execution date of the agreement, Liberator owned
eighty-point seven (80.7%) percent of the issued and outstanding shares of
the Company’s common stock. Upon the consummation of the merger, the WES
Common Stock owned by Liberator prior to the agreement were
cancelled.
The
merger transaction has been accounted for as a reverse merger, and as such the
historical financial statements of Liberator are being presented herein with
those of the Company. Also, the capital structure of the Company for all
periods presented herein is different from that appearing in the historical
financial statements of the Company due to the recapitalization
accounting.
Both the
Company and Liberator provided customary representations and warranties,
pre-closing covenants and closing conditions in the agreement, by which
customary indemnification provisions secure any and all breaches of such
representations and warranties.
BUSINESS
WES
CONSULTING, INC.
The
Company was incorporated in the State of Florida on February 25, 1999. Our
executive offices are located at 2745 Bankers Industrial Drive, Atlanta, Georgia
30360. Prior to the merger with Liberator, our principal business plan was
to provide consulting services to companies requiring expert guidance and
assistance in successfully upgrading and improving their high-volume commercial
printing businesses. The primary emphasis was on global companies involved in
printing telephone directories.
LIBERATOR,
INC.
Liberator
was incorporated in the State of Nevada on October 31, 2007 under the name
“Remark Enterprises Inc.” Since inception, Liberator was engaged in
organizational efforts and obtaining initial financing. Liberator was formed as
a vehicle to pursue a business combination. Liberator formed One Up Acquisition,
Inc., a Georgia corporation and as a wholly owned subsidiary (the “Subsidiary”)
on March 11. 2009. On April 3, 2009, Liberator entered into a Stock
Purchase and Recapitalization Agreement with OneUp Innovations, Inc., a
privately held Georgia corporation (“OneUp”), and the Subsidiary. On June
26, 2009, Liberator consummated the transactions contemplated by the agreement,
as amended. Pursuant to the agreement, the Subsidiary and OneUp merged,
and all of the issued and outstanding common stock of OneUp was exchanged for an
aggregate of 45,000,000 shares of the Liberator’s common stock (90% of the total
issued and outstanding shares of common stock of Liberator). In addition,
all of the issued and outstanding shares of preferred stock of OneUp was
exchanged for 4,300,000 shares of preferred stock of Liberator. After the
merger, OneUp became Liberator’s wholly owned subsidiary, and Liberator’s
business operations were conducted through OneUp. On July 2, 2009,
Liberator changed its name to “Liberator, Inc.”
ONEUP
INNOVATIONS, INC.
Founded
in Atlanta, Georgia in 2000, OneUp is a provider of goods and information to
customers who believe that sensual pleasure and fulfillment are essential to a
well-lived and healthy life. The information that OneUp provides consists
primarily of product demonstration videos that the Company shows on its websites
and instructional DVD’s that the Company sells.
4
Established
with this conviction, Liberator Bedroom Adventure Gear® empowers exploration,
fantasy and the communication of desire, no matter the person’s shape, size or
ability. Products include the original Liberator shapes and furniture,
sophisticated lingerie and latex apparel, pleasure objects, as well as bath and
body, bedding and home décor. Liberator is a growing consumer brand that
celebrates intimacy by inspiring romantic imagination. Our primary website
address is www.liberator.com.
Liberator
Bedroom Adventure Gear® is a love-style brand that exists in a space where the
act of love meets art and invention. Not prurient enough to be an "adult"
product, yet too sexy to be considered mainstream, we created a retail category
called “lovestyle” to define ourselves in a marketplace that is rapidly gaining
in popularity and acceptance.
Since we
shipped our first product in 2002, Liberator has evolved into a community of
dedicated employees that create, develop, make, market, advertise, promote and
re-invent items and ideas that allow couples to have a fuller sexual experience
of themselves and each other.
From the
year ended December 2002 to the year ended December 2008, our annual revenues
increased from $522,000 to $11.3 million, representing a compound annual growth
rate of approximately 67%. Our growth is the result of increased consumer
awareness of our products, led by the emerging trend in society called “sexual
wellness.”
We are
focused on building, developing and marketing its Liberator brand of Bedroom
Adventure Gear products. Since inception, we have spent over $7 million in
print advertising, building awareness of the brand primarily through magazine
advertisements. We now intend to broaden our marketing reach by
advertising on selected cable television and radio channels and in newspaper
ads.
In
addition to the Liberator Shapes®, we also produce a line of
casual foam-based furniture that we sell under the Studio OneUp brand. These
products are produced as a by-product from the manufacturing of Liberator
products, as we re-purpose the scrap foam created from the cutting of the
Liberator cushions. The Studio OneUp products are offered directly to consumers
through our web site, www.studiooneup.com, to e-Merchants under drop-ship
agreements where we ship directly to their customers, and to other
resellers.
We are
currently housed in a 140,000 sq. ft. vertically integrated manufacturing
facility in a suburb of Atlanta, Georgia. Since our first sale in May 2002,
we have grown to include 112 employees, with our products being sold directly to
consumers and through approximately six hundred domestic resellers and six
international resellers, approximately 1,200 marketing affiliates, and several
dozen independent sales consultants within the United States. Other than the six
international resellers, none of our customers are subject to a written
agreement or are required to purchase or sell a specific amount of our products.
Marketing affiliates are companies that operate websites that market our
products on their websites. These marketing affiliates direct visitor traffic to
our websites by using our technology to place banners or links on their websites
to our website.
Industry
Background
We
participate in the rapidly growing worldwide market of sexual wellness. What was
once called Family Planning has evolved over the last 5 years into a new
category called Sexual Wellness. All of the major retailers, pharmacies and
on-line retailers have embraced this development.
Major
consumer brands are rapidly entering the Sexual Wellness market, with either new
products or repackaged existing products. These brands include:
K-Y
Personal Lubricant (a division of $63 billion Johnson &
Johnson)
Trojan
Condoms (a division of $2.4 billion Church & Dwight)
Philips
Electronics (a $26 billion company) recently introduced a line of personal
vibrators
Durex
Condoms (a $250 million division of UK-based SSL International)
We
believe that the category of sexual wellness is in the early stages of consumer
awareness and that it will continue to grow and gain consumer acceptance to
become a major trend in society.
Our
Competitive Strengths
We
believe that we have the following competitive strengths that we can leverage to
implement our strategy:
Leading market position. Since
our first magazine advertisements appeared in 2002, we have been one of only a
handful of companies that are permitted to advertise sexual wellness products in
mainstream publications. Because of our upscale presentation and mainstream
appeal, Liberator product advertisements have passed the approval of magazines
that have never before permitted an adult product to advertise. As a result, we
believe that we enjoy a somewhat exclusive franchise in this category. Because
of our ability to reach mainstream consumers through print advertisements, we
believe that we have established a leading market position in the category of
sexual wellness products. To some degree, we believe this is evidenced by our
product position on leading e-commerce websites.
Vertically integrated operations
which includes product and packaging design, website design, manufacturing, and
marketing capabilities. Our state-of-the-art design and production
facility allows us to rapidly bring new products to market and respond quickly
to changes in consumer preference, and our in-house website design capabilities
allows us to create a constant stream of website content that provides our
consumers with an entertainment venue, which creates a catalyst for them to
revisit our website after their initial purchase.
5
Broad product offering. We
currently manufacture approximately 1,200 products and purchases for resale an
additional 400 products.
Established and diversified customer
base. We have approximately 145,000 unique individual customers in
addition to leading retailers and e-merchants.
Experienced executive team. We
have an experienced team of corporate managers. Our founder and Chief Executive
Officer, Louis Friedman, is an entrepreneur and investor whose management
experience spans the past 30 years. Our Chief Financial Officer, Ronald Scott,
has over 30 years of experience in accounting and financial management, with 13
years as the Chief Financial Officer for a NASDAQ-listed natural products
company.
Products
and Services
Liberator
Products
We
developed a product line of "Bedroom Adventure Gear ®" which
consists of six differently shaped cushions being marketed as Liberator ® Shapes.
Liberator Shapes are positioning props that rock, elevate, and create surfaces
and textures that expand the sexual repertoire and make the act of love more
exciting. As human bodies come in different sizes, so do Liberator Shapes, and
Liberator Shapes are available in an assortment of fabric colors and prints to
add to the visual excitement. The Shapes are covered under United States Patent
#6,925,669. Each of the six Liberator Shapes has a unique shape, designed to
introduce to the sexual experience positions that were previously difficult to
achieve. The Liberator Shapes are manufactured from structured urethane foam cut
at an angle, in large cubes and in platform shapes. The urethane base is encased
in a tight, fluid resistant nylon shell, helping the cushions to maintain their
shape. Our best-selling lines of the Liberator ® Shapes
products are the Wedge, Ramp, and Wedge/Ramp combination.
We have
also developed a unique a line of furniture pieces, called “sex furniture”,
which set the benchmark for relaxed interaction and creative sex. Three of the
sex furniture pieces are made from contoured urethane foam and covered in a
variety of fabrics and colors. These items are marketed as the Esse ® , the
Equus ™ , and
the Freestyle ™ . The
sex furniture line also includes products based on shredded polyurethane foam
encased in a wide range of fabric types and colors and sold as the Zeppelin
™ ,
the Zeppelin ™ Lounger,
the Zeppelin ™ Cocoon,
and the Zeppelin ™
Pillow.
The
products sold under the Liberator ® Shapes
line, including the sex furniture, provided 67.5%, 69.9%, and 79.0% of our
revenues for our fiscal years ended June 30, 2009, 2008, and 2007,
respectively. Revenues from the Wedge, Ramp, and Wedge/Ramp
combination products made up approximately 50% of the revenues from the
Liberator ® Shapes
line in each of those fiscal years.
Studio
OneUp Products
In
addition to the Liberator product line, we also produce a line of casual
foam-based furniture sold under the Studio OneUp brand. These products are
offered directly to consumers through OneUp’s web site and to e-Merchants
under drop-ship arrangements where we ship directly to customers and to other
resellers. Our Studio OneUp products provided 13.7%, 9.8%, and 2.2%
of our revenues for our fiscal years ended June 30, 2009, 2008, and 2007,
respectively.
Resale
Products
Beginning
in 2006, we began importing high-quality pleasure objects and erotica from
around the world. This collection now includes products for the body and mind,
including erotic books, music, and gifts. These resale products provided 10.9%,
12.2%, and 9.0% of our revenues for our fiscal years ended June 30, 2009, 2008,
and 2007, respectively.
Miscellaneous
Products and Contract Manufacturing
We also
manufacture couture lingerie, latex garments, fetish wear, and a line of boudoir
bedding items that are sold under the Fascinator ™
line. The Fascinator line and restraints provided an immaterial
portion of our revenues during the last 3 fiscal years. Beginning in early
fiscal 2007, we began providing contract manufacturing services to companies
seeking private label specialty products made from fabric and foam. These
products are typically designed by the client companies and manufactured to
their specifications and, to date, have not been a material part of our
business.
Competition
The
markets for the products and information offered by us are highly fragmented and
are characterized by thousands of small and often undercapitalized businesses.
We believe that we compete on the basis of integrity, the distinctiveness,
quality and performance of our products, quality of customer service, creative
presentations and brand name recognition.
We
believe that the primary competitive factors in e-commerce are brand
recognition, site content, ease of use, price, fulfillment speed, customer
support, reliability and integrity. Our success, particularly against larger and
better financed competitors, will continue to depend upon our ability to provide
a compelling and satisfying shopping experience for the consumer, both on-line
and at our current and future retail stores.
Strategy
As one of
the few recognized brands in the sexual wellness market, our goal is to enhance
revenue opportunities while improving our profitability. We plan to achieve
these goals using the following strategies:
6
·
|
Expand Advertising Beyond
Magazines. Since inception, 95% of our advertising expenditures
have been for print advertisements in magazines. While we plan to continue
and grow this effort, we also believe that we can be more successful by
advertising on adult and mainstream cable television and network channels,
and satellite and terrestrial radio
stations.
|
·
|
Pursue Targeted
Acquisitions. We believe that the sexual wellness industry is
highly fragmented, with few market leaders, and we seek to pursue
acquisitions that meet our values, strategic focus and economic criteria.
We believe there is a significant opportunity to expand our business by
acquiring and integrating companies that manufacture or market
high-quality products to the sexual wellness consumer market and that, in
many cases, such companies could increase their sales as a result of
offering their products for sale under the Liberator
brand.
|
·
|
Capitalize on the Liberator
brand. We intend to extend the Liberator brand through the
introduction of Liberator brand pleasure objects and consumables, like
personal lubricants and massage
oils.
|
·
|
Expand our Channels of
Distribution. In 2008, we began licensing the Liberator brand to
entrepreneurs in foreign countries and we now have six licensees in 11
European and Asian countries with a total population of 250 million. We
intend to continue to add to its list of international licensees. We also
believe there is a significant opportunity to open Liberator Love Artist
stores in specific domestic markets like Atlanta, New York, Los Angeles
and Miami. Not only will such stores increase awareness of the brand, but
they will serve as regional hubs to support local networks of independent
sales agents that purchase products from our stores and resell them to
their friends and family members through in-home
parties.
|
·
|
Expand Distribution of our
Studio OneUp and TheOoh products. We have developed a unique
point-of-purchase packaging system for our “bean bag” line of Studio OneUp
seating. This system allows the retailer to stock a variety of bean bag
colors and fabric types while maintaining minimal inventory of the
foam-based filling. The foam-based filling is re-purposed scrap foam
created from the manufacturing of the Liberator cushions. The foam-based
filling is compressed into square capsules with a maximum weight of 25
pounds, which makes it easier for the consumer to transport the product,
and it reduces the amount of shelf space required by the retailer. To
purchase one of the various sizes of bean bags, consumers simply select
the required size and number of compressed foam capsules that match the
selected cover.
|
Intellectual
Property
Liberator,
Wedge, Ramp, Cube, Stage, Esse, Zeppelin, Jaxx, “Explore More”, “Bedroom
Adventure Gear“, and the Liberator logo are subject to trademark or pending
trademark applications of Liberator.
We also
currently hold 28 web domain names relating to our brand.
In August
2005, we were issued a United States utility patent number US 6,925,669,
“Support Cushion and System of Cushions.”
Marketing
Through
advertisements in a broad range of national magazines, consumers are directed to
one of our e-commerce websites to learn more about the products and place their
orders.
We intend
to expand its advertising efforts beyond magazines to reach broader segments of
the population and increase its consumer base.
Through
our in-house sales organization, we engage retailers directly and then either
ships to them on a wholesale basis or provides fulfillment services by
drop-shipping directly to their customers.
Through
attendance at a variety of domestic and international consumer and industry
trade shows, we gain valuable feedback from consumers and retailers regarding
its product offering. Attendance at these trade shows also provides us with an
opportunity to monitor the competitive environment and be made aware of any
emerging trends in the sexual wellness industry.
Licenses
We
launched our international expansion program in mid-2008 through a licensing
program. Through a co-manufacturing arrangement whereby the foam is contoured
locally, we have created a way for local partners to launch the brand quickly
and aggressively. Each licensee has the full capability to sell directly to
consumers and traditional resellers, and has made significant financial
commitments to marketing the Liberator brand through country specific
advertising channels which include print, television, and radio. These licensees
are also empowered to interpret the brand so as to be culturally sensitive to
their respective territories.
Since
September 2008, we have issued six license agreements which cover 11 countries
around the world including the UK, Germany, Netherlands, Belgium, France, Italy,
Australia / New Zealand, Singapore, Indonesia, and Malaysia (with a combined
population greater than 250 million residents.) There are currently five other
territories under negotiation with licensees. All territories will have, if not
already, a fully functional consumer website, and in some cases, our partners
will develop Liberator Lovestyle retail stores.
International
websites are in the process of being launched in Singapore, the United Kingdom,
the Netherlands, Germany, Belgium, and Australia/New Zealand.
7
These
international licensees are expected to eventually be successful distribution
pipelines which will market the Liberator branded products, ranging from
consumables and toys to shapes and furniture. Under the licensing agreements,
the licensees are encouraged to open all sales channels within their territories
including big box retailers, drugstores, and other retail channels. Sales to
licensees consist of an initial license fee plus recurring product sales.
Product sales and license fees from international licensees was less than 1% of
total net sales in fiscal 2008 and less than 3% of total net sales during fiscal
2009. The international license agreements, which have a term of three to six
years, appoint the companies or individuals as exclusive distributors in their
respective territories (with no minimum annual purchase requirements) and
require the licensees to spend specific amounts on advertising in their local
markets. However, to date, these advertising requirements have not been enforced
by the Company. The international license agreements may be terminated at any
time upon the mutual written agreement of the parties, and upon the occurrence
of any event of default, as defined in the agreements. The international license
agreements are filed as exhibits to this filing.
Sales
Channels
We
conduct our business through two primary sales channels: Direct (consisting of
our Internet websites, telephone sales, and our single retail store) and
Wholesale (consisting of our stocking reseller, drop-ship, contract
manufacturing and distributor accounts).
The
following is a summary of our revenues for the 2007, 2008, and 2009 fiscal
years:
(Dollars in thousands)
|
Fiscal
2007
|
Fiscal
2008
|
Fiscal
2009
|
|||||||||
Direct
|
$
|
6,547
|
$
|
6,703
|
$
|
5,144
|
||||||
Wholesale
|
2,369
|
3,550
|
4,022
|
|||||||||
Other
|
1,218
|
1,498
|
1,095
|
|||||||||
Total
Net Sales
|
$
|
10,134
|
$
|
11,751
|
$
|
10,261
|
The
following is a summary of our revenues for the three months ended September 30,
2009 and 2008:
Three Months Ended
September 30, 2009
|
Three Months Ended
September 30, 2008
|
Change
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Direct
|
$
|
1,170
|
$
|
1,387
|
(16
|
)%
|
||||||
Wholesale
|
$
|
685
|
$
|
951
|
(28
|
)%
|
||||||
Other
|
$
|
180
|
$
|
308
|
(42
|
)%
|
||||||
Total
Net Sales
|
$
|
2,035
|
$
|
2,646
|
(23
|
)%
|
Other
revenues consist principally of shipping and handling fees derived from our
Direct business.
Direct
The
following is a summary of our Direct business net sales and the percentage
relationship to total revenues for the 2007, 2008, and 2009 fiscal
years:
(Dollars in thousands)
|
Fiscal
2007
|
Fiscal
2008
|
Fiscal
2009
|
|||||||||
Internet
|
$
|
5,883
|
$
|
6,096
|
$
|
4,536
|
||||||
Phone
|
664
|
607
|
608
|
|||||||||
Total
Direct Net Sales
|
$
|
6,547
|
$
|
6,703
|
$
|
5,144
|
||||||
Direct
net sales as a percentage of total revenues
|
64.6
|
%
|
57.0
|
%
|
50.1
|
%
|
Since
inception, Liberator has sold directly to approximately 145,000 consumers, many
of these consumers have ordered from the Company more than once.
Wholesale
The
following is a summary of our net sales to Wholesale customers and the
percentage relationship to total revenues for the 2007, 2008, and 2009 fiscal
years:
(Dollars in thousands)
|
Fiscal
2007
|
Fiscal
2008
|
Fiscal
2009
|
|||||||||
Wholesale
customers
|
$
|
2,369
|
$
|
3,550
|
$
|
4,022
|
||||||
Percentage
of total revenues
|
23.4
|
%
|
30.2
|
%
|
39.2
|
%
|
8
At June
30, 2009, we had approximately 800 wholesale accounts, most of which are located
in the United States.
Internet
Website
Since
2002, our main website located at www.liberator.com has allowed our customers to
purchase our merchandise over the Internet. Using a consistent standard measure,
our website logged over 3.1 million visits in fiscal 2009, as compared to over
3.5 million visits in fiscal 2008, representing an 11% decrease in website
visits. Internet revenues represented 88% of the Direct business in fiscal 2009,
compared to 91% of the Direct business in fiscal 2008. We design and operate our
websites using an in-house technical and creative staff. Our www.liberator.com
website is intended to be an entertainment and educational venue where consumers
can watch product demonstration videos, videos on sexual wellness topics and
humorous videos on the many facets of human sexuality. In addition to our
www.Liberator.com website, we also maintain the www.StudioOneUp.com website and
the www.FoamLabs.com website.
In
response to declining sales on our main website, in fiscal 2009 (the year ended
June 30, 2009) we began an implementation project of a new e-commerce platform
and a new enterprise resource planning (ERP) system. The implementation of both
of these systems was substantially completed during the first quarter of fiscal
2010 (the year ended June 30, 2010).
Liberator®
“Lovestyle” Store
Sex and
love are inherently essential to life, but we do not believe they have been
properly presented in retailing. Couples seeking products to enhance intimacy
have limited choices beyond that of the local sex shop. We will present
“lovestyle” and sexual adventure in an interactive environment that is couple
friendly, mainstream and not faced with the zoning restrictions of adult
shops.
Products
offered may include:
·
|
Liberator
Shapes, sexual furniture, playful
restraints
|
·
|
Bedding
– silk / satin sheets, duvets,
pillows
|
·
|
Pleasure
objects (imported high-end)
|
·
|
Leather
products.
|
·
|
Erotic
prints, books and sculptures
|
·
|
Borosilicate
glass art and pleasure objects
|
·
|
Lingerie
– leather, silk, latex, and high end dress-up
costumes
|
·
|
Dance
wear & accessories – burlesque, belly dance, strip tease plus
DVD’s
|
·
|
Sensual
Massage, bath and body products
|
·
|
Music,
educational DVD’s, limited erotic
DVD’s
|
·
|
Personal
lubricants
|
·
|
Scents,
fragrances and candles
|
·
|
Gift
baskets
|
·
|
Instructional
monthly presentations or salons
|
Our 3,500
square foot factory store has demonstrated the power of the Liberator brand –
customers want to feel and touch Liberator products and are willing to travel to
the store, return repeatedly and refer friends.
The
Liberator Lovestyle Store serves as a laboratory to observe consumer reaction to
new products and to evaluate price points and merchandising
techniques.
We
believe that our retail store concept is ready to be rolled out or licensed
throughout the United States, providing an upscale experience in-sync with the
mainstreaming of sexual well-being.
Government
Regulation
We are
subject to customs, truth-in-advertising and other laws, including consumer
protection regulations that regulate the promotion and sale of merchandise and
the operation of warehouse facilities. We monitor changes in these laws and
believe that we are in material compliance with applicable laws.
Seasonality
Our
business has a seasonal pattern. 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. Also, during these past three
years, we have had net income in our second and third quarters and generated
losses in our first and fourth quarters, although there can be no assurance that
this trend will continue.
9
Employees
and Labor Relations
As of the
date of this filing, we have 112 employees. In addition, approximately 20
employees are hired on a seasonal basis to meet demand during the peak season.
None of our employees are represented by a union. We have had no labor-related
work stoppages and we believe our relationship with our employees is
good.
WHERE
YOU CAN FIND MORE INFORMATION
Because
we are subject to the informational requirements of the Securities Exchange Act,
we file reports, proxy statements and other information with the SEC. You may
read and copy these reports, proxy statements and other information at the
public reference room maintained by the SEC at its Public Reference Room,
located at 100 F Street, N.E. Washington, D.C. 20549. You may obtain information
on the operation of the public reference room by calling the SEC at
(800) SEC-0330. In addition, we are required to file electronic versions of
those materials with the SEC through the SEC’s EDGAR system. The SEC also
maintains a web site at http://www.sec.gov, which contains reports, proxy
statements and other information regarding registrants that file electronically
with the SEC.
RISK
FACTORS
You
should carefully consider the following risks, as well as the other information
contained in this Current Report. If any of the following risks actually occur,
our business could be materially harmed.
RISKS
RELATED TO OUR BUSINESS
Limited
operating history and limited experience of management
We have a
limited operating history upon which investors may base an evaluation of our
performance. We have experienced significant growth in sales from
inception through June 30, 2008, growing at a compound annual growth rate of
approximately 67%; however, there is no guarantee that we will be able to return
to the rate of growth we achieved in the past. To that point, sales
decreased 13% between fiscal 2008 and fiscal 2009. Continuation of our
existence as a going concern requires us to generate sufficient cash flows to
meet our obligations, to successfully market our products and to achieve a level
of sales adequate to support our cost structure. There can be no
assurances that these requirements will be met. We must be evaluated in
light of the expenses, delays, uncertainties, and other difficulties frequently
encountered by an unseasoned business enterprise. The experience and
ability of management are often considered the most significant factors in the
success of a business. No assurance can be given that we will achieve or
maintain profitable operations in the future.
We
have a history of significant operating losses and we may incur additional
losses in the future.
We have
historically generated significant operating losses. As of September 30,
2009, we had an accumulated deficit of approximately $5,824,214. We had
net losses of approximately $3,754,982 for the twelve months ended June 30, 2009
and a net loss of $153,113 for the fiscal year ended June 30, 2008. For
the three months ended September 30, 2009, we had a net loss of $514,756. We
expect our operating expenses will continue to increase during the next several
years as a result of the promotion of our products and the expansion of our
operations, including the launch of new products, the opening of one or more
stand-alone retail stores and entering into acquisitions, strategic alliances
and joint ventures. If our revenue does not grow at a substantially faster
rate than these expected increases in our expenses or if our operating expenses
are higher than we anticipate, we may not be profitable and we may incur
additional losses, which could be significant.
We
must dedicate significant resources to market our products to
consumers.
We plan
to continue to dedicate significant resources to market our products to
consumers and create awareness of the benefits of our products. Although our
prior advertising campaigns have generally been successful, there is no
assurance that our future marketing programs will achieve the desired results.
Failure to achieve the desired success in our marketing programs may have a
material adverse effect on our business, financial condition and results of
operations.
Our
quarterly operating results may fluctuate significantly and you should not rely
on them as an indication of our future results.
Our
future revenues and results of operations may fluctuate significantly due to a
combination of factors, many of which are outside of our control. The most
important of these factors include:
·
|
seasonality;
|
·
|
the
timing and effectiveness of our marketing
programs;
|
·
|
the
timing and effectiveness of capital
expenditures;
|
·
|
our
ability to enter into or renew marketing agreements with other sexual
wellness companies; and
|
10
·
|
competition.
|
We may be
unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If we have a shortfall in revenue in relation to our expenses, our
operating results will suffer. Our operating results for any particular quarter
may not be indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. It is possible that, in future periods, our results of
operations may be below the expectations of investors.
Consumer
spending on sexual wellness products and other products we sell may vary with
general economic conditions. If general economic conditions deteriorate and our
customers have less disposable income, consumers will likely spend less on our
products and our quarterly operating results will suffer.
Our
business, financial condition and results of operations may be adversely
affected by unfavorable economic and market conditions.
Changes
in global economic conditions could adversely affect the profitability of our
business. Economic conditions worldwide have continued to deteriorate and
have contributed to slowdowns in the consumer products industry, as well as in
the specific segments and markets in which we operate, resulting in reduced
demand and increased price competition for our products. If economic and
market conditions in the United States or other key markets, remain unfavorable
or persist, spread or deteriorate further, we may experience an adverse impact
on our business, financial condition and results of operation. In
addition, the current or future tightening of credit in financial markets could
result in a decrease in demand for our products. The demand for entertainment
and leisure activities tends to be highly sensitive to consumers’ disposable
incomes, and thus a decline in general economic conditions may lead to our
customers and potential new customers having less discretionary income to
spend. This could lead to a reduction in our revenue and have a material
adverse effect on our operating results. Accordingly, this economic downturn in
the U.S. and other countries may hurt our financial performance. We are
unable to predict the likely duration and severity of the current disruption in
financial markets and adverse economic conditions and the effects they may have
on our business and financial condition and results of operations. In addition,
any significant increase in the cost of raw materials, utilities, wages,
transportation costs and other production costs could have a material adverse
effect on our business, financial condition and results of
operations.
Our
operating results will suffer if sales during our peak seasons do not meet our
expectations.
Sales of
our products are seasonal, concentrated in the fourth calendar quarter, due to
the Christmas holiday, and the first calendar quarter, due to Valentine's Day.
In anticipation of increased sales activity during these periods, we hire a
number of temporary employees to supplement our permanent staff and we increase
our inventory levels. If sales during these periods do not meet our
expectations, we may not generate sufficient revenue to offset these increased
costs and our operating results will suffer.
If
we fail to develop and increase awareness of our brand, we will not increase or
maintain our customer base or our revenues.
We must
develop and increase awareness of the Liberator brand in order to expand our
customer base and our revenues. In addition, we may introduce or acquire other
brands in the future. We believe that the importance of brand recognition will
increase as we expand our product offerings. Many of our customers may not be
aware of the variety of products we offer. We intend to substantially increase
our expenditures for creating and maintaining brand loyalty and raising
awareness of our current and additional product offerings. However, if we fail
to advertise and market our products effectively, we may not succeed in
maintaining our brands, we will lose customers and our revenues will
decline.
Our
success in promoting and enhancing the Liberator brand will also depend on our
success in providing our customers high-quality products and a high level of
customer service. If our customers do not perceive our products to be of high
quality, the value of the Liberator brand would be diminished, we will lose
customers and our revenues will decline.
Because
there are a limited number of suppliers of a key component of our products, we
may suffer cost and supply difficulties if we are forced to change
suppliers.
A limited
number of domestic suppliers currently manufacture the microfiber fabric
included in the outer shell of our main product line. This concentration in
supply by two domestic manufacturers for this item subjects us to certain
economic and production risks that are beyond our control. The two
suppliers are Spectro Coating Corporation and Microfibres, Inc. To date,
we have been able to purchase the required levels of microfiber fabric on an
as-needed basis and we believe that these suppliers can meet our expected future
demand requirements. However, should one or both of these suppliers
experience any disruptions in their businesses, we may be forced to seek out
other sources of supply. While foreign suppliers of the microfiber fabric
are available, cost of goods sold and other costs may increase and order lead
times may increase, in the event a change in supplier is
necessitated.
We
will need to successfully manage our growth for the foreseeable
future.
If we
experiences significant growth, this growth may place a significant strain on
our managerial, operational, financial and other resources. We believe that our
performance and success depends in part on our ability to manage our growth
effectively. This, in turn, will require ongoing enhancement of our operating,
administrative, financial and accounting systems, and the expansion of our work
force and the training and management of our personnel. There can be no
assurance that we will be able to manage our growth effectively, or that our
facilities, systems, procedures or controls will be adequate to support our
operations. Our inability to manage our growth effectively could have a material
adverse effect on our business, prospects, operating results and financial
condition.
11
We
are dependent on key personnel, whose loss may be difficult to
replace.
We are
highly dependent on the technical and managerial skills of our key employees,
including sales, marketing, information systems, financial and executive
personnel. Therefore, the success of our business is highly dependent upon our
ability to retain existing employees and to identify, hire and retain additional
personnel as the need arises.
Currently,
we particularly depend upon the efforts and skills of Louis S. Friedman.
Mr. Friedman, one of the founders and current President and Chief Executive
Officer of the Company, is the driving force behind our overall direction and
our growth. The loss of services of Mr. Friedman could materially
adversely affect our business, financial condition or results of
operations. If Mr. Friedman left the Company’s employ, we might not be
able to employ an equally qualified person or persons on suitable
terms.
Competition
for key personnel is intense and there can be no assurance that we will be able
to retain existing personnel or to identify or hire additional qualified
personnel as needed. The need for such personnel is particularly important
in light of the anticipated demands of future growth. Our inability to
attract, hire or retain necessary personnel could have a material adverse effect
on our business, prospects, operating results and financial
condition.
There
are no contractual limits on compensation of our officers.
There are
no contractual limitations on compensation that may become payable to officers
or directors or on our ability to enter into contracts with related parties, all
of which remain in the control of our Board of Directors.
We
are controlled by our Chief Executive Officer, whose interests may differ from
other stockholders.
Our
Preferred Stock has voting rights that always exceed the voting rights of all
the Common Stock holders. The Common Stock has one vote per share and the
Preferred Stock has votes per share equal to the result of the total number of
Common Stock outstanding times 1.01 divided by the number of Preferred Stock
shares outstanding. 100% of the Preferred Stock will be owned by Louis S.
Friedman, our Chairman and Chief Executive Officer. Accordingly, Mr.
Friedman will own 72.6 % of the combined voting power of the Common Stock and
Preferred Stock, voting as a single class and will control the outcome of any
corporate transaction or other matter submitted to the stockholders for
approval, including mergers, consolidations and the sale of all or substantially
all of our assets, and also the power to prevent or cause a change in control.
The interests of Mr. Friedman may differ from the interests of the other
stockholders.
The
market for our products is highly competitive, our products are not necessities
and there can be no assurance that we will have sufficient resources to compete
successfully.
Although
we have unique and proprietary products, the market for adult products and
sexual enhancements is extremely competitive and highly fragmented and we
believe that competition in this market will intensify. We cannot assure that
our existing competitors and potential competitors will not succeed in
developing or marketing products that will be more accepted in the marketplace
or render our products non-competitive. We sell products that are not required
by the vast majority of the general public and, as such, sales of such items are
subject to fluctuations in the economy as well as fluctuations in individual
preference for sexual wellness products. Any delay in developing,
marketing and releasing new products in accordance with market demand could
materially adversely affect our business, operating results and financial
condition.
We
believe that our ability to compete successfully will depend on a number of
factors, including strong market presence directed to our ideal demographics;
our pricing policies, our competitors and our suppliers; the timing of
introduction of our new products and the products of our competitors; and
industry and general economic trends. There can be no assurance that we will
have the financial resources, technical expertise or marketing and support
capabilities to compete successfully.
We have
acquired certain copyrights and trademarks (the “Marks”) and patents and has
applied for registration of certain other copyrights, patents, trademarks and
service marks (collectively, the “Intellectual Property”), but there can be no
assurance that our Marks and our other efforts to protect our rights in our
Intellectual Property will prevent duplication or provide a competitive
advantage.
If
we are unable to obtain or maintain key website addresses, our ability to
operate and grow our business may be impaired.
Our
website addresses, or domain names, are critical to our business. However, the
regulation of domain names is subject to change, and it may be difficult for us
to prevent third parties from acquiring domain names that are similar to ours,
that infringe our trademarks or that otherwise decrease the value of our brands.
If we are unable to obtain or maintain key domain names for the various areas of
our business, our ability to operate and grow our business may be
impaired.
The
loss of our main data center or other parts of our systems and network
infrastructure would adversely affect our business.
Our main
data center and most of our servers are located at external third-party
facilities in Atlanta, Georgia. If our main data center or other parts of our
systems and network infrastructure was destroyed by, or suffered significant
damage from, an earthquake, fire, flood, or other similar catastrophes, or if
our main data center was closed because of natural disaster or the operator
having financial difficulties, our business would be adversely affected. Our
casualty insurance policies may not adequately compensate us for any losses that
may occur due to the occurrence of a natural disaster.
12
Our
internet operations are subject to system failures and interruptions that could
hurt our ability to provide customers’ with access to our websites, which could
adversely affect our business and results of operations.
The
uninterrupted performance of our computer systems is critical to the operation
of our websites. Our ability to provide access to our websites and content may
be disrupted by power losses, telecommunications failures or break-ins to the
facilities housing our servers. Our customers may become dissatisfied by
any disruption or failure of our computer systems that interrupts our ability to
provide access to our websites. Repeated or prolonged system failures
could substantially reduce the attractiveness of our websites and/or interfere
with commercial transactions, negatively affecting our ability to generate
revenue as approximately 60% of our revenues are derived from online
sales. Our websites must accommodate a high volume of traffic and deliver
regularly updated content. Some of our network infrastructure is not fully
redundant, meaning that we do not have back-up infrastructure on site for our
entire network, and our disaster recovery planning cannot account for all
eventualities. Our websites have, on occasion, experienced slow response
times and network failures. These types of occurrences in the future could
cause our customers’ to perceive our websites as not functioning properly and
therefore induce them to abandon our websites. We are also subject to
risks from failures in computer systems other than our own because our customers
depend on their own internet service providers in order to access our websites
and view our product offerings. Our revenue could be negatively affected
by outages or other difficulties customers experience in accessing our websites
due to internet service providers’ system disruptions or similar failures
unrelated to our systems. Any disruption in the ability of customers to
access our websites could result in fewer visitors to our websites and reduced
sales, which could adversely affect our business and results of
operations. We may not carry sufficient levels of business interruption
insurance to compensate us for losses that may occur as a result of any events
that cause interruptions in our websites.
In
pursuing acquisitions, we may not be successful in identifying appropriate
acquisition candidates or consummating acquisitions on favorable or acceptable
terms. Furthermore, we may face significant integration issues and may not
realize the anticipated benefits of the acquisitions due to integration
difficulties or other operating issues.
If
appropriate opportunities become available, we may acquire businesses, products
or technologies that we believe are strategically advantageous to our business.
Transactions of this sort could involve numerous risks, including:
·
|
unforeseen
operating difficulties and expenditures arising from the process of
integrating any acquired business, product or technology, including
related personnel, and maintaining uniform standards, controls, procedures
and policies;
|
·
|
diversion
of a significant amount of management’s attention from the ongoing
development of our business;
|
·
|
dilution
of existing stockholders’ ownership
interests;
|
·
|
incurrence
of additional debt;
|
·
|
exposure
to additional operational risks and liabilities, including risks and
liabilities arising from the operating history of any acquired
businesses;
|
·
|
negative
effects on reported results of operations from acquisition-related charges
and amortization of acquired
intangibles;
|
·
|
entry
into markets and geographic areas where we have limited or no
experience;
|
·
|
the
potential inability to retain and motivate key employees of acquired
businesses;
|
·
|
adverse
effects on our relationships with suppliers and customers;
and
|
·
|
adverse
effects on the existing relationships of any acquired companies, including
suppliers and customers.
|
In
addition, we may not be successful in identifying appropriate acquisition
candidates or consummating acquisitions on favorable or acceptable terms, or at
all. Failure to effectively manage our growth through acquisitions could
adversely affect our growth prospects, business, results of operations and
financial condition.
The
prices we charge for our products may decline over time, which would reduce our
revenues and adversely affect our profitability.
As our
products continue to gain consumer acceptance and attract the attention of
competitors, we may experience pressure to decrease the prices for our products,
which could adversely affect our revenues and gross margin. If we are
unable to sell our products at acceptable prices, or if we fail to develop and
offer new products with sufficient profit margins, our revenue growth will slow
and our business and financial results will suffer.
13
Continued
imposition of tighter processing restrictions by credit card processing
companies and acquiring banks would make it more difficult to generate revenue
from our websites.
We rely
on third parties to provide credit card processing services allowing us to
accept credit card payments from the majority of our customers. Our
business could be disrupted if these companies become unwilling or unable to
provide these services to us. We are also subject to the operating rules,
certification requirements and rules governing electronic funds transfers
imposed by the payment card industry seeking to protect credit cards issuers,
which could change or be reinterpreted to make it difficult or impossible for us
to comply with such rules or requirements. If we fail to comply, we may be
subject to fines and higher transaction fees and lose our ability to accept
credit card payments from our customers, and our business and operating results
would be adversely affected. Our ability to accept credit cards as a form
of payment for our online products sales could also be restricted or denied for
a number of other reasons, including but not limited to:
·
|
if
we experience excessive charge backs and/or
credits;
|
·
|
if
we experience excessive fraud
ratios;
|
·
|
if
there is an adverse change in policy of the acquiring banks and/or card
associations with respect to the processing of credit card charges for
sexual wellness products;
|
·
|
an
increase in the number of European and U.S. banks that will not accept
accounts selling sexual wellness
products;
|
·
|
if
there is a breach of our security resulting in the theft of credit card
data;
|
·
|
continued
tightening of credit card association chargeback regulations in
international commerce; and
|
·
|
association
requirements for new technologies that consumers are less likely to
use.
|
Our
ability to keep pace with technological developments is uncertain.
Our
failure to respond in a timely and effective manner to new and evolving
technologies could harm our business, financial condition and operating
results.
The
internet industry is characterized by rapidly changing technology, evolving
industry standards, changes in consumer needs and frequent new service and
product introductions. Our business, financial condition and operating
results will depend, in part, on our ability to develop the technical expertise
to address these rapid changes and to use leading technologies
effectively. We may experience difficulties that could delay or prevent
the successful development, introduction or implementation of new features used
to promote our products.
Further,
if the new technologies on which we intend to focus our investments fail to
achieve acceptance in the marketplace or our technology does not work and
requires significant cost to replace or fix, our competitive position could be
adversely affected, which could cause a reduction in our revenue and
earnings. Further, after incurring substantial costs, one or more of the
technologies under development could become obsolete prior to its
introduction.
To access
technologies and provide products that are necessary for us to remain
competitive, we may make future acquisitions and investments and may enter into
strategic partnerships with other companies. Such investments may require
a commitment of significant capital and human and other resources. The
value of such acquisitions, investments and partnerships and the technology
accessed may be highly speculative. Arrangements with third parties can
lead to contractual and other disputes and dependence on the development and
delivery of necessary technology on third parties that we may not be able to
control or influence. These relationships may commit us to technologies
that are rendered obsolete by other developments or preclude the pursuit of
other technologies which may prove to be superior.
Our
business, financial condition and results of operations could be adversely
affected if we fail to provide adequate security to protect our customers’ data
and our systems.
Online
security breaches could adversely affect our business, financial condition and
results of operations. Any well-publicized compromise of security could
deter use of the internet in general or use of the internet to conduct
transactions that involve transmitting confidential information or downloading
sensitive materials. In offering online payment services, we may increasingly
rely on technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
could compromise or breach the algorithms that we use to protect our customers’
transaction data. If third parties are able to penetrate our network
security or otherwise misappropriate confidential information, we could be
subject to liability, which could result in litigation. In addition,
experienced programmers or “hackers” may attempt to misappropriate proprietary
information or cause interruptions in our services that could require us to
expend significant capital and resources to protect against or remediate these
problems.
14
Our
business is exposed to risks associated with online commerce security and credit
card fraud.
Consumer
concerns over the security of transactions conducted on the internet or the
privacy of users may inhibit the growth of the internet and online
commerce. To transmit confidential information such as customer credit
card numbers securely, we rely on encryption and authentication
technology. Unanticipated events or developments could result in a
compromise or breach of the systems we use to protect customer transaction
data. Furthermore, our servers may also be vulnerable to viruses and other
attacks transmitted via the internet. While we proactively check for
intrusions into our infrastructure, a new and undetected virus could cause a
service disruption. Under current credit card practices, we may be held
liable for fraudulent credit card transactions and other payment disputes with
customers. A failure to control fraudulent credit card transactions
adequately would adversely affect our business.
We
may not be able to protect and enforce our intellectual property
rights.
We
believe that our marks, particularly the “Liberator,” “Wedge,” “Ramp,” “Cube,”
“Stage,” “Esse,” “Zeppelin,” “Jaxx,” “Explore More,” “Bedroom Adventure Gear,”
and the Liberator logo, and other proprietary rights are critical to our
success, potential growth and competitive position. Our inability or
failure to protect or enforce these trademarks and other proprietary rights
could materially adversely affect our business. Accordingly, we devote
substantial resources to the establishment, protection and enforcement of our
trademarks and other proprietary rights. Our actions to establish, protect
and enforce our marks and other proprietary rights may not prevent imitation of
our products or brands or control piracy by others or prevent others from
claiming violations of their trademarks and other proprietary rights by
us. There are factors outside of our control that pose a threat to our
intellectual property rights. For example, effective intellectual property
protection may not be available in every country in which our products are
distributed or made available through the internet.
Intellectual
property litigation could expose us to significant costs and liabilities and
thus negatively affect our business, financial condition and results of
operations.
Although
not currently, we have in the past been subject to claims of infringement or
other violations of intellectual property rights. Intellectual property
claims are generally time-consuming and expensive to litigate or settle.
To the extent that any future claims against us are successful, we may have to
pay monetary damages or discontinue sales of any of our products that are found
to be in violation of another party’s rights. Successful claims against us
could also result in us having to seek a license to continue sales of such
products, which may significantly increase our operating burden and expenses,
potentially resulting in a negative effect on our business, financial condition
and results of operations.
Because
of the adult nature of our products, companies providing products and services
on which we rely may refuse to do business with us.
Many
companies that provide products and services we need are concerned that
associating with a company in our industry will somehow hurt their
reputation. As a result of these concerns, these companies may be
reluctant to enter into or continue business relationships with us. For example,
some credit card companies have declined to be affiliated with us. This
has caused us, in some cases, to seek out and establish business relationships
with other providers of the services we need to operate our business.
There can be no assurance however, that we will be able to maintain our existing
business relationships with the companies that currently provide us with
services and products. Our inability to maintain such business
relationships, or to find replacement service providers, would materially
adversely affect our business, financial condition and results of
operations. We could be forced to enter into business arrangements on
terms less favorable to us than we might otherwise obtain, which could lead to
our doing business with less competitive terms, higher transaction costs and
more inefficient operations than if we were able to maintain such business
relationships or find replacement service providers.
Workplace
and other restrictions on access to the internet may limit user traffic on our
websites.
Many
offices, businesses, libraries and educational institutions restrict employee
and student access to the internet or to certain types of websites, including
websites containing sexual wellness content. Since much of our revenue is
dependent on customer traffic to our websites, an increase in these types of
restrictions, or other similar policies, could harm our business, financial
condition and operating results. In addition, access to our websites
outside the U.S. may be restricted by governmental authorities or internet
service providers. If these restrictions become more prevalent, our growth
could be hindered.
If
one or more states or countries successfully assert that we should collect sales
or other taxes on the online sales of goods, our expenses will increase,
resulting in lower margins.
In the
United States, federal and state tax authorities are currently exploring the
appropriate tax treatment of companies engaged in e-commerce and new state tax
regulations may subject us to additional state sales and income taxes, which
could increase our expenses and decrease our profit margins. The
application of indirect taxes (such as sales and use tax, value added tax, goods
and services tax, business tax and gross receipt tax) to e-commerce businesses
such as ours and to our customers is a complex and evolving issue. Many of
the statutes and regulations that impose these taxes were established before the
growth in internet technology and e-commerce. In many cases, it is not
clear how existing statutes apply to the internet or e-commerce or
communications conducted over the internet. In addition, some
jurisdictions have implemented or may implement laws specifically addressing the
internet or some aspect of e-commerce or communications on the internet. The
application of existing or future laws could have adverse effects on our
business.
15
Under
current law, as outlined in the U.S. Supreme Court’s decision in Quill Corp. v.
North Dakota, 504 U.S. 298 (1992), a seller with substantial nexus (usually
defined as physical presence) in its customer’s state is required to collect
state (and local) sales tax on sales arranged over the internet (or by
telephone, mail order, or other means). In contrast, an out-of-state
seller without substantial nexus in the customer’s state is not required to
collect the sales tax. The U.S. federal government’s moratorium on states
and other local authorities imposing new taxes on internet access or multiple or
discriminatory taxes on internet commerce is scheduled to expire in October 31,
2014. This moratorium, however, does not prohibit the possibility that
U.S. Congress will be willing to grant state or local authorities the authority
to require remote (out-of-state) sellers to collect sales and use taxes on
interstate sales of goods over the internet. Several proposals to that
extent have been made at the U.S. federal, state and local levels (for example,
the Streamlined Sales and the Use Tax initiative). These proposals, if
adopted, would likely result in our having to charge state sales tax to some or
all of our customers in connection with the sale of our products, which would
harm our business if the added cost deterred customers from visiting our
websites and could substantially impair the growth of our e-commerce
opportunities and diminish our ability to derive financial benefit from our
activities.
We
presently do not intend to pay cash dividends on our common stock.
We have
never declared or paid any cash dividends or distributions on our capital
stock. We currently intend to retain our future earnings, if any, to
support operations and to finance expansion and therefore we do not anticipate
paying any cash dividends on our common stock in the foreseeable
future.
The
declaration, payment and amount of any future dividends will be made at the
discretion of the board of directors, and will depend upon, among other things,
the results of our operations, cash flows and financial condition, operating and
capital requirements, and other factors as the board of directors considers
relevant. There is no assurance that future dividends will be paid, and,
if dividends are paid, there is no assurance with respect to the amount of any
such dividend.
The
price of the Common Shares may be volatile.
In the
event a public market does develop for the common shares, market prices will be
influenced by many factors, and will be subject to significant fluctuation in
response to variations in operating results and other factors such as investor
perceptions, supply and demand of the common shares, interest rates, general
economic conditions, and those economic conditions specific to the industry, and
developments with regard to our activities, future financial condition and
management.
Our
ability to generate the cash we need depends on many events beyond our control,
and we may have to raise additional capital on terms unfavorable to our
shareholders to pursue our business plan.
The
actual amount of capital required to fund our operations and development may
vary materially from our estimates. To obtain additional funding in the
future, we may have to sell assets, seek debt financing or obtain additional
equity capital. If we raise funds by selling more shares of our common
stock, your ownership percentage in us will be diluted, and we may grant future
investors rights superior to those of the Common Shares that you are
purchasing. If we are unable to obtain additional capital when needed, we
may have to delay, modify or abandon some of our expansion plans. This
could slow our growth, negatively affect our ability to compete in the
marketplace and adversely affect our financial condition.
We
may incur substantial debt in the future that may impair our financial and
operating flexibility.
If our
business plans and cost estimates are inaccurate and our operations require
additional cash or if we deviate from our current plans, we could be required to
seek debt financing for particular projects or for ongoing operational
needs. This indebtedness could harm our business if we are unable to
obtain additional financing on reasonable terms. In addition, any
indebtedness we incur in the future could subject us to restrictive covenants
limiting our flexibility in planning for, or reacting to changes in, our
business. If we do not comply with such covenants, our lenders could
accelerate repayment of our debt or restrict our access to further borrowings,
which in turn could restrict our operating flexibility and endanger our ability
to continue operations.
The
availability of shares for sale in the future could reduce the market price of
our common stock.
In the
future, we may issue additional securities to raise cash for acquisitions.
We may also pay for interests in additional subsidiary companies by using a
combination of cash and shares of our common stock or just shares of our common
stock. We may also issue securities convertible into shares of our common
stock. Any of these events may dilute shareholders’ ownership interests in
our company and have an adverse impact on the price of our common stock. In
addition, sales of a substantial amount of our common stock in the public
market, or the perception that these sales may occur, could reduce the market
price of our common stock. This could also impair our ability to raise
additional capital through the sale of our securities.
Our
stock prices may be highly volatile, and this volatility may depress the price
of our common stock.
The stock
market has experienced significant price and volume fluctuations, and the market
prices of early stage companies have been highly volatile. We believe that
various factors may cause the market price of our common stock to fluctuate,
perhaps substantially, including, among others, the following:
16
·
|
announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures, capital commitments, new technologies or
patents;
|
·
|
failure
to complete significant
transactions;
|
·
|
developments
or disputes concerning our patents;
|
·
|
developments
in relationships with licensees;
|
·
|
variations
in our quarter operating results;
|
·
|
our
failure to meet or exceed securities analysts’ expectations of our
financial results;
|
·
|
changes
in management’s or securities analysts’ estimates of our financial
performance; and
|
·
|
changes
in market valuations of similar
companies.
|
If
we are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. As a public company, we will have significant
additional requirements for enhanced financial reporting and internal
controls. We will be required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent registered public accounting firm addressing these
assessments. The process of designing and implementing effective
internal controls is a continuous effort that requires us to anticipate and
react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls
that is adequate to satisfy our reporting obligations as a public
company.
We cannot
assure you that we will not, in the future, identify areas requiring improvement
in our internal control over financial reporting. We cannot assure
you that the measures we will take to remediate any areas in need of improvement
will be successful or that we will implement and maintain adequate controls over
our financial processes and reporting in the future as we continue our
growth. If we are unable to establish appropriate internal financial
reporting controls and procedures, it could cause us to fail to meet our
reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction,
cause investors to lose confidence in our reported financial information and
have a negative effect on the market price for our common stock.
We
are subject to the periodic reporting requirements of the Exchange Act, which
will require us to incur audit fees and legal fees in connection with the
preparation of such reports. These additional costs will reduce or might
eliminate our profitability.
We are
required to file periodic reports with the SEC pursuant to the Exchange Act and
the rules and regulations promulgated thereunder. To comply with
these requirements, our independent registered auditors will have to review our
quarterly financial statements and audit our annual financial
statements. Moreover, our legal counsel will have to review and
assist in the preparation of such reports. The costs charged by these
professionals for such services cannot be accurately predicted at this time,
because factors such as the number and type of transactions that we engage in
and the complexity of our reports cannot be determined at this time and will
have a major affect on the amount of time to be spent by our auditors and
attorneys. However, the incurrence of such costs will obviously be an
expense to our operations and thus have a negative effect on our ability to meet
our overhead requirements and earn a profit. We may be exposed to
potential risks resulting from new requirements under Section 404 of the
Sarbanes-Oxley Act of 2002. If we cannot provide reliable financial
reports or prevent fraud, our business and operating results could be harmed,
investors could lose confidence in our reported financial information, the
trading price of our common stock, if a market ever develops, could drop
significantly, or we could become subject to SEC enforcement
proceedings.
As
currently required under Section 404 of the Sarbanes-Oxley Act of 2002, we will
be required to include in our annual report our assessment of the effectiveness
of our internal control over financial reporting. Furthermore, our
independent registered public accounting firm will be required to attest to
whether our assessment of the effectiveness of our internal control over
financial reporting is fairly stated in all material respects and separately
report on whether it believes we have maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2009. We have not yet completed our assessment of the effectiveness
of our internal control over financial reporting. We expect to incur
additional expenses and diversion of management's time as a result of performing
the system and process evaluation, testing, and remediation required to comply
with the management certification and auditor attestation
requirements.
17
During
the course of our testing, we may identify deficiencies that we may not be able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. In addition, if we
fail to achieve and maintain the adequacy of our internal controls, as such
standards are modified, supplemented, or amended from time to time, we may not
be able to ensure that we can conclude on an ongoing basis that we have
effective internal controls over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important to help prevent financial
fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and operating results would be harmed, investors could lose
confidence in our reported financial information, the trading price of our
common stock, if a market ever develops, could drop significantly, or we could
become subject to SEC enforcement proceedings.
Because
we are becoming public by means of a merger, we have no history of compliance
with United States securities laws and accounting rules.
Because
we are becoming public by means of a merger, we have no history of compliance
with United States securities laws and accounting rules. In order to
be able to comply with United States securities laws, we recently had an initial
audit of our financial statements in accordance with U.S. generally accepted
auditing standards. As the management of Liberator does not have a
long term familiarity with the preparation of financial statements prepared in
accordance with generally accepted accounting principles or with the preparation
of periodic reports filed with the SEC, it may be more difficult for such
management, when they become managers of the Company following a merger, to
comply on a timely basis with SEC reporting requirements than a comparable
public company.
Our
Common Stock is classified as a “penny stock” as the term is generally defined
in the Securities Exchange Act of 1934 to mean equity securities with a price of
the than $5.00. Our Common Stock will be subject to rules that impose
sales practice and disclosure requirements on broker-dealers who engage in
certain transactions involving a penny stock.
We will
be subject to the penny stock rules adopted by the Securities and Exchange
Commission that require brokers to provide extensive disclosure to its customers
prior to executing trades in penny stocks. These disclosure
requirements may cause a reduction in the trading activity of our Common Stock,
which in all likelihood would make it difficult for our stockholders to sell
their securities.
Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a
“penny stock,” for purposes relevant to us, as any equity security that has a
minimum bid price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to a limited number of exceptions which are not
available to us. It is likely that our shares will be considered to be penny
stocks for the immediately foreseeable future. This classification
severely and adversely affects any market liquidity for our Common
Stock.
For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person's account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person's account for
transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transactions in penny stocks are suitable for
that person and that that person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market,
which, in highlight form, sets forth:
|
·
|
the
basis on which the broker or dealer made the suitability determination,
and
|
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny
stocks.
Because
of these regulations, broker-dealers may not wish to engage in the
above-referenced necessary paperwork and disclosures and/or may encounter
difficulties in their attempt to sell shares of our Common Stock, which may
affect the ability of selling shareholders or other holders to sell
their shares in any secondary market and have the effect of reducing the
level of trading activity in any secondary market. These additional
sales practice and disclosure requirements could impede the sale of our common
stock, if and when our common stock becomes publicly traded. In addition, the
liquidity for our common stock may decrease, with a corresponding decrease in
the price of our common stock. Our Common Stock, in all probability,
will be subject to such penny stock rules for the foreseeable future and our
shareholders will, in all likelihood, find it difficult to sell their common
stock.
18
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND PLAN OF OPERATION
The
following discussion and analysis of the results of operations and financial
condition of WES Consulting, Inc. for the three months ended September 30, 2009
and 2008 and the fiscal years ended June 30, 2009 and 2008 should be read in
conjunction with the financial statements and the notes to those financial
statements that are included elsewhere in this Form 8-K. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Note
Regarding Forward-Looking Statements, and Business sections in this Form 8-K. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.
Overview
Comparison
of Three Months Ended September 30, 2009 and Three Months Ended September 30,
2008
Comparisons
of selected consolidated statements of operations data as reported herein follow
for the periods indicated:
Total:
|
Three
Months Ended
September
30, 2009
|
Three Months Ended
September
30, 2008
|
Change
|
|||||||||
Net
sales:
|
$
|
2,034,992
|
$
|
2,645,823
|
(23
|
)%
|
||||||
Gross profit
|
$
|
658,177
|
$
|
816,835
|
(19
|
)%
|
||||||
Loss
from operations
|
$
|
(266,009
|
)
|
$
|
(285,340
|
)
|
7
|
%
|
||||
Diluted
(loss) per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
—
|
Net Sales by Channel:
|
Three Months Ended
September 30, 2009
|
Three Months Ended
September 30, 2008
|
Change
|
|||||||||
Direct
|
$ | 1,169,788 | $ | 1,387,227 | (16 | )% | ||||||
Wholesale
|
$ | 685,363 | $ | 950,723 | (28 | )% | ||||||
Other
|
$ | 179,841 | $ | 307,873 | (42 | )% | ||||||
Total
Net Sales
|
$ | 2,034,992 | $ | 2,645,823 | (23 | )% |
Other
revenues consist principally of shipping and handling fees derived from our
Direct business.
Gross Profit by Channel:
|
Three Months Ended
September 30, 2009
|
Margin
%
|
Three Months Ended
September 30, 2008
|
Margin
%
|
Change
|
|||||||||||||||
Direct
|
$ | 501,884 | 43 | % | $ | 565,234 | 41 | % | (11 | )% | ||||||||||
Wholesale
|
$ | 183,715 | 27 | % | $ | 193,627 | 20 | % | (5 | )% | ||||||||||
Other
|
$ | (27,422 | ) | (15 | )% | $ | 57,974 | 19 | % | (147 | )% | |||||||||
Total
Gross Profit
|
$ | 658,177 | 32 | % | $ | 816,835 | 31 | % | (19 | )% |
Net sales
for the three months ended September 30, 2009 decreased from the comparable
prior year period by $610,831, or 23%. The decrease in sales was
experienced in all sales channels. Direct sales (which includes product sales
through our e-commerce sites, telephone orders, and through our retail store)
decreased from $1,387,227 in the first quarter of fiscal 2009 to $1,169,788 in
the first quarter of fiscal 2010, a decrease of approximately 16%, or
$217,439. One of the most frequent consumer discount offers during
the three months ended September 30, 2009 was “free” or significantly reduced
shipping and handling, which accounts for the decrease in the Other category
revenue and gross profit from the prior year comparable period. The
Other category of revenue and gross profit consists primarily of shipping and
handling fees and costs derived from our Direct business. Sales to
Wholesale customers had the largest decrease during the first quarter from the
prior year first quarter, both in dollars and as a percentage, decreasing 28% or
$265,360. Sales to wholesale customers is expected to increase during the second
quarter of fiscal 2010 (the three months ended December 31, 2009) as a result of
new accounts being added and as wholesale customers increase their inventory
levels prior to the Christmas holiday. We attribute the overall decrease in
sales to the current economic uncertainty and overall decreases in domestic
consumer spending, as our products are typically a discretionary
purchase. Wholesale customers include Liberator products sold to
distributors and retailers and private label items sold to other resellers. The
Wholesale category also includes contract manufacturing services, which consists
of specialty items that are manufactured in small quantities for certain
customer, and which, to date, has not been a material part of our
business.
19
Gross
profit, derived from net sales less the cost of product sales, includes the cost
of materials, direct labor, manufacturing overhead and
depreciation. Gross margin as a percentage of sales increased
slightly to 32% for the three months ended September 30, 2009 from 31% in the
comparable prior year period. This is primarily the result of an increase
in the proportion of higher margin Direct to consumer sales to total net sales
during the quarter from the comparable prior year period. Direct to consumer
sales accounted for 57% of total net sales, compared to 52% in the prior year
first quarter. In addition, the gross profit margin on Direct to consumer sales
increased to 43% during the three months ended September 30, 2009 from 41% in
the comparable prior year period. Gross profit on the Wholesale sales
increased as a result of a price increase that was implemented during the third
quarter of fiscal 2009. The Gross profit on the Other category
decreased from a positive $78,223 to a negative margin of $23,123 as a result of
the “free” or reduced shipping and handling charge promotions that were offered
during the first quarter of fiscal 2010. In the current economic
environment, we anticipate the need to continue to offer “free” or reduced
shipping and handling to consumers as a promotional tool.
Total
operating expenses for the three months ended September 30, 2009 were 45% of net
sales, or $924,186, compared to 42% of net sales, or $1,102,175, for the same
period in the prior year. This 16% decrease in operating expenses was
the result of lower expenses in all categories including advertising and
promotion costs, other selling and marketing costs, general and administrative
costs and depreciation expense.
Advertising
and promotion expenses decreased by 32% (or $82,648) from $260,780 in the first
quarter of fiscal 2009 to $178,132 in the first quarter of fiscal
2010. Advertising and promotion expenses were reduced during the
first quarter of fiscal 2010 as part of an on going program to improve the
targeting, timing and effectiveness of advertising spending. Other
Selling and Marketing costs decreased 18% (or $53,503) from the first quarter of
fiscal 2009 to the current quarter of fiscal 2010, primarily as a result of
lower professional fees and graphic services cost which was partially offset by
higher trade show and travel costs.
General
and administrative costs decreased by 5% (or $24,657) from $460,404 in the first
quarter of fiscal 2009 to $435,747 in the first quarter of fiscal 2010. This was
primarily the result of lower utility costs and lower product development
payroll related costs during the current year first quarter.
Other
income (expense) during the first quarter increased from expense of ($61,765) in
fiscal 2009 to expense of ($248,747) in fiscal 2010. Interest
(expense) and financing costs in the current quarter included $5,358 from the
amortization of the debt discount on the convertible note. Expenses related to
the issuance of the convertible note payable to acquire majority control of WES
Consulting, Inc. during the first quarter of fiscal 2010 totaled
$192,167. This item consists of the discounted face value of the
$250,000 convertible note payable to Hope Capital, which is net of the value of
the embedded derivative.
No
expense or benefit from income taxes was recorded in the three months ended
September 30, 2009 or 2008. We do not expect any U.S. federal or
state income taxes to be recorded for the current fiscal year because of
available net operating loss carry-forwards.
We had a
net loss of $514,756, or ($0.01) per diluted share, for the three months ended
September 30, 2009 compared with a net loss of $347,106, or ($0.01) per diluted
share, for the three months ended September 30, 2008.
Fiscal
Year ended June 30, 2009 Compared to the Fiscal Year Ended June 30,
2008
Comparisons
of selected consolidated statements of operations data as reported herein follow
for the periods indicated:
Total:
|
Year Ended
June 30, 2009
|
Year Ended
June 30, 2008
|
Change
|
|||||||||
|
||||||||||||
Net sales:
|
$
|
10,260,552
|
$
|
11,750,832
|
(13
|
)%
|
||||||
Gross profit
|
$
|
3,116,444
|
$
|
4,234,099
|
(26
|
)%
|
||||||
Operating
income (loss)
|
$
|
(1,000,869
|
)
|
$
|
73,625
|
—
|
||||||
Diluted
(loss) per share
|
$
|
(0.08
|
)
|
$
|
(0.00
|
)
|
—
|
Net Sales by Channel:
|
Year Ended
June 30, 2009
|
Year Ended
June 30, 2008
|
Change
|
|||||||||
|
||||||||||||
Direct
|
$
|
5,143,604
|
$
|
6,703,172
|
(23
|
)%
|
||||||
Wholesale
|
$
|
4,022,127
|
$
|
3,549,808
|
13
|
%
|
||||||
Other
|
$
|
1,094,821
|
$
|
1,497,852
|
(27
|
)%
|
||||||
Total
Net Sales
|
$
|
10,260,552
|
$
|
11,750,832
|
(13
|
)%
|
Other
revenues consist principally of shipping and handling fees derived from our
Direct business.
Gross Profit by Channel:
|
Year Ended
June 30, 2009
|
Margin
%
|
Year Ended
June 30, 2008
|
Margin
%
|
Change
|
|||||||||||||||
Direct
|
$
|
1,896,561
|
37
|
%
|
$
|
2,993,815
|
45
|
%
|
(37
|
)%
|
||||||||||
Wholesale
|
$
|
1,096,678
|
27
|
%
|
$
|
866,899
|
24
|
%
|
27
|
%
|
||||||||||
Other
|
$
|
123,205
|
11
|
%
|
$
|
373,385
|
25
|
%
|
(67
|
)%
|
||||||||||
Total
Gross Profit
|
$
|
3,116,444
|
30
|
%
|
$
|
4,234,099
|
36
|
%
|
(26
|
)%
|
20
Net sales
for the twelve months ended June 30, 2009 decreased from the comparable prior
year period by $1,490,280, or 13%. The decrease in sales is due to a
decrease in consumer sales of $1,265,000. Consumer sales decreased from
approximately $6.7 million in the twelve months ended June 30, 2008 to
approximately $5.1 million in the twelve months ended June 30, 2009, a decrease
of approximately 23%. We attribute this decrease to the current
economic uncertainty and changes in consumer spending, as our products are
typically a discretionary purchase. As a result of an increased focus
on our wholesale and contract business, sales to wholesale and contract
manufacturing customers increased approximately 13% from the prior
year.
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 30%
for the year ended June 30, 2009 from 36% in the prior year. This is
primarily the result of a decrease in Direct to consumer sales combined with
more frequent order level and product specific discount offers for
consumers. One of the most frequent consumer discount offers during
fiscal 2009 was “free” or significantly reduced shipping and handling, which
accounts for the decrease in the Other category revenue and gross
profit. Gross profit on wholesale and contract manufacturing sales
increased as a result of a price increase that was implemented during the third
quarter of fiscal 2009.
Total
operating expenses for the year ended June 30, 2009 were 40% of net sales, or
$4,117,313, compared to 35% of net sales, or $4,160,474, for the year ended June
30, 2008. This slight decrease in operating expenses was primarily
the result of lower advertising and promotion costs offset by higher sales and
marketing personnel costs to support greater domestic and international
wholesale distribution efforts. Advertising and promotion expenses
decreased by 18% (or $190,269) from $1,054,959 in fiscal 2008 to $864,690 in
fiscal 2009. Advertising and promotion expenses were reduced during
fiscal 2009 as part of a plan to improve the targeting, timing and effectiveness
of advertising spending. Other Selling and Marketing costs increased
18% (or $181,365) from fiscal 2008 to fiscal 2009, primarily as a result of
increased sales staff and related personnel costs and additional website hosting
costs.
Other
income (expense) increased from ($153,113) to ($2,754,113) in fiscal
2009. Interest (expense) and financing costs in fiscal 2009 included
$167,879 in additional interest expense related to the issuance of the Series A
Preferred shares. This additional interest expense was recorded to bring the
carrying value of the shares to their stated liquidation
value. Expenses related to the reverse acquisition during fiscal 2009
total $2,273,495. This item consists of $285,750 for the discounted
face value of the convertible note payable to Hope Capital, $4,500 for the fair
market value of the warrant for 1 million shares issued to Hope Capital,
$1,250,000 for the fair market value of the Company shares deemed issued to
Remark shareholders, and $733,245 for the fair market value of shares issued for
services in connection with the private placement that closed on June 26,
2009. All of the expenses related to the reverse acquisition included
in other income (expense) are non-cash expenses.
No
expense or benefit from income taxes was recorded in the twelve months ended
June 30, 2009 or 2008. The Company does 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.
The
Company had a net loss of $3,754,982, or ($0.08) per diluted share, for the
twelve months ended June 30, 2009 compared with a net loss of $153,113, or $0.00
per diluted share, for the year ended March 31, 2008.
Variability
of Results
The
Company has experienced significant quarterly fluctuations in operating results
and anticipates that these fluctuations may continue in future periods. As
described in previous paragraphs, operating results have fluctuated as a result
of changes in sales levels to consumers and wholesalers, competition, costs
associated with new product introductions and increases in raw material costs.
In addition, future operating results may fluctuate as a result of factors
beyond the Company’s control such as foreign exchange fluctuation, changes in
government regulations, and economic changes in the regions it operates in and
sells to. A portion of our operating expenses are relatively fixed and the
timing of increases in expense levels is based in large part on forecasts of
future sales. Therefore, if net sales are below expectations in any given
period, the adverse impact on results of operations may be magnified by our
inability to meaningfully adjust spending in certain areas, or the inability to
adjust spending quickly enough, as in personnel and administrative costs, to
compensate for a sales shortfall. We may also choose to reduce prices or
increase spending in response to market conditions, and these decisions may have
a material adverse effect on financial condition and results of
operations.
Financial
Condition
Cash and
cash equivalents decreased $1,586,278 to $229,355 at September 30, 2009 from
$1,815,633 at June 30, 2009. This decrease in cash resulted from cash used in
operating activities of $1,157,996, cash used in investing activities
of $97,688, and by cash used in financing activities of $330,594, as more fully
described below.
Cash used
in operating activities for the three months ended September 30, 2009 represents
the results of operations adjusted for non-cash depreciation ($58,749) and the
non-cash deferred rent accrual reversal $4,854, and the non-cash expense related
to the issuance of the convertible note payable of $192,167. Changes in
operating assets and liabilities include an increase in accounts receivable of
$84,873, and increase in inventory of $74,141 and an increase in prepaid
expenses and other assets of $50,886. Additional cash was used to
reduce accounts payable by $581,633 during the three months ended September 30,
2009, and reduce accrued compensation and accrued expenses and interest by
$33,492 and $69,631, respectively.
21
Cash
flows used in investing activities reflects capital expenditures during the
quarter ended September 30, 2009. The largest component of capital expenditures
during the three months ended September 30, 2009, was our project to upgrade its
e-commerce platform and ERP system. Expenditures on the e-commerce platform and
ERP system, as of September 30, 2009, total approximately $344,000 and the
systems were operational and in use as of September 1, 2009.
Cash
flows used in financing activities are attributable to the repayment of the
revolving line of credit of $171,433, repayment of the credit card cash advance
of $96,326, and principal payments on notes payable and capital leases totaling
$36,917.
As of
September 30, 2009, our net accounts receivable increased by $84,873, or 24%, to
$431,303 from $346,430 at June 30, 2009. The increase in accounts receivable is
primarily the result of increased sales to certain wholesale accounts near the
end of September 2009. Management believes that our accounts receivable are
collectible net of the allowance for doubtful accounts of $15,178 at September
30, 2009.
Our net
inventory increased by $74,141, or 11%, to $774,544 as of September 30, 2009
compared to $700,403 as of June 30, 2009. The increase reflects an increase in
finished goods inventory in anticipation of increased product sales during the
three months ended December 31, 2009.
Accounts
payable decreased by $581,633, or 26%, to $1,666,212 as of September 30, 2009
compared to $2,247,845 as of June 30, 2009. The decrease in accounts payable was
the result of our improved working capital position that resulted from the net
proceeds of the private placement of Liberator, Inc.’s common stock that closed
on June 26, 2009.
Liquidity
and Capital Resources
At
September 30, 2009, our working capital deficiency was $536,826, a decrease of
$430,702 compared to the deficiency of $106,124 at June 30,
2009. Cash and cash equivalents at September 30, 2009 totaled
$229,355, a decrease of $1,586,278 from $1,815,633 at June 30,
2009.
On
November 10, 2009, the Company entered into a loan agreement for a revolving
line of credit with a commercial finance company that provides credit to 80% of
domestic accounts receivable aged less than 90 days up to $250,000. Borrowings
under the agreement bear interest at Prime rate plus six percent (9.25 percent
as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly
collateral monitoring fee, as defined in the agreement.
Management
believes anticipated cash flows generated from operations during the second and
third quarter of fiscal 2010, along with current cash and cash equivalents as
well as borrowing capacity under the line of credit should be sufficient to
finance working capital requirements required by operations during the next
twelve months. However, if product sales are less than anticipated during the
three months ended December 31, 2009 and the three months ended March 31, 2010,
we will need to raise additional funding in the near term to meet its working
capital requirements. If we raise additional capital by issuing equity
securities, our existing stockholders’ ownership will be diluted. We
cannot provide assurance that additional financing will be available in the near
term when needed, particularly in light of the current economic environment and
adverse conditions in the financial markets, or that, if available, financing
will be obtained on terms favorable to the Company or to our
stockholders. If we require additional financing in the near-term and
are unable to obtain it, this will adversely affect our ability to operate as a
going concern and may require the Company to substantial scale back operations
or cease operations altogether.
Sufficiency
of Liquidity
The
accompanying financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. The Company incurred a net loss of $3,754,982 and
$153,113 for the years ended June 30, 2009 and 2008, respectively, and as of
June 30, 2009 the Company has an accumulated deficit of $15,965 and a working
capital deficit of $106,124.
In view
of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern.
These
actions include initiatives to increase gross profit margins through improved
production controls and reporting. To that end, the Company recently implemented
a new Enterprise Resource Planning (ERP) software system. We also plan to reduce
discretionary expense levels to be better 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.
22
Capital
Resources
The
accompanying financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. We incurred a net loss of $514,756 and $347,106 for
the three months ended September 30, 2009 and 2008, respectively, and, as of
September 30, 2009, we have an accumulated deficit of $530,722 and a working
capital deficit of $536,826.
In view
of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon our ability to meet our financing
requirements, and the success of our future operations. Management believes that
actions presently being taken to revise our operating and financial requirements
provide the opportunity for the Company to continue as a going
concern.
These
actions include initiatives to increase gross profit margins through improved
production controls and reporting. To that end, we recently implemented a new
Enterprise Resource Planning (ERP) software system. We also plan to reduce
discretionary expense levels to be better in line with current revenue levels.
Furthermore, our plan of operation in the next twelve months continues a
strategy for growth within our existing lines of business with an on-going focus
on growing domestic sales. We estimate that the operational and strategic
development plans we have identified will require approximately $2,300,000 of
funding. We expect to invest approximately $500,000 for additional inventory of
sexual wellness products and $1,800,000 on sales and marketing programs,
primarily sexual wellness advertising in magazines and on cable television. We
will also be exploring the opportunity to acquire other compatible
businesses.
We plan
to finance the required $2,300,000 with a combination of cash flow from
operations as well as cash on hand and cash raised through equity and debt
financings.
DESCRIPTION
OF PROPERTY
We
maintain our principal manufacturing and business offices at 2745 Bankers
Industrial Drive, Atlanta, GA 30360, which consists of 140,000 square feet of
manufacturing, warehouse and office space. Lease payments are
currently $28,595 per month and increase approximately 3% annually to a maximum
of $34,358 per month in the year 2015, which is when the lease
expires.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The
following table sets forth certain information known to us with respect to the
beneficial ownership of our common stock by:
•
|
all
persons who are beneficial owners of five percent (5%) or more of our
common stock;
|
•
|
each
of our directors;
|
•
|
each
of our executive officers; and
|
•
|
all
current directors and executive officers as a
group.
|
Except as
otherwise indicated, and subject to applicable community property laws, the
persons named in the table below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable
percentage ownership in the following table is based on 63,015,981 shares of
common stock outstanding as of March 3, 2010.
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage ownership
of that person, shares of common stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of March 3,
2010, are deemed outstanding. Such shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.
23
Title of
Class
|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
Percent
of Class
|
|||||||
Executive Officers and
Directors
|
||||||||||
Common
|
Louis
S. Friedman (1)
|
28,394,376
|
45.1
|
%
|
||||||
Common
|
Ronald
P. Scott (1)
|
438,456
|
(2)
|
0.7
|
%
|
|||||
Common
|
Leslie
Vogelman (1)
|
0
|
0.0
|
%
|
||||||
Common
|
David
Wirth (1)
|
0
|
0.0
|
%
|
||||||
5% Shareholders
|
||||||||||
Common
|
Hope
Capital, Inc. (4)
|
6,425,001
|
(5)
|
9.9
|
%
|
|||||
Common
|
Donald
Cohen (3)
|
13,022,127
|
20.6
|
%
|
||||||
Common
|
All
directors and executive officers as a group (4 persons)
|
28,832,833
|
45.8
|
%
|
||||||
Executive Officers and
Directors
|
||||||||||
Preferred
|
Louis
S. Friedman (1)
|
4,300,000
|
100.0
|
%
|
||||||
Preferred
|
Ronald
P. Scott (1)
|
0
|
0.0
|
%
|
||||||
Preferred
|
Leslie
Vogelman (1)
|
0
|
0.0
|
%
|
||||||
Preferred
|
David
Wirth (1)
|
0
|
0.0
|
%
|
||||||
Preferred
|
All
directors and executive officers as a group (4 persons)
|
4,300,000
|
100.0
|
%
|
(1)
|
This
person’s address is c/o Liberator, Inc., 2745 Bankers Industrial
Drive, Atlanta, GA 30360.
|
(2)
|
Includes
options to purchase 438,456 shares of common
stock.
|
(3)
|
This
person’s address is c/o Paul M. Spizzirri, Esq., 1170 Peachtree Street NE,
Suite 1200, Atlanta, GA 30309.
|
(4)
|
This
person’s address is 1 Linden Place, Suite 207, Great Neck, NY 11021. Curt
Kramer is the sole shareholder of Hope Capital,
Inc.
|
(5)
|
Includes
1,275,000 shares of the 1,500,000 shares that are issuable upon conversion
of the $375,000 convertible note payable held by Hope Capital,
Inc. Such note is convertible only to the extent that Hope
Capital’s total ownership does not exceed 9.9% of the total shares issued
and outstanding. The reported amount does not include a warrant
to purchase 1,000,000 shares of common stock to Hope Capital. Such warrant
is exercisable at the holders option until June 26, 2014 and allows the
holder to purchase shares of the Company at $.75 per share. The warrant is
only exercisable to the extent that Hope Capital’s total share ownership
does not exceed 9.9% of the total shares issued and outstanding. The
reported amount also does not include 1,000,000 shares that are issuable
upon conversion of the $250,000 convertible note payable held by Hope
Capital, Inc. Such note is convertible only to the extent that
Hope Capital’s total ownership does not exceed 9.9% of the total shares
issued and outstanding.
|
EXECUTIVE
COMPENSATION
BOARD
OF DIRECTORS
All of
our directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Our executive officers are
elected annually by the board of directors to hold office until the first
meeting of the board following the next annual meeting of stockholders and until
their successors are chosen and qualified.
DIRECTORS’
COMPENSATION
We
reimburse our directors for expenses incurred in connection with attending board
meetings, but we do not pay our directors compensation in any form for services
rendered in all capacities to the Company.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
compensation discussion addresses all compensation awarded to, earned by, or
paid to the Company’s named executive officers which, following the consummation
of the merger with Liberator, includes Liberator, Inc. (collectively, the “Named
Executive Officers”.) Set forth below is the aggregate compensation
for services rendered in all capacities to Company during our fiscal years ended
June 30, 2008 and 2009 by the Company’s executive officers. The table below also
sets forth the compensation paid to Louis Friedman, our President, Chief
Executive Officer and Chairman, and Ronald P. Scott, our Secretary, Chief
Financial Officer, and Director which was paid by Liberator.
24
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
|
||||||||||||
|
|
Fiscal
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
||||||||
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|||||||||
Louis
S. Friedman (2)
|
||||||||||||||||||||||||||||||||
President,
Chief Executive
|
2009
|
78,000
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||
Officer
and Chairman of the Board
|
2008
|
71,500
|
—
|
—
|
—
|
—
|
—
|
71,500
|
||||||||||||||||||||||||
Ronald
P. Scott (3)
|
||||||||||||||||||||||||||||||||
Chief
Financial Officer, Secretary and
|
2009
|
128,500
|
—
|
—
|
—
|
—
|
—
|
128,500
|
||||||||||||||||||||||||
Director
|
2008
|
101,280
|
—
|
—
|
866
|
—
|
—
|
102,146
|
||||||||||||||||||||||||
Sanford
H. Barber (4)
|
||||||||||||||||||||||||||||||||
President,
Chief Executive Officer,
|
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Chief
Financial Officer and Director
|
2008
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1)
|
Awards
consist of stock options granted to the Named Executive Officer in the
fiscal year specified as well as prior fiscal years. Amounts shown do not
reflect whether the Named Executive Officer has actually realized a
financial benefit from the awards (such as by exercising stock options).
Amounts listed in this column represent the compensation cost recognized
by us for financial statement reporting purposes. These amounts have been
calculated in accordance with
SFAS No. 123(R).
|
(2)
|
Louis
Friedman has been the Company’s Chief Executive Officer and Chairman of
the Board of Directors since inception. On November 7, 2008 Mr. Friedman
assumed the additional title of President from Don Cohen. Mr. Friedman’s
current annual salary, effective July 1, 2009, is
$150,000.
|
(3)
|
Ronald
Scott joined Liberator as a part-time consultant in July 2006, serving as
the Company’s Chief Financial Officer. In October, 2007 he became a
full-time consultant and Chief Financial Officer and as of July 1, 2009,
became a full-time employee of the Company at an annual salary of
$125,000.
|
(4)
|
On
July 23, 2009, Sanford Barber resigned as Chief Executive Office, Chief
Financial Officer and Director and was succeeded by Joseph Meuse who also
assumed the position of Secretary. Mr. Meuse was not
compensated in any capacity with the Company. On October 19,
2009 we acquired Liberator, Inc. in a reverse acquisition structure that
was structured as a share exchange and in connection with that
transaction, Joseph Meuse tendered his resignation from the board and from
all offices held in the Company, effective
immediately.
|
Outstanding
Equity Awards at Fiscal Year End 2009
The
following table shows, for the fiscal year ended June 30, 2009, certain
information regarding outstanding equity awards at fiscal year end for our Named
Executive Officers.
|
Option Awards
|
|
|
Stock Awards
|
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Equity
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Incentive
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Plan Awards:
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market or
|
|||||||||||||||
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Unearned
|
|
|
Payout Value
|
|||||||||||||
|
|
Securities
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Shares,
|
|
|
of Unearned
|
|||||||||||
|
|
Underlying
|
|
|
Securities
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
Units or
|
|
|
Shares, Units
|
|||||||||||
|
|
Unexercised
|
|
|
Underlying
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
Other
|
|
|
or Other
|
|||||||||||
|
|
Options
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Rights That
|
|
|
Rights That
|
||||||||||
|
|
(#)
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|||||||||
|
|
Exercisable
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|||||||||
Name
|
|
(1)
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
(#)
|
($)
|
(#)
|
($)(3)
|
|||||||||||||||||
Louis
S. Friedman
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Ronald
P. Scott
|
438,456
|
—
|
.228
|
10/1/2012
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Sanford
H. Barber
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1)
|
Options
granted to the Named Executive Officers expire five years after the grant
date. These options were not pursuant to a Section 16(b)(3)
Plan.
|
OPTIONS/SAR GRANTS IN THE LAST FISCAL
YEAR
None.
AGGREGATED
OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR
VALUES
None.
25
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Following
is a description of our related party transactions since July 1,
2007:
On June
30, 2008, OneUp issued a subordinated note payable to Liberator’s then majority
shareholder and CEO, Louis Friedman, in the amount of $310,000 and the majority
shareholder's wife, Leslie Vogelman (who was also Liberator’s Treasurer), in the
amount of $395,000, which was not memorialized in writing. During fiscal 2009,
Mr. Friedman loaned OneUp an additional $91,000 and Don Cohen, a then director
of Liberator, loaned OneUp $29,948, each of which were also not memorialized in
writing. Interest on both loans accrued at the prime rate, and the balance
is due upon the lender’s demand for payment, provided, however, that OneUp has
the ability to repay. On June 26, 2009, in connection with the merger
between Liberator and OneUp, Mr. Friedman and Ms. Vogelman verbally agreed to
convert $700,000 of principal balance and $132,120 of accrued but unpaid
interest to 4,300,000 shares of preferred stock held in the name of Mr.
Friedman. Interest during fiscal 2009 was accrued by OneUp 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, is $8,210. The
notes are subordinate to all other credit facilities currently in place and are
based on verbal agreements between the lenders and OneUp. As of September 30,
2009, OneUp owed Mr. Cohen $29,948 and Ms. Vogelman $76,000, for a total amount
due to related parties of $105,948.
In
connection with the OneUp acquisition, Liberator issued a 3% convertible note
payable to Hope Capital with a face amount of $375,000. Hope Capital was a
shareholder of Liberator. 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. The 3% convertible note
payable is carried net of the fair market value of the embedded conversion
feature of $89,250. This amount will be amortized over the life of the
note as additional interest. Liberator also issued a warrant to Hope
Capital for the purchase of 1,000,000 shares of common stock at $0.75 per
share. The warrants expire on the fifth anniversary of the issue date,
which is June 26, 2009. Pursuant to the terms of the note and warrant,
Liberator was required to, promptly after the issuance of each security,
register 130% of the shares of common stock underlying the note and 100% of the
shares of common stock underlying the warrants. As of the date of the merger
between WES and Liberator, Liberator did not file a registration statement to
register such shares. Following the merger, the obligation to register
such securities are the obligations of the Company. To date, we have not
filed a registration statement to register such shares. There are no
penalties associated with a delay in satisfying such registration
obligations. Further, Hope Capital held shares of common stock of OneUp
immediately prior to the acquisition, 100% of which were exchanged for 4,750,001
shares of the Company’s common stock as part of the acquisition. Other
than these securities, Hope Capital did not receive any consideration in
connection with the acquisition of OneUp.
On
September 2, 2009, Liberator acquired the majority of the issued
and outstanding common stock of WES in accordance with a common stock
purchase agreement by and among Liberator and Belmont Partners, LLC, a Virginia
limited liability company (the “Seller”). Pursuant to the terms of the
purchase agreement, Liberator acquired 972,000 shares (81%) of WES from the
Seller for a total of two hundred forty thousand five hundred dollars
($240,500). Funds for the purchase came from a convertible note in the
amount of $250,000 issued to Hope Capital Inc., a then shareholder of Liberator.
The note bears interest at 3% annually and is due September 2, 2012. The note is
convertible at any time prior to maturity, at the holders’ option, into common
stock at a conversion price of $.25 per share, subject to adjustment. In
connection with the purchase, all of the officers and directors of WES resigned
and were succeeded by the directors and officers of Liberator.
Liberator’s
former officer and director, Lawrence Rothberg, received no consideration in
connection with the acquisition of OneUp.
The lease
for Liberator’s former facility, and currently the Company’s facility, required
a standby letter of credit payable to the lessor in the amount of $225,000 until
December 31, 2010. 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 secured. Mr. Friedman provided this standby letter of credit on the Company’s
behalf, which is not memorialized in writing.
On June
25, 2008, Mr. Friedman personally guaranteed the full and prompt payment,
performance, and discharge of OneUp Innovation’s obligations to Credit Cash NJ,
LLC under a Credit Card Advance Agreement entered into between OneUp Innovations
and Credit Cash NJ, LLC on June 25, 2008. To date, $350,000 was borrowed
under the advance agreement on July 2, 2008, which has been fully repaid, and
$200,000 was borrowed under the advance agreement on June 3, 2009.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is
presently no established market for the Company’s securities
Shareholders
As of
March 19, 2010, we have approximately 67 shareholders of record of our issued
and outstanding common stock.
26
Transfer
Agent and Registrar
The
transfer agent and registrar for the common stock is Pacific Stock Transfer
Company. The transfer agent’s address is 4045 S. Spencer Street, Suite 403, Las
Vegas, NV 89119, and their telephone number is 702-361-3033.
Dividend
Policy
Any
future determination as to the declaration and payment of dividends on shares of
our Common Stock will be made at the discretion of our board of directors out of
funds legally available for such purpose. We are under no contractual
obligations or restrictions to declare or pay dividends on our shares of Common
Stock. In addition, we currently have no plans to pay such dividends. Our board
of directors currently intends to retain all earnings for use in the business
for the foreseeable future. See “Risk Factors.”
DESCRIPTION
OF SECURITIES
General
We are
authorized to issue up to 175,000,000 shares of common stock, $0.01 par value
per share, of which 63,015,981 shares are issued and
outstanding as of March 19, 2010.
Common
Stock
Subject
to the rights of holders of preferred stock, if any, holders of shares of our
common stock are entitled to share equally on a per share basis in such
dividends as may be declared by our Board of Directors out of funds legally
available therefore. There are presently no plans to pay dividends with respect
to the shares of our common stock. Upon our liquidation, dissolution or winding
up, after payment of creditors and the holders of any of our senior securities,
including preferred stock, if any, our assets will be divided pro rata on a per
share basis among the holders of the shares of our common stock. The common
stock is not subject to any liability for further assessments. There are no
conversion or redemption privileges or any sinking fund provisions with respect
to the common stock and the common stock is not subject to call. The holders of
common stock do not have any pre-emptive or other subscription
rights.
Holders
of shares of common stock are entitled to cast one vote for each share held at
all stockholders' meetings for all purposes, including the election of
directors. The common stock does not have cumulative voting rights.
Preferred Stock
Pursuant to the terms of the merger
agreement for the merger transaction between WES and Liberator, we are to issue
4,300,000 shares of preferred stock, no par value, to Louis Friedman. On
the closing of the merger, however, we were not authorized to issue any
preferred stock, and the parties to the merger agreed that we would file an
amendment to our Articles of Incorporation authorizing the issuance of the WES
preferred stock with the following designation of rights:
Dividend
Rights
The
holders of preferred stock shall be entitled to receive dividends in such
amounts and at such times as may from time to time be declared by the board of
directors. For purposes of any dividend declared on the common stock of
the company, holders of the preferred stock outstanding at such time shall be
entitled to receive such dividend as if their preferred stock were converted to
common stock at the time such dividend was declared, at the conversion rate then
in effect.
Liquidation
Rights
(i)
Upon the voluntary or involuntary dissolution, liquidation, or winding up
of the company, the holders of preferred stock shares then outstanding shall be
entitled to receive out of the assets of the company (whether representing
capital or surplus), before any payment or distribution shall be made on the
common stock, or upon any other class or series of stock ranking junior to the
preferred stock as to liquidation rights or dividends, $.2326 for each shares of
preferred stock, subject to appropriate adjustment in the event of any stock
dividend, stock split, combination, or other similar recapitalization with
respect to the preferred stock, plus any dividends declared but unpaid
thereon.
(ii) If
the assets distributable on any dissolution, liquidation, or winding up of the
company, whether voluntary or involuntary, shall be insufficient to permit the
payment to the holders of preferred stock of the full preferential amounts
attributable thereto, then the entire assets of the company shall be distributed
among the holders of the preferred stock ratably, in proportion to the
respective amounts the holders of such shares of preferred stock would be
entitled to receive if they were paid in full all preferential
amounts.
27
(iii) Written
notice of such liquidation, dissolution, or winding up, stating a payment date
or dates, the aggregate amount of all payments to be made, and the place where
said sums shall be payable shall be given by first class mail, postage prepaid,
not less than 30 days prior to the payment date stated therein, to the holders
of record of all shareholders of the company, such notice to be addressed to
each holder at his post office address as shown by the records of the
company. A consolidation or merger of the company with or into any other
corporation or corporations not owned or controlled by the corporation and in
which the corporation is not the surviving entity, or the sale or transfer by
the corporation of all or substantially all of its assets, shall be deemed to be
a liquidation, dissolution, or winding up of the business of the company for
purposes hereof.
(iv) In
the event of a partial liquidation, distribution of assets shall be made so as
to give effect to the foregoing provisions. In the event some or all of
the proceeds from a liquidation, dissolution, or winding up consist of property
other than cash, then for purposes of making distributions, the fair value of
such non-cash property shall be determined in good faith by the company’s board
of directors.
Voting
Rights
Each
holder of record of preferred stock shall be entitled to vote at all meetings of
stockholders and shall have ten (10) votes per share of preferred stock.
Except as provided herein or as required by law, holders of preferred stock
shall vote together with the holders of common stock as a single class on all
actions to be taken by the shareholders of the company.
Conversion
Rights
(i) The
holder of shares of preferred stock shall have the right, subject to the terms
and conditions set forth below, to convert each such stock into one share of
fully paid and non-assessable common stock of the company as hereinafter
provided. Such conversion right shall vest and shall first be available on
July 1, 2011.
(ii) Any
holder of one or more shares of preferred stock electing to convert any or all
of such shares into common stock shall surrender the certificate or certificates
evidencing such shares at the company’s principal offices during usual business
hours and shall simultaneously with such surrender give written notice of his or
its intention to convert, stating therein the number of shares of preferred
stock to be converted and the name or names (with addresses) of the registered
holders of the preferred stock in which the certificate or certificates for
common stock shall be issued. Each certificate evidencing such shares so
surrendered shall be duly endorsed by the company by means of signatures which
shall be guaranteed by either a national bank or a member of a national
securities exchange.
(iii) Such
conversion shall be deemed to have been made as of the date of receipt by the
company of the certificate or certificates (endorsed as herein above provided)
representing the shares of preferred stock to be converted and receipt by the
company of written notice, as above prescribed; and after such receipt, the
person entitled to receive the shares of common stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of common stock.
(iv) As
promptly as practicable after surrender and notice as herein above provided, the
company shall issue and deliver, or cause to be issued and delivered, to the
holder of the shares of preferred stock surrendered for conversion: (a) a
certificate or certificates for the number of shares of common stock into which
such preferred stock has been converted, and (b) if necessary in the case of a
conversion of less than all of the shares of preferred stock held by such
holder, a new certificate or certificates representing the unconverted shares of
preferred stock.
(v) Cash
dividends declared but theretofore unpaid on the shares of preferred stock so
converted after the record date for such dividend shall instead be paid on the
shares of common stock into which such preferred stock has been converted, pro
rata, at such time as cash dividends shall be paid to record holders of the
common stock generally.
(vi) All
shares of preferred stock at any time converted as herein provided shall be
forthwith permanently retired and cancelled and shall under no circumstances be
reissued.
Protective
Provisions
At any
time when shares of preferred stock are outstanding, the company shall not,
either directly or indirectly by amendment, merger, consolidation, or otherwise,
do any of the following without (in addition to any other vote required by law
or the articles of incorporation) the written consent or affirmative vote of the
holders of at least a majority of the then outstanding shares of preferred
stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a class:
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(i)
|
liquidate,
dissolve, or wind-up the business and affairs of the company, effect any
deemed liquidation event described under “Liquidation Rights” above, or
consent to any of the foregoing;
and
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(ii)
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create,
or authorize the creation of, or issue or obligate itself to issue shares
of any additional class or series of capital stock or increase the
authorized number of shares of preferred
stock.
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At the
filing of such designation, we will issue 4,300,000 shares of our preferred
stock to Mr. Friedman.
28
Debt
Securities
We
assumed the following debt securities as a result of our merger with
Liberator:
On June
30, 2008, OneUp issued a subordinated note payable to Louis Friedman in the
amount of $310,000 and Leslie Vogelman in the amount of $395,000, which was not
memorialized in writing. During fiscal 2009, Mr. Friedman loaned OneUp an
additional $91,000 and Don Cohen, a then director of Liberator, loaned OneUp
$29,948, each of which were also not memorialized in writing. Interest on
both loans accrued at the prime rate, and the balance is due upon the lender’s
demand for payment, provided, however, that OneUp has the ability to repay.
The notes are subordinate to all other credit facilities currently in
place and are based on verbal agreements between the lenders and OneUp. As of
September 30, 2009, OneUp owed Mr. Cohen $29,948 and Ms. Vogelman $76,000, for a
total amount due to related parties of $105,948.
On June
24, 2009, Liberator issued a 3% convertible note payable to Hope Capital with a
face amount of $375,000. The note is convertible, at the holder’s option, into
common stock at $.25 per share and may be converted at any time prior to the
maturity date of August 15, 2012. Upon maturity, the issuer has the option to
either repay the note plus accrued interest in cash or issue the equivalent
number of shares of common stock at $.25 per share.
On
September 2, 2009, Liberator issued a convertible note in the amount of $250,000
to Hope Capital Inc. The note bears interest at 3% annually and is due September
2, 2012. The note is convertible at any time prior to maturity, at the holders’
option, into common stock at a conversion price of $.25 per share, subject to
adjustment.
Warrants
We
assumed the following warrants as a result of our merger with
Liberator:
On June
26, 2009, Liberator issued a warrant to Hope Capital for the purchase of
1,000,000 shares of common stock at $0.75 per share. The warrants expire
on the fifth anniversary of the issue date, which is June 26, 2009.
On June
26, 2009, Liberator issued 1,462,393 warrants to New Castle Financial Services
for services rendered by them as placement agent in Liberator’s private
placement that closed on June 26, 2009. These warrants have fixed exercise
prices of $.50 per share (for 292,479 warrant shares), $.75 per share (for
292,479 warrant shares), and $1.00 per share (for 877,435 warrant shares) ,and
expire on the fifth anniversary of the issue date, which is June 26,
2014.
On
September 2, 2009, the Company issued 250,000 warrants to Belmont Partners LLC
in conjunction with the purchase of majority control of WES by Liberator, which
warrants are exercisable for an aggregate 250,000 shares of common stock at a
fixed price of $.25 per share. The warrants were fully vested when granted and
expire on September 2, 2012.
Registration
Rights
In
connection with the OneUp acquisition, Liberator issued a 3% convertible note
payable to Hope Capital with a face amount of $375,000 and a warrant to Hope
Capital for the purchase of 1,000,000 shares of common stock at $0.75 per
share. Pursuant to the terms of the note and warrant, Liberator was
required to, promptly after the issuance of each security, register 130% of the
shares of common stock underlying the note and 100% of the shares of common
stock underlying the warrants. As of the date of the merger between WES and
Liberator, Liberator did not file a registration statement to register such
shares. Following the merger, the obligation to register such securities
are the obligations of the Company. To date, we have not filed a
registration statement to register such shares. There are no penalties
associated with a delay in satisfying such registration
obligations.
On June
26, 2009, Liberator issued 1,462,393 warrants to New Castle Financial Services
for services rendered by them as placement agent in Liberator’s private
placement that closed on June 26, 2009. These warrants have fixed exercise
prices of $.50 per share (for 292,479 warrant shares), $.75 per share (for
292,479 warrant shares), and $1.00 per share (for 877,435 warrant shares) ,and
expire on the fifth anniversary of the issue date, which is June 26, 2014.
Pursuant to the terms of warrant, Liberator was required to, promptly after the
issuance of the warrant, register 100% of the shares of common stock underlying
the warrants. As of the date of the merger between WES and Liberator, Liberator
did not file a registration statement to register such shares. Following
the merger, the obligation to register such securities are the obligations of
the Company. To date, we have not filed a registration statement to
register such shares. There are no penalties associated with a delay in
satisfying such registration obligations.
On June
26, 2009, Liberator issued 8,000,000 restricted shares of common stock to 37
individuals and entities pursuant to a private placement memorandum and
subscription agreement in the aggregate amount of $2,000,000. Liberator was
required to prepare a registration statement commencing no later than thirty
(30) days following the closing of the merger between OneUp and
Liberator to register such shares. As of the date of the merger
between WES and Liberator, Liberator did not file a registration
statement to register such shares. Following the merger, the obligation to
register such securities are the obligations of the Company. To date, we have
not filed a registration statement to register such shares. There are no
penalties associated with the delay in satisfying such registration
obligations.
29
On
September 2, 2009, the Company issued 250,000 warrants to Belmont Partners LLC
in conjunction with the purchase of majority control of WES by Liberator, which
warrants are exercisable for an aggregate 250,000 shares of common stock at a
fixed price of $.25 per share. The warrants were fully vested when granted and
expire on September 2, 2012. Pursuant to the terms of warrant, Liberator was
required to, promptly after the issuance of the warrant, register 100% of the
shares of common stock underlying the warrants. As of the date of the merger
between WES and Liberator, WES did not file a registration statement to register
such shares. Following the merger, the obligation to register such
securities are the obligations of the Company. To date, we have not filed
a registration statement to register such shares. There are no penalties
associated with a delay in satisfying such registration
obligations.
Pursuant
to a private placement memorandum and subscription agreement, on January 29,
2010, the Company issued 1,000,000 shares of restricted common stock to 12
individuals and entities in the aggregate amount of $300,000. In connection with
this financing, the Company issued New Castle Financial Services (“New Castle”)
100,000 shares of restricted common stock. The purchaser of the Company’s common
stock and New Castle have unlimited “piggyback” registration right with respect
to future registration statements filed by the Company with respect to its
common stock, As of the date of the merger between WES and Liberator, the
Company did not file a registration statement to register such shares. To
date, we have not filed a registration statement to register such shares.
There are no penalties associated with a delay in satisfying such registration
obligations.
LEGAL
PROCEEDINGS
We know
of no material, existing or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceeding or pending litigation. There
are no proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial shareholder, is an adverse party or has a material
interest adverse to our company.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to Item 3.02 of this Form 8-K for a description of recent sales of
unregistered securities, which is hereby incorporated herein by
reference.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Our
Articles of Incorporation provide for the indemnification of our directors,
officers, employees and agents to the fullest extent permitted by the laws of
the State of Florida. Florida law permits a corporation to indemnify any
of its directors, officers, employees or agents against expenses actually and
reasonably incurred by such person in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (except for an action by or in right of the corporation) by reason
of the fact that such person is or was a director, officer, employee or agent of
the corporation, provided that it is determined that such person acted in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Florida
law requires that the determination that indemnification is proper in a specific
case must be made by: (a) the stockholders, (b) the board of directors by
majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding or (c) independent legal counsel in a written opinion
(i) if a majority vote of a quorum consisting of disinterested directors is not
possible or (ii) if such an opinion is requested by a quorum consisting of
disinterested directors.
Article
VII of our By-laws provides that:
(a) no
director shall be liable to the Company or any of its stockholders for monetary
damages for breach of fiduciary duty as a director except with respect to (i) a
breach of the director’s loyalty to the Company or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) liability which may be specifically defined by
law or (iv) a transaction from the director derived an improper personal
benefit; and
(b) the
Company shall indemnify to the fullest extent permitted by law each person that
such law grants to the Company power to indemnify.
Any
amendment to or repeal of our Articles of Incorporation or by-laws shall not
adversely affect any right or protection of any of our directors or officers for
or with respect to any acts or omissions of such director or officer occurring
prior to such amendment or repeal.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
30
Item 3.02 Unregistered Sales of Equity
Securities
In
connection with the purchase of majority control of the Company by Liberator on
September 2, 2009, the Company issued 750,000 shares of common stock to Belmont
upon the closing of the transaction and agreed to issue an additional 750,000
share on the one-year anniversary of the transaction upon the non-occurrence of
certain events. The Company also issued two hundred fifty thousand
(250,000) 3-year warrants to Belmont to purchase an equal number of shares of
the Company’s common stock with an exercise price of twenty five cents ($0.25).
We relied on an exemption from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act as the securities were issued by the issuer,
the Company, not involving a public offering.
On
October 19, 2009, the Company issued 60,932,981 shares of our common stock in
exchange for 100% of the issued and outstanding common stock shares of Liberator
to the holders of such Liberator shares pursuant to a merger and
recapitalization agreement entered into with Liberator. Additionally, we
are to issue 4,300,000 shares of our preferred stock shares in exchange for 100%
of the issued and outstanding preferred stock of Liberator, Inc. to the holders
of such Liberator shares. We relied on an exemption from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act as the
transaction was by the issuer, the Company, not involving a public
offering. The offering was made available only to Liberator shareholders,
each of whom we believed to be sophisticated investors with such knowledge and
experience in financial and business matters that each was capable of evaluating
the merits and risks of a prospective investment, which belief was based on
representations by the Liberator shareholders. Further, we did not
offer or sell the securities by any form of general solicitation or general
advertising, all communications being directly with the parties to the merger
transaction, nor was an underwriter involved in the sale.
Pursuant
to a private placement memorandum and subscription agreement, on January 29,
2010, the Company issued 1,000,000 shares of common stock to 12 individuals and
entities in the aggregate amount of $300,000. All of the shares were sold
to “accredited investors” as defined in 501(a) of the Securities Act. We
relied on an exemption from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act as the transaction was by the issuer, the
Company, not involving a public offering. We did not offer or sell the
securities by any form of general solicitation or general advertising, nor was
an underwriter involved in the sale.
Pursuant
to an engagement letter with New Castle Financial Services, on January 29, 2010,
the Company issued 100,000 shares of common stock to New Castle Financial
Services with respect to investment banking and financial services performed by
New Castle Financial Services in connection with the above-described private
placement. Such securities were not registered under the Securities Act. We
relied on an exemption from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act as the transaction was by the issuer, the
Company, not involving a public offering. We did not offer or sell the
securities by any form of general solicitation or general advertising, nor was
an underwriter involved in the sale.
Item
4.01 Change in Registrant’s Certifying Accountant
On
October 19, 2009, we terminated Randall N. Drake, CPA, PA (“Drake”) as our
independent registered public accounting firm in connection with the
merger. We engaged a new independent registered public accounting firm,
Gruber & Company LLC (“Gruber”) who provided the audit of Liberator,
Inc. Pursuant to Item 304(a) of Regulation S-K under the Securities Act of
1933, as amended, and under the Securities Exchange Act of 1934, as amended, we
report as follows:
(a)
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(i)
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Drake
was terminated as our independent registered public accounting firm
effective on October 19, 2009.
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(ii)
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For
the two most recent fiscal years ended December 31, 2008 and 2007, Drake’s
report on the financial statements did not contain any adverse opinions or
disclaimers of opinion, and were not qualified or modified as to
uncertainty, audit scope, or accounting principles, other than for a going
concern.
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(iii)
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The
termination of Drake and engagement of Gruber was approved by our Board of
Directors.
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(iv)
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We
and Drake did not have any disagreements with regard to any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure for the audited financials for the fiscal
years ended December 31, 2008 and 2007, and subsequent interim period from
January 1, 2009 through the date of dismissal on October 19, 2009, which
disagreements, if not resolved to the satisfaction of Drake, would have
caused it to make reference to the subject matter of the disagreements in
connection with its reports.
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(v)
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During
our fiscal years ended December 31, 2008 and 2007, and subsequent interim
period from January 1, 2009 through the date of dismissal on October 19,
2009, we did not experience any reportable
events.
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(b)
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On
October 19, 2009, we engaged Gruber to be our independent registered
public accounting firm.
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(i)
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Prior
to engaging Gruber, we had not consulted Gruber regarding the
application of accounting principles to a specified transaction, completed
or proposed, the type of audit opinion that might be rendered on our
financial statements or a reportable event, nor did we consult with
Gruber regarding any disagreements with its prior auditor on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the prior auditor, would have caused it to make a
reference to the subject matter of the disagreements in connection with
its reports.
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(ii)
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We
did not have any disagreements with Drake and therefore did not discuss
any past disagreements with Drake.
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(c)
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We
have requested Drake to furnish it with a letter addressed to the SEC
stating whether it agrees with the statements made by us regarding Drake.
Attached hereto as Exhibit 16.1 is a copy of Drake’s letter to the SEC
dated October 19, 2009.
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31
As
explained more fully in Item 2.01, on October 19, 2009, the Liberator
Common Shares were converted, into one share of the Company’s common stock,
$0.01 par value, which, after giving effect to the merger with Liberator,
equaled, in the aggregate, 98.4% of the total issued and outstanding common
stock of the Company (the “WES Common Stock”). Pursuant to the Merger and
Recapitalization Agreement, the Liberator Preferred Shares were to be converted
into one share of the Company’s preferred stock with the provisions, rights, and
designations set forth in the agreement (the “WES Preferred Stock”). On
the closing date, the Company was not authorized to issue any preferred stock
and therefore pursuant to the agreement, it was agreed that within ten (10) days
of the closing date the Company will file an amendment to its Articles of
Incorporation authorizing the issuance of the WES Preferred Stock, and at such
time the WES Preferred Stock will be exchanged pursuant to the terms of the
agreement.
As
explained more fully in the above Item 2.01, on October 19, 2009, we
acquired Liberator in a merger transaction that was structured as a share
exchange. In connection with the merger of Liberator on the closing date, the
officers and directors of the Company remained the same.
Item
5.03 Amendments to the Articles of Incorporation; Change in Fiscal
Year
On
October 19, 2009, we entered into a Merger and Recapitalization Agreement with
Liberator, Inc., a privately held Nevada corporation (“Liberator”). On
October 19, 2009, the Company consummated the transactions contemplated by the
agreement. Pursuant to the agreement, Liberator and the Company merged and all
of the issued and outstanding common stock of Liberator was exchanged for an
aggregate of 60,932,981 shares of the Company’s common stock. In addition,
all of the issued and outstanding shares of preferred stock of Liberator was
exchanged for 4,300,000 shares of preferred stock of the Company. WES
Consulting, Inc. is the surviving corporation; all business operations of the
Company are now the business operations of Liberator. Prior to the merger,
the Company’s fiscal year end was December 31, and the fiscal year end of
Liberator was June 30.
Accordingly,
and following the interpretive guidelines of the Commission, the Company has
elected to formally change its fiscal year end to the fiscal year end of
Liberator. On October 19, 2009, the Board of Directors of the Company
acted by unanimous written consent to change the Company’s fiscal year end from
December 31 to June 30. As a result of the interpretive guidelines of the
Commission referenced above, no transition report is required in connection with
such change in fiscal year end. Accordingly, the Company intends to file an
annual report on Form 10-K for the year ended June 30, 2010.
Item
9.01 Financial Statements and Exhibits
(a) FINANCIAL
STATEMENTS OF BUSINESS ACQUIRED.
The
Audited Consolidated Financial Statements of Liberator, Inc. as of June 30,
2008 and 2009 are filed as Exhibit 99.1 to this current
report.
(b) PRO
FORMA FINANCIAL INFORMATION.
The
unaudited condensed combined pro forma statement of operations for the year
ended June 30, 2009 and the unaudited condensed combined pro forma balance sheet
as of June 30, 2009 are filed as Exhibit 99.2 to this current
report.
(d)
EXHIBITS
Exhibit No.
|
Description
|
|
2.1
|
Merger
and Recapitalization Agreement between WES Consulting, Inc., the majority
shareholder of WES Consulting, Inc., Liberator, Inc., and the majority
shareholder of Liberator, Inc., dated as of October 19, 2009
(2)
|
|
2.2
|
Stock
Purchase and Recapitalization Agreement between OneUp Acquisition, Inc.,
Remark Enterprises, Inc., OneUp Innovations, Inc., and Louis S. Friedman,
dated March 31, 2009 and fully executed on April 3, 2009
(3)
|
|
2.3
|
Amendment
No. 1 to Stock Purchase and Recapitalization Agreement, dated June 22,
2009 (3)
|
|
3.1
|
Articles
of Incorporation for WES Consulting, Inc.
(1)
|
|
3.2
|
Bylaws
of WES Consulting, Inc. (1)
|
|
3.3
|
Articles
of Incorporation for Liberator, Inc. (3)
|
|
3.4
|
Bylaws
of Liberator, Inc. (2)
|
|
4.1
|
Common
Stock Purchase Warrant issued by Liberator, Inc. to Hope Capital, Inc. on
June 26, 2009 (3)
|
|
4.2
|
Common
Stock Purchase Warrant issued by Liberator, Inc. to New Castle Financial
Services LLC on June 26, 2009 (3)
|
|
4.3
|
3%
Convertible Note Due August 15, 2012 issued by Liberator, Inc. to Hope
Capital, Inc. on June 24, 2009 (3)
|
|
4.4
|
3%
Convertible Note Due September 2, 2012 issued by Liberator, Inc. to Hope
Capital, Inc. on September 2, 2009 (3)
|
|
4.5
|
Common
Stock Purchase Warrant issued to Belmont Partners LLC on September 2, 2009
(3)
|
|
10.1
|
Distribution
Agreement between OneUp Innovations, Inc. and InJoy Innovations Pty Ltd.,
dated May 12, 2008 (3)
|
|
10.2
|
Distribution
Agreement between OneUp Innovations, Inc. and Ong S.C. Ian, dated May 21,
2008 (3)
|
|
10.3
|
Distribution
Agreement between OneUp Innovations, Inc. and UpOne Trading B.V., dated
May 31, 2008 (3)
|
|
10.4
|
Distribution
Agreement between OneUp Innovations, Inc. and Freedom Worldwide Limited,
dated June 2, 2008 (3)
|
32
10.5
|
Distribution
Agreement between OneUp Innovations, Inc. and Dahlab Pascal, dated October
20, 2008 (3)
|
|
10.6
|
Distribution
Agreement between OneUp Innovations, Inc. and TRE PI SRL, dated January
12, 2009 (3)
|
|
10.7
|
Lease
Agreement between Bedford Realty Company, LLC and OneUp Innovations, Inc.,
dated September 26, 2005 (3)
|
|
10.8
|
Written
Description of Oral Agreement between OneUp Innovations, Inc. and
Downshire Capital, dated March 11, 2009 (3)
|
|
10.9
|
Receivables
Financing Agreement between Advance Financial Corporation and OneUp
Innovations, Inc., dated March 19, 2008 (3)
|
|
10.10
|
Credit
Cash Receivables Advance Agreement between CC Funding and OneUp
Innovations, Inc., dated June 25, 2008 (3)
|
|
10.11
|
Irrevocable
Standby Letter of Credit issued by Fidelity Bank to Bedford Realty
Company, LLC for the account of OneUp Innovations, Inc., dated September
29, 2005 (3)
|
|
10.12
|
Common
Stock Purchase Agreement dated September 2, 2009 by and between Liberator,
Inc, Belmont Partners, LLC, and WES Consulting, Inc.
(3)
|
|
10.13
|
Written
Description of Oral Agreement between OneUp Innovations, Inc. and Louis S.
Friedman, dated January 1, 2005 (3)
|
|
10.14
|
Written
Description of Oral Agreement between OneUp Innovations, Inc. and Leslie
Vogelman, dated June 23, 2006 (3)
|
|
10.15
|
Written
Description of Oral Agreement between OneUp Innovations, Inc. and Don
Cohen, dated July 25, 2008 (3)
|
|
10.16
|
Guaranty
by Louis Friedman, dated June 25, 2008 (3)
|
|
10.17
|
Engagement
Letter between WES Consulting, Inc. and New Castle Financial Services LLC,
dated December 14, 2009 (3)
|
|
10.18
|
Form
of WES Subscription Agreement (3)
|
|
10.19
|
Form
of Liberator Subscription Agreement (3)
|
|
10.20
|
Loan
and Security Agreement between Entrepreneur Growth Capital LLC and OneUp
Innovations, Inc and Foam Labs, Inc., dated November 10, 2009
(3)
|
|
16.1
|
Letter
from Randall N. Drake, CPA PA (2)
|
|
21.1
|
Subsidiaries
(3)
|
|
99.1
|
Audited
Consolidated Financial Statements of Liberator, Inc. as of June 30,
2008 and 2009 (2)
|
|
99.2
|
Unaudited
condensed combined pro forma statement of operations for the year ended
June 30, 2009 and the unaudited condensed combined pro forma balance sheet
as of June 30, 2009 *
|
|
99.3
|
Press
Release (2)
|
|
99.4
|
WES
Consulting, Inc. 2009 Stock Option Plan (3)
|
|
99.5
|
Unaudited
Financial Statements of Liberator, Inc. as of September 30, 2009 and for
the three months ended September 30, 2009 and 2008
(3)
|
* Filed
herewith.
(1)
|
Filed
on March 2, 2007 as an exhibit to our Registration Statement on Form SB-2,
and incorporated herein by
reference.
|
(2)
|
Filed
on October 22, 2009 as an exhibit to our Current Report on Form 8-K, and
incorporated herein by reference.
|
(3)
|
Filed
on March 24, 2010 as an exhibit to Amendment No. 1 to our Current Report
on Form 8-K, and incorporated herein by
reference.
|
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 hereunto
duly authorized.
WES
Consulting, Inc.
|
|||
Date:
June 30, 2010
|
By:
|
/s/
Louis S. Friedman
|
|
Louis
S. Friedman
|
|||
Chief
Executive Officer and President
|
34