PART I: FINANCIAL INFORMATION

ITEM 1.		Financial Statements

 

WES CONSULTING, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

		December 31,				June 30,
		2010				2010
ASSETS
Current assets:
Cash and cash equivalents		$	383,971			$	388,659
Accounts receivable, net			1,079,910				562,872
Inventories			1,138,731				908,851
Prepaid expenses			185,753				210,028
Total current assets			2,788,365				2,070,410
Equipment and leasehold improvements, net			1,015,969				1,075,315
Other assets			7,585				2,410
Total assets		$	3,811,919			$	3,148,135
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,129,924			$	1,579,138
Accrued compensation			255,921				284,796
Accrued expenses and interest			143,935				125,869
Line of credit			666,207				320,184
Current portion of notes and leases payable			251,270				439,822
Credit card advance			308,658				—
Total current liabilities			3,755,915				2,749,809
Long-term liabilities:
Note payable			200,000				—
Note payable – equipment			—				12,136
Leases payable			99,427				140,749
Notes payable – related party			145,948				105,948
Convertible notes payable – shareholder, net of discount			548,246				523,731
Unsecured lines of credit			85,884				99,664
Deferred rent payable			316,542				331,570
Less: current portion of leases payable			(56,183	)			(77,010	)
Total long-term liabilities			1,339,864				1,136,788
Total liabilities			5,095,779				3,886,597
Commitments and contingencies
Stockholders’ Equity:
Series A Convertible Preferred stock, zero shares authorized, 4,300,000 shares are           obligated to be issued by the Company with a liquidation preference of           $1,000,000 as of December 31, 2010 and June 30, 2010			—				—
Common stock of $0.01 par value, shares authorized 175,000,000; 63,532,647     shares issued and outstanding at December 31, 2010 and 63,182,647 at June 30,2010			635,326				631,826
Additional paid-in capital			4,860,392				4,805,243
Accumulated deficit			(6,779,578	)			(6,175,531	)
Total stockholders’ equity (deficit)			(1,283,860	)			(738,462	)
Total liabilities and stockholders’ equity		$	3,811,919			$	3,148,135

See accompanying notes to unaudited interim financial statements.

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WES CONSULTING, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2010			2009			2010				2009
NET SALES		$	3,697,631		$	3,034,664		$	6,321,729		$	5,069,656
COST OF GOODS SOLD			2,762,327			1,958,032			4,466,569			3,334,848
Gross profit			935,304			1,076,632			1,855,160			1,734,808
OPERATING EXPENSES:
Advertising and promotion			131,249			239,871			256,628			418,002
Other selling and marketing			339,024			295,934			674,997			547,493
General and administrative			595,477			570,655			1,172,714			1,006,404
Depreciation			53,579			75,930			109,503			134,679
		1
Total operating expenses			1,119,329			1,182,390			2,213,842			2,106,578
Loss from operations			(184,025	)		(105,758	)		(358,682	)		(371,770	)
OTHER INCOME (EXPENSE):
Interest income			174			133			199			3,522
Interest expense and financing costs			(125,138	)		(50,491	)		(193,064	)		(110,458	)
Expenses related to merger			(52,500	)		—			(52,500	)		(192,167	)
Total other expense, net			(177,464	)		(50,358	)		(245,365	)		(299,103	)
Loss from operations before income taxes			(361,489	)		(156,116	)		(604,047	)		(670,873	)
PROVISION (BENEFIT) FOR INCOME TAXES			—			—			—			—
NET LOSS		$	(361,489	)	$	(156,116	)	$	(604,047	)	$	(670,873	)
NET LOSS PER SHARE:
Basic		$	(0.01	)	$	(0.00	)	$	(0.01	)	$	(0.01	)
Diluted		$	(0.01	)	$	(0.00	)	$	(0.01	)	$	(0.01	)
SHARES USED IN CALCULATION OF NET LOSS PER SHARE:
Basic			63,503,958			61,915,981			63,289,169			61,993,198
Diluted			63,503,958			61,915,981			63,289,169			61,993,198

 

See accompanying notes to unaudited interim financial statements.

 

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WES CONSULTING, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

		Six Months Ended
		December 31,
		2010				2009
OPERATING ACTIVITIES:
Net loss		$	(604,047	)		$	(670,873	)
Adjustments to reconcile net loss to net cash provided by (used in) operating         activities:
Depreciation and amortization			109,503				134,679
Amortization of debt discount			24,514				21,305
Expenses related to merger			52,500				192,163
Stock based compensation expense			6,149				—
Deferred rent payable			(15,029	)			(9,709	)
Changes in operating assets and liabilities:
Accounts receivable			(517,038	)			(181,612	)
Inventories			(229,880	)			(189,554	)
Prepaid expenses and other assets			19,100				(35,738	)
Accounts payable			550,786				(372,232	)
Accrued compensation			(28,875	)			(33,260	)
Accrued expenses and interest			18,066				(85,210	)
Net cash used in operating activities			(614,251	)			(1,230,041	)
INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements			(50,156	)			(146,872	)
Cash used in investing activities			(50,156	)			(146,872	)
FINANCING ACTIVITIES:
Repayments under line of credit			(1,880,977	)			(1,426,705	)
Borrowings under line of credit			2,227,000				1,499,239
Proceeds from credit card cash advance			400,000				—
Repayment of credit card cash advance			(91,342	)			(198,935	)
Repayment of unsecured line of credit			(13,780	)			(12,199	)
Repayment of loans from related parties			—				(20,000	)
Borrowings from related parties			160,000				—
Proceeds from notes payable			60,000				—
Repayment of notes payable			(147,725	)			—
Principal payments on equipment note payable and capital leases			(53,458	)			(73,819	)
Cash provided by (used in) financing activities			659,719				(232,419	)
Net decrease in cash and cash equivalents			(4,688	)			(1,609,332	)
Cash and cash equivalents at beginning of period			388,659				1,815,633
Cash and cash equivalents at end of period		$	383,971			$	206,301
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	142,835			$	88,138
Income taxes		$	—			$	—

 

See accompanying notes to unaudited interim financial statements.

 

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WES CONSULTING, INC.

 (Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Overview – WES Consulting, Inc. (the “Company”) was incorporated on February 25, 1999 in the State of Florida. Until October 19, 2009, the Company was in the business of consulting and commercial property management.  On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc., a Nevada corporation (“Liberator”).  Pursuant to the Merger Agreement, Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”).  References to the “Company” in these notes include the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc.

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

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

The Company is a designer and manufacturer of various specialty furnishings for the sexual wellness market.  The Company's sales and manufacturing operation are located in the same facility in Atlanta, Georgia.  Sales are generated through the internet and print advertisements. We have a diversified customer base with only one customer accounting for 10% or more of consolidated net sales and no particular concentration of credit risk in one economic sector (see Note 6 - Major Customers.).  Foreign operations and foreign net sales are not material.

Going Concern – The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company incurred a net loss of $361,489 and $156,116 for the three months ended December 31, 2010 and 2009, respectively, and a net loss of $604,047 and $670,873 for the six months ended December 31, 2010 and 2009, respectively. As of December 31, 2010, the Company has an accumulated deficit of $6,779,578 and a working capital deficit of $967,550.

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 ongoing initiatives to increase gross profit margins through improved production controls and reporting. To that end, the Company implemented a new Enterprise Resource Planning (ERP) software system during the first quarter of fiscal 2010. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels.  Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic growth 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.

 

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

 

FORWARD-LOOKING STATEMENTS

 

The following discussion should be read along with the unaudited consolidated condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended June 30, 2010 contained in our 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 13, 2010.  This Management’s Discussion and Analysis of Financial Condition and Results of Operations and certain information incorporated herein by reference contain certain forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management. In some cases, forward-looking statements are identified by words such as “expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimates,” and  “intend” and variations of these types of words and similar expressions that  are intended to identify these forward-looking statements. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

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

Results of Operations

Comparison of Three Months Ended December 31, 2010 to Three Months Ended December 31, 2009

 

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

 

Total:		Three Months Ended December 31, 2010				Three Months Ended December 31, 2009				Change
Net sales:		$	3,697,631			$	3,034,664				22	%
Gross profit		$	935,304			$	1,076,632				(13	%)
Loss from operations		$	(184,025	)		$	(105,758	)			(74	%)
Diluted (loss) per share		$	(0.01	)		$	(0.00	)			—

Net Sales by Channel:		Three Months Ended December 31, 2010				Three Months Ended December 31, 2009				Change
Direct		$	1,502,426			$	1,381,818				9	%
Wholesale		$	1,903,597			$	1,347,777				41	%
Other		$	291,608			$	305,069				(4	%)
Total Net Sales		$	3,697,631			$	3,034,664				22	%

 

Net sales in the Other channel consists principally of shipping and handling fees derived from our Direct business.

 

Gross Profit by Channel:		Three Months Ended December 31, 2010				Margin %				Three Months Ended December 31, 2009				Margin %				Change
Direct		$	655,886				44%			$	724,040				52%				(9%)
Wholesale		$	368,347				19%			$	352,792				26%				4%
Other		$	(88,929	)			(30%)			$	(200	)			0%				(444%)
Total Gross Profit		$	935,304				25%			$	1,076,632				35%				(13%)

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Net sales for the three months ended December 31, 2010 increased from the comparable prior year period by $662,967, or 22%.  The increase in sales was primarily the result of higher sales in the Wholesale channel and, to a lesser extent, the Direct channel.  As a result of a continued focus on our Wholesale business, sales to wholesale customers during the second quarter increased approximately 41% from the prior year.  The Wholesale category includes Liberator branded products sold to retailers, non-Liberator products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Sales of Tenga products during the second quarter of fiscal 2011, of which 96% were sold through the Wholesale channel, accounted for $458,760 of the increase in total net sales and $136,932 of the increase in gross profit.  The Direct category (which includes product sales through our two e-commerce sites and our single retail store) increased from $1,381,818 in the second quarter of fiscal 2010 to $1,502,426 in the second quarter of fiscal 2011, an increase of approximately 9%, or $120,608.  The increase in Direct sales during the second quarter of fiscal 2011 is primarily the result of sales of non-Liberator products through that channel.

Comparison of Six Months Ended December 31, 2010 to Six Months Ended December 31, 2009

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

 

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Total:		Six Months Ended December 31, 2010				Six Months Ended December 31, 2009				Change
Net sales:		$	6,321,729			$	5,069,656				25	%
Gross profit		$	1,855,160			$	1,734,808				7	%
Loss from operations		$	( 358,682	)		$	(371,770	)			4	%
Diluted (loss) per share		$	(0.01	)		$	(0.01	)			—

Net Sales by Channel:		Six Months Ended December 31, 2010				Six Months Ended December 31, 2009				Change
Direct		$	2,703,153			$	2,551,606				6	%
Wholesale		$	3,078,780			$	2,033,140				51	%
Other		$	539,796			$	484,910				11	%
Total Net Sales		$	6,321,729			$	5,069,656				25	%

 

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

Gross Profit by Channel:		Six Months Ended December 31, 2010				Margin%				Six Months Ended December 31, 2009				Margin%				Change
Direct		$	1,232,018				46%			$	1,225,924				48%				—
Wholesale		$	653,285				21%			$	536,507				26%				22	%
Other		$	(30,143	)			(6%)			$	(27,623	)			(6%)				(9	% )
Total Gross Profit		$	1,855,160				29%			$	1,734,808				34%				7	%

Net sales for the six months ended December 31, 2010 increased from the comparable prior year period by $1,252,073, or 25%.  The increase in sales was primarily the result of higher sales in the Wholesale channel and, to a lesser extent, the Direct channel.  As a result of a continued focus on our Wholesale business, sales to wholesale customers during the first half of fiscal 2011 increased approximately 51% from the prior year.  The Wholesale category includes Liberator branded products sold to distributors and retailers, non-Liberator products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Sales of Tenga products during the first six months of fiscal 2011, of which 96% were sold through the Wholesale channel, accounted for $840,189 of the increase in total net sales and $259,107 of the increase in gross profit.  Sales through the Direct category (which includes product sales through our two e-commerce sites and our single retail store) increased from $2,551,606 in the first half of fiscal 2010 to $2,703,153 in the first half of fiscal 2011, an increase of approximately 6%, or $151,547.  The increase in Direct sales during the first six months of fiscal 2011 is due to higher sales of both Liberator and non-Liberator products.

Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation.  Total gross margin as a percentage of sales decreased to 29% for the six months ended December 31, 2010 from 34% in the comparable prior year period.  This is the result of a decrease in the margin on Direct sales (from 48% to 46%) and a decrease in margin on Wholesale sales (from 26% to 21%) during the six month period.  The decline in the Direct margin was the result of more frequent discounting of Liberator products during the six months and, to a lesser extent, a change in the mix of products sold. The decrease in the Wholesale margin was the result of a change in product mix during the first half of fiscal 2011 from the same period in the prior fiscal year. This change in Wholesale product mix occurred principally in the second quarter resulting in higher sales of non-Liberator products during that period.

Total operating expenses for the six months ended December 31, 2010 were 35% of net sales, or $2,213,842, compared to 42% of net sales, or $2,106,578, for the same period in the prior year.  The 5% increase in operating expenses was primarily the result of higher Other selling and marketing expense and General and administrative expense offset in part by lower Advertising and promotion expense and Depreciation expense.  Other selling and marketing expense increased by 23%, or $127,504, primarily as a result of higher personnel related costs ($186,383), offset in part by lower internet costs ($51,520). General and administrative expense increased by 16%, or $166,310, as a result of higher legal expense ($123,563), personnel costs ($63,834) and facilities related costs ($43,628), offset in part by lower insurance expense ($27,495) and lower computer software and network related costs ($14,760).  Total legal expense during the six months ended December 31, 2010 was $149,500.

 

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Other income (expense) during the first six months of fiscal 2011 decreased from expense of ($299,103) in fiscal 2010 to expense of ($245,365) in fiscal 2011.  Interest expense and financing costs in the current year included $24,514 from the amortization of the debt discount on the convertible notes and $48,000 in interest expense related to the one-time finance charge on the credit card advance. Expenses related to merger ($52,500) in the current year consist of the fair market value of the 350,000 shares issued to Belmont Partners, LLC in connection with a Settlement Agreement and General Release we entered into on October 13, 2010. Expenses related to merger in the prior year consist of the $192,167 for the discounted face value of the $250,000 convertible note payable to Hope Capital, Inc., a shareholder of the Company.

No expense or benefit from income taxes was recorded in the six months ended December 31, 2010 or 2009.  We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

We had a net loss of $604,047, or ($0.01) per diluted share, for the six months ended December 31, 2010 compared with a net loss of $670,873, or ($0.01) per diluted share, for the six months ended December 31, 2009.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. As described in previous paragraphs, operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, costs associated with new product introductions, and increases in raw material costs. In addition, future operating results may fluctuate as a result of factors beyond our control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which we operate and sell.  A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales. Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to meaningfully adjust spending in certain areas, or the inability to adjust spending quickly enough, as in personnel and administrative costs, to compensate for a sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

Financial Condition

Cash and cash equivalents decreased $4,688 to $383,971 at December 31, 2010 from $388,659 at June 30, 2010. This decrease in cash resulted from cash used in operating activities of $614,251, cash used in investing activities of $50,156, and cash provided by financing activities of $659,719, as more fully described below.

Cash used in operating activities for the six months ended December 31, 2010 represents the results of operations adjusted for non-cash depreciation ($109,503) and the non-cash deferred rent accrual reversal of $15,029, the amortization of the debt discount on the convertible notes of $24,514 and the expenses related to our merger with Liberator, Inc. of $52,500. Significant changes in operating assets and liabilities during the six months ended December 31, 2010 include an increase in accounts receivable of $517,038, an increase in inventory of $229,880 and an increase in accounts payable of $550,786.

Cash flows used in investing activities reflects capital expenditures during the six months ended December 31, 2010 of $50,156.

Cash flows provided by financing activities are attributable to the net increase in the asset-based line of credit of $346,023, proceeds from the credit card cash advance of $400,000 less repayments of $91,342 and borrowings under notes payable of $220,000 less repayments of $147,725.

As of December 31, 2010, our net accounts receivable increased by $517,039, or 92%, to $1,079,910 from $562,872 at June 30, 2010. The increase in accounts receivable is primarily the result of increased sales to certain wholesale customers during December 2010 as these customers typically increase their purchases in advance of Christmas and Valentine’s Day. Management believes that our accounts receivable are collectible net of the allowance for doubtful accounts of $9,559 at December 31, 2010.

 

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Our net inventory increased by $229,880, or 25%, to $1,138,731 as of December 31, 2010 compared to $908,851 as of June 30, 2010. The increase reflects an increase in finished goods inventory in anticipation of increased product sales during the three months ended March 31, 2011.

Accounts payable increased by $550,786, or 35%, to $2,129,924 as of December 31, 2010 compared to $1,579,138 as of June 30, 2010. The increase in accounts payable was primarily the result of an increase in raw materials purchases in advance of Christmas and Valentine’s Day.

Liquidity and Capital Resources

At December 31, 2010, our working capital deficiency was $967,550, an increase of $288,151 compared to the deficiency of $679,399 at June 30, 2010.  Cash and cash equivalents at December 31, 2010 totaled $383,971, a decrease of $4,688 from $388,659 at June 30, 2010.

 

At December 31, 2010, we had $666,207 outstanding on our line of credit, compared to an outstanding balance of $320,184 at June 30, 2010.

 

On May 17, 2010, OneUp Innovations, Inc., our wholly owned subsidiary, entered into a credit facility to provide it with an asset based line of credit of up to $600,000 against 80% of eligible accounts receivable (as defined in the agreement.)  The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 60 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory, and equipment, and are subject to eligibility requirements for current accounts receivable and inventory balances. Advances under the agreement bear interest at a rate of 2% over the prime rate (5.25% as of June 30, 2010 and December 31, 2010) for the accounts receivable portion of the advances and the inventory portion of the borrowings.  In addition, there are collateral management fees of 0.4% for each 10-day period that an advance on an accounts receivable invoice remains outstanding and a 1.9% collateral management fee on the average monthly loan outstanding on the inventory portion of any advance. As of December 31, 2010, we had $666,207 outstanding on this line of credit.  Our CEO, Louis S. Friedman, personally guaranteed the repayment of the loan obligation.  On December 31, 2010, we were in compliance with all of the financial and other covenants required under this credit facility.  During the second quarter ended December 31, 2010, the lender authorized a temporary increase in the credit limit to $750,000 until January 31, 2011.

As described in Note 10 – Credit Card Advance, on November 4, 2010, our wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”), entered into a receivable advance agreement with CC Funding, LLC (“Credit Cash”), a division of Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by May 4, 2011.  This will be accomplished by Credit Cash withholding a fixed amount each business day of $3,446 from OneUp’s credit card receipts until full repayment is made.  The loan is guaranteed by the Company and is personally guaranteed by Mr. Friedman and our CFO, Ronald P. Scott.  

Management believes anticipated cash flows generated from operations during the third quarter of fiscal 2011 along with current cash and cash equivalents as well as borrowing capacity under the line of credit and borrowings under the receivable advance agreement with Credit Cash should be sufficient to finance current working capital requirements during the next twelve months. However, if product sales are less than anticipated during the six months ended June 30, 2011, we may need to raise additional funding in the near term to meet our 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 substantially 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. We incurred a net loss of $604,047 for the six months ended December 31, 2010 and a net loss of $1,033,952 for the year ended June 30, 2010. As of December 31, 2010, we have an accumulated deficit of $6,779,578 and a working capital deficit of $967,550.

 

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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 manufacturing reporting. To that end, the Company implemented a new Enterprise Resource Planning (ERP) software system during the first quarter of fiscal 2010. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation during the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic growth 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.

 As previously reported in our Current Report on Form 8-K filed on February 2, 2011, the Company acquired 100% of the capital stock of Web Merchants, Inc (“WMI”).  We pursued the acquisition of WMI to increase our presence in the sexual wellness market and to begin to develop a business portfolio with significant growth opportunities.  Although there can be no assurance in this regard, we believe that the WMI acquisition will provide the Company with sufficient sales revenue and gross profit to allow the Company to be profitable on an annual basis.  Web Merchants, Inc. had net revenues of $7.6 million in 2009 and net revenues of $6.2 million for the nine months ended September 30, 2010. As part of the acquisition, Web Merchants, Inc. will relocate their New Jersey facility to the 140,000 square foot WES Consulting, Inc. headquarters and fulfillment center in Atlanta, GA.  Full integration of the companies is expected to be completed by April of 2011.

Capital Resources

We do not currently have any material commitments for capital expenditures. We expect total capital expenditures for the remainder of fiscal 2011 to be under $25,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit. This includes capital expenditures in support of our normal operations and the integration of Web Merchants, Inc., a Delaware corporation that we acquired on January 27, 2011 and expenditures that we may incur in conjunction with initiatives to further upgrade our e-commerce platform and ERP system.

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

 

ITEM 4.                                          Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

 

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Changes in Internal Control Over Financial Reporting

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

 

 

 

Exh. No.		Description
2.1		Merger and Recapitalization Agreement, between the registrant, the registrant’s majority shareholder, Liberator, Inc., and Liberator, Inc.’s majority shareholder, dated October 19, 2009 (2)
3.1		Amended and Restated Articles of Incorporation (1)
3.2		Bylaws (1)
31.1		Section 302 Certification by the Corporation’s Principal Executive Officer *
31.2		Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer *
32.1		Section 906 Certification by the Corporation’s Principal Executive Officer *
32.2		Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer *

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*	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 20, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

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

 

			WES CONSULTING, INC.
			(Registrant)
February 14, 2011		By:	/s/ Louis S. Friedman
(Date)			Louis S. Friedman
			President and Chief Executive Officer (Principal Executive Officer)
February 14, 2011		By:	/s/ Ronald P. Scott
(Date)			Ronald P. Scott
			Chief Financial Officer and Secretary (Principal Financial & Accounting Officer)

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