Luvu Brands, Inc. - Quarter Report: 2009 December (Form 10-Q)
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended December 31, 2009
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission File Number:
333-141022
WES Consulting,
Inc.
(Exact
name of registrant as specified in this charter)
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Florida
(State
or other jurisdiction
of
incorporation or organization)
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59-3581576
(I.R.S.
Employer
Identification
No.)
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2745
Bankers Industrial Drive
Atlanta,
Georgia 30360
(Address
of principal executive offices and zip code)
(770) 246-6400
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company þ
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(Do
not check if a smaller reporting company)
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||||||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes o No þ
As of
February 18, 2010 there were 63,015,981 shares of the registrant’s common stock
outstanding.
WES
CONSULTING, INC. AND SUBSIDIARIES
QUARTERLY
REPORT ON FORM 10-Q
TABLE
OF CONTENTS
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Page
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PART I. FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements (unaudited)
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3
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Consolidated
Condensed Balance Sheets as of December 31, 2009 and
June 30, 2009
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3
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Consolidated
Condensed Statements of Operations for the three and six month periods
ended December 31, 2009 and 2008
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4
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Consolidated
Condensed Statements of Cash Flows for the six month periods ended
December 31, 2009 and 2008
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5
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Notes
to Consolidated Condensed Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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24
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Item
4.
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Controls
and Procedures
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24
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PART II. OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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24
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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24
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Item
3.
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Defaults
upon Senior Securities
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24
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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Item
5.
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Other
Information
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25
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Item 6.
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Exhibits
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25
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SIGNATURES
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26
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2
PART I: FINANCIAL
INFORMATION
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ITEM 1.
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Condensed
Consolidated Financial Statements
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WES
CONSULTING, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
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December 31,
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June 30,
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|||||||
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2009
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2009
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(unaudited)
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||||||||
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ASSETS
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 206,301 | $ | 1,815,663 | ||||
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Accounts
receivable, net of allowance for doubtful accounts of $15,178 at December
31, 2009 and $5,740 at June 30, 2009
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528,042 | 346,430 | ||||||
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Inventories
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889,957 | 700,403 | ||||||
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Prepaid
expenses
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131,629 | 95,891 | ||||||
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Total
current assets
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1,755,929 | 2,958,357 | ||||||
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Equipment
and leasehold improvements, net
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1,147,710 | 1,135,517 | ||||||
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Other
assets
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— | — | ||||||
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Total
assets
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$ | 2,903,639 | $ | 4,093,874 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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||||||||
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Current
liabilities:
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||||||||
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Accounts
Payable
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$ | 1,875,613 | $ | 2,247,845 | ||||
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Accrued
compensation
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121,734 | 154,994 | ||||||
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Accrued
expenses and interest
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60,583 | 145,793 | ||||||
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Revolving
line of credit
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243,967 | 171,433 | ||||||
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Current
portion of long-term debt
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124,598 | 145,481 | ||||||
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Credit
card advance
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— | 198,935 | ||||||
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Total
current liabilities
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2,426,495 | 3,064,481 | ||||||
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Long-term
liabilities:
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||||||||
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Note
payable – equipment
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43,092 | 72,812 | ||||||
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Leases
payable
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180,933 | 225,032 | ||||||
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Notes
payable – related party
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105,948 | 125,948 | ||||||
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Convertible
notes payable – shareholder, net of discount
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499,218 | 285,750 | ||||||
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Unsecured
lines of credit
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112,790 | 124,989 | ||||||
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Deferred
rent payable
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346,599 | 356,308 | ||||||
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Less:
current portion of long-term debt
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(124,598 | ) | (145,481 | ) | ||||
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Total
long-term liabilities
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1,163,982 | 1,045,358 | ||||||
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Total
liabilities
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3,590,477 | 4,109,839 | ||||||
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Commitments
and contingencies
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||||||||
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Stockholders’
Equity:
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||||||||
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Series
A Convertible Preferred stock, $.0001 par value, 10,000,000
shares
Authorized,
4,300,000 shares issued and outstanding on December 31 and June 30,
2009, liquidation preference of $1,000,000
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430 | 430 | ||||||
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Common
stock of $0.01 par value, shares authorized 175,000,000; 61,915,981
shares
issued
and outstanding at December 31, 2009 and 60,932,981 shares issued
and
outstanding
at June 30,2009
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619,160 | 609,330 | ||||||
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Additional
paid-in capital
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4,673,903 | 4,683,733 | ||||||
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Accumulated
deficit
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(5,980,331 | ) | (5,309,458 | ) | ||||
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Total
stockholders’ equity (deficit)
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(686,838 | ) | (15,965 | ) | ||||
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Total
liabilities and stockholders’ equity
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$ | 2,903,639 | $ | 4,093,874 | ||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
3
WES
CONSULTING, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
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Three Months Ended
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Six Months Ended
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December 31,
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December 31,
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|||||||||||||||
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2009
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2008
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2009
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2008
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(unaudited)
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(unaudited)
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NET
SALES
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$ | 3,034,664 | $ | 2,705,471 | $ | 5,069,656 | $ | 5,351,294 | ||||||||
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COST
OF GOODS SOLD
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1,958,032 | 1,663,100 | 3,334,848 | 3,492,088 | ||||||||||||
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Gross
profit
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1,076,632 | 1,042,371 | 1,734,808 | 1,859,206 | ||||||||||||
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OPERATING
EXPENSES:
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Advertising
and Promotion
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239,871 | 290,454 | 418,002 | 551,234 | ||||||||||||
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Other
Selling and Marketing
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295,934 | 290,949 | 547,493 | 596,010 | ||||||||||||
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General
and administrative
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570,655 | 495,579 | 1,006,404 | 955,983 | ||||||||||||
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Depreciation
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75,930 | 75,930 | 134,679 | 151,860 | ||||||||||||
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Total
operating expenses
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1,182,390 | 1,152,912 | 2,106,578 | 2,255,087 | ||||||||||||
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Operating
loss
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(105,758 | ) | (110,541 | ) | (371,770 | ) | (395,881 | ) | ||||||||
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OTHER
INCOME (EXPENSE)
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Interest
income
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133 | 347 | 3,522 | 1,469 | ||||||||||||
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Interest
expense and financing costs
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(50,491 | ) | (73,363 | ) | (110,458 | ) | (136,251 | ) | ||||||||
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Expenses
related to merger
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— | — | (192,167 | ) | — | |||||||||||
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Total
other expense, net
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(50,358 | ) | (73,016 | ) | (299,103 | ) | (134,782 | ) | ||||||||
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Loss
from continuing operations before income taxes
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(156,116 | ) | (183,557 | ) | (670,873 | ) | (530,663 | ) | ||||||||
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PROVISION
(BENEFIT) FOR INCOME TAXES
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— | — | — | — | ||||||||||||
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NET
LOSS
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$ | (156,116 | ) | $ | (183,557 | ) | $ | (670,873 | ) | $ | (530,663 | ) | ||||
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NET
LOSS PER SHARE:
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||||||||||||||||
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Basic
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$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
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Diluted
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$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
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SHARES
USED IN CALCULATION OF NET LOSS PER SHARE:
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||||||||||||||||
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Basic
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61,915,981 | 45,000,000 | 60,932,981 | 45,000,000 | ||||||||||||
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Diluted
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61,915,981 | 45,000,000 | 60,932,981 | 45,000,000 | ||||||||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
4
WES
CONSULTING, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
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Six Months Ended
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||||||||
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December 31,
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||||||||
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2009
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2008
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(unaudited)
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||||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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||||||||
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Net
loss
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$ | (670,873 | ) | $ | (530,663 | ) | ||
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Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
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||||||||
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Depreciation
and amortization
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134,679 | 151,860 | ||||||
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Amortization
of debt discount
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21,305 | — | ||||||
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Expenses
related to merger
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192,163 | — | ||||||
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Deferred
rent payable
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(9,709 | ) | 28,862 | |||||
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Changes
in operating assets and liabilities:
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||||||||
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Accounts
receivable
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(181,612 | ) | (148,303 | ) | ||||
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Inventories
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(189,554 | ) | (143,492 | ) | ||||
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Prepaid
expenses and other assets
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(35,738 | ) | 10,444 | |||||
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Accounts
payable
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(372,232 | ) | 286,351 | |||||
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Accrued
compensation
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(33,260 | ) | (95,683 | ) | ||||
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Accrued
expenses and interest
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(85,210 | ) | 43,925 | |||||
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Net
cash used in operating activities
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(1,230,041 | ) | (396,699 | ) | ||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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||||||||
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Investment
in equipment and leasehold improvements
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(146,872 | ) | (42,220 | ) | ||||
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Cash
used in investing activities
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(146,872 | ) | (42,220 | ) | ||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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||||||||
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Repayments
under revolving line of credit
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(1,426,705 | ) | (1,002,687 | ) | ||||
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Borrowings
under revolving line of credit
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1,499,239 | 1,147,778 | ||||||
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Proceeds
from credit card cash advance
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— | 350,000 | ||||||
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Repayment
of credit card cash advance
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(198,935 | ) | (159,530 | ) | ||||
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Repayment
of unsecured line of credit
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(12,199 | ) | (10,697 | ) | ||||
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Repayment
of loans from related parties
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(20,000 | ) | — | |||||
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Borrowings
from related party loans
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— | 193,948 | ||||||
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Proceeds
from short-term note payable
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— | 100,000 | ||||||
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Principal
payments on notes payable and capital leases
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(73,819 | ) | (99,006 | ) | ||||
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Cash
(used in) provided by financing activities
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(232,419 | ) | 519,806 | |||||
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Net
(decrease) increase in cash and cash equivalents
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(1,609,332 | ) | 80,887 | |||||
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Cash
and cash equivalents at beginning of period
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1,815,633 | 89,519 | ||||||
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Cash
and cash equivalents at end of period
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$ | 206,301 | $ | 170,406 | ||||
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SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
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||||||||
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Cash
paid during the period for:
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||||||||
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Interest
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88,138 | 137,447 | ||||||
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Income
taxes
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— | — | ||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
5
WES
CONSULTING, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
As
of December 31, 2009
(Unaudited)
NOTE 1 – ORGANIZATION AND
NATURE OF BUSINESS
Overview
– WES
Consulting, Inc. (the “Company”) was incorporated 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 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 includes
Liberator and the Company’s 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”) were 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, 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 Merger Agreement. As of the execution date of
the Merger Agreement, Liberator owned eighty-one 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 Agreement has been accounted for as a reverse merger, and as such the
historical financial statements of Liberator prior to the merger are being
presented herein as 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.
Our
unaudited condensed consolidated financial statements for the three and six
months ended December 31, 2009 exclude the results of operations of the
Company that existed prior to our merger with Liberator (“Old WES”), commencing
as of October 19, 2009. Disclosures required for material business combinations
have been limited due to the immateriality of the Old WES financial results to
our consolidated financial statements. No supplemental pro forma information is
presented for the merger due to the immaterial effect of Old WES on our results
of operations.
Going Concern –
The accompanying financial statements have been prepared in accordance
with U.S. generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. The Company incurred a net loss
of $156,116 and $183,557 for the three months ended December 31, 2009 and 2008,
respectively, and a net loss of $670,873 and $530,663 for the six months ended
December 31, 2009 and 2008, respectively. As of December 31, 2009, the Company
has an accumulated deficit of $686,838 and a working capital deficit of
$670,566.
In view
of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future
operations. Management believes that actions presently being taken to
revise the Company's operating and financial requirements provide the
opportunity for the Company to continue as a going concern.
These
actions include initiatives to increase gross profit margins through improved
production controls and reporting. To that end, the Company recently implemented
a new Enterprise Resource Planning (ERP) software system. We also plan to reduce
discretionary expense levels to be better aligned with current revenue
levels. Furthermore, our plan of operation in the next twelve months
continues a strategy for growth within our existing lines of business with an
on-going focus on growing domestic sales. We estimate that the operational and
strategic development plans we have identified will require approximately
$2,300,000 of funding. We expect to invest approximately $500,000 for additional
inventory of sexual wellness products and $1,800,000 on sales and marketing
programs, primarily sexual wellness advertising in magazines and on cable
television. We will also be exploring the opportunity to acquire other
compatible businesses.
6
We plan
to finance the required $2,300,000 with a combination of anticipated cash flow
from operations over the next twelve months as well as cash on hand and cash
raised through equity and debt financings.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. However, management cannot provide any assurances that
the Company will be successful in accomplishing these plans. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
consolidated financial statements include the accounts and operations of
Liberator, Inc. and our wholly owned operating subsidiaries, OneUp
Innovations, Inc. and Foam Labs, Inc. Intercompany accounts and
transactions have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform to the current year presentation.
The
accompanying consolidated condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to
Form 10-Q and Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles (“GAAP”) for complete financial statements. These consolidated
condensed financial statements and notes should be read in conjunction with the
Company’s consolidated financial statements contained in the Company’s report on
Form 10-K for the year ended December 31, 2008 filed on February 18,
2009 and Amendment to Form 10-K filed on May 28, 2009. In addition, these
consolidated condensed financial statements and notes should also be read in
conjunction with the Company’s Current Report on Form 8-K filed on October 22,
2009 and Form 10-Q for the three months ended September 30, 2009 filed on
November 18, 2009.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the
balance sheet date and the reported amounts of revenues and expenses during the
period reported. Management reviews these estimates and assumptions
periodically and reflects the effect of revisions in the period that they are
determined to be necessary. Actual results could differ from those
estimates and assumptions.
Use
of Estimates
The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Significant estimates in these consolidated financial
statements include estimates of: asset impairment; income taxes; tax valuation
reserves; restructuring reserve; loss contingencies; allowances for doubtful
accounts; share-based compensation; and useful lives for depreciation and
amortization. Actual results could differ materially from these
estimates.
Revenue Recognition
The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue
Recognition.” (“SAB No. 104”). SAB No. 104
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) title has
transferred; (3) the fee is fixed or determinable; and
(4) collectability is reasonably assured. The Company uses
contracts and customer purchase orders to determine the existence of an
arrangement. The Company uses shipping documents and third-party proof of
delivery to verify that title has transferred. The Company assesses whether the
fee is fixed or determinable based upon the terms of the agreement associated
with the transaction. To determine whether collection is probable, the Company
assesses a number of factors, including past transaction history with the
customer and the creditworthiness of the customer. If the Company determines
that collection is not reasonably assured, then the recognition of revenue is
deferred until collection becomes reasonably assured, which is generally upon
receipt of payment.
The
Company records product sales net of estimated product returns and discounts
from the list prices for its products. The amounts of product returns and the
discount amounts have not been material to date. The Company includes shipping
and handling costs in cost of product sales.
7
Cash
and Cash Equivalents
For purposes of reporting cash flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects management's best estimate of probable
credit losses inherent in the accounts receivable balance. The
Company determines the allowance based on historical experience, specifically
identified nonpaying accounts and other currently available
evidence. The Company reviews its allowance for doubtful accounts
monthly with a focus on significant individual past due balances over 90
days. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance sheet credit
exposure related to its customers. At December 31, 2009, accounts
receivable totaled $528,042 net of $15,178 in the allowance for doubtful
accounts.
Inventories
Inventories are stated at the lower of
cost or market. Cost is determined using the first-in, first-out (FIFO) method.
Market is defined as sales price less cost to dispose and a normal profit
margin. Inventory costs include materials, labor, depreciation, and
overhead.
Concentration
of Credit Risk
Financial instruments that potentially
subject us to significant concentration of credit risk consist primarily of
cash, cash equivalents, and accounts receivable. As of December 31,
2009, substantially all of our cash and cash equivalents were managed by a
number of financial institutions. As of December 31, 2009, our cash
and cash equivalents with certain of these financial institutions exceed FDIC
insured limits. Accounts receivable are typically unsecured and are
derived from revenue earned from customers primarily located in the United
States and Canada.
Fair
Value of Financial and Derivative Instruments
The
Company values its financial instruments in accordance with new accounting
guidance on fair value measurements which, for certain financial assets and
liabilities, requires that assets and liabilities carried at fair value be
classified and disclosed in one of the following three categories:
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•
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Level
1 — Quoted prices in active markets for identical assets or
liabilities.
|
||
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•
|
Level
2 — Inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
•
|
Level
3 — Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
This includes certain pricing models, discounted cash flow methodologies,
and similar techniques that use significant unobservable
inputs.
|
At
December 31, 2009, our financial instruments included cash and cash equivalents,
accounts receivable, accounts payable, and other long-term debt.
The fair
values of these financial instruments approximated their carrying values based
on either their short maturity or current terms for similar
instruments.
Advertising
Costs
Advertising
costs are expensed in the period when the advertisements are first aired or
distributed to the public. Prepaid advertising (included in prepaid expenses)
was $61,233 at December 31, 2009 and $57,625 at June 30, 2009. Advertising
expense for the three months ended December 31, 2009 and 2008 was $239,871 and
$290,454, respectively.
8
Research
and Development
Research
and development expenses for new products are expensed as they are
incurred. Expenses for new product development totaled $37,580 for
the three months ended December 31, 2009 and $68,375 for the three months ended
December 31, 2008. Research and development costs are included in general and
administrative expense.
Shipping and
Handling
Net sales
for the three months ended December 31, 2009 and 2008 includes amounts charged
to customers of $302,715 and $294,807, respectively, for shipping and handling
charges.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method over estimated service lives for financial
reporting purposes.
Expenditures
for major renewals and betterments that extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred. When properties are disposed of, the related costs and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is recognized currently.
Operating
Leases
The
Company leases its facility under a ten year operating lease that was signed in
September 2005 and expires December 31, 2015. The lease is on an
escalating schedule with the final year on the lease at $34,358 per
month. The liability for this difference in the monthly payments is
accounted for as a deferred rent liability and the balance in this account at
December 31, 2009 was $346,599. The Rent expense under this lease for
the three months ended December 31, 2009 and 2008 was $80,931.
Income
Taxes
The
Company accounts for income taxes using an asset and liability approach.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and operating loss and
tax credit carryforwards measured by applying currently enacted tax laws. A
valuation allowance is provided to reduce net deferred tax assets to an amount
that is more likely than not to be realized. The amount of the valuation
allowance is based on the Company’s best estimate of the recoverability of its
deferred tax assets. On January 1, 2007, the Company adopted new accounting
guidance for the accounting for uncertainty in income tax positions. This
guidance seeks to reduce the diversity in practice associated with certain
aspects of measurement and recognition in accounting for income taxes and
provide guidance on de-recognition, classification, interest and penalties, and
accounting in interim periods and requires expanded disclosure with respect to
the uncertainty in income taxes. The accounting guidance requires that the
Company recognize in its financial statements the impact of a tax position if
that position is more likely than not to be sustained on audit, based on the
technical merits of the position.
Segment
Information
During
the three and six months ended December 31, 2009 and 2008, the Company only
operated in one segment; therefore, segment information has not been
presented.
New
Accounting Pronouncements
In
May 2009, the FASB issued SFAS No. 165, “Subsequent events”, (now known as ASC 855). The
objective of this Statement is to establish general standards of accounting for,
and disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this Statement sets forth: 1. the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, 2. the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its financial
statements and 3. the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. In accordance with this
Statement, an entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The Company adopted
ASC 855 during the first quarter of fiscal 2010. The adoption of ASC 855
did not have a material impact on the Company’s financial statements or
condition. In accordance with ASC 855, management has evaluated subsequent
events through the date and time the financial statements were issued on
February 19, 2010, and has disclosed such subsequent events in Note
16.
9
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once effective, the Codification’s content
will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be
modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We have
incorporated the new Codification citations in place of the corresponding
references to legacy accounting pronouncements. Our adoption of the codification
did not impact our financial position or results of operations.
On
October 1, 2009, we adopted ASU No. 2010-02, “Consolidation (Topic
810) Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope
Clarification,” as codified in ASC 810, “Consolidation.” ASU No. 2010-02
applies retrospectively to April 1, 2009, our adoption date for ASC
810-10-65-1. This ASU clarifies the applicable scope of ASC 810 for a decrease
in ownership in a subsidiary or an exchange of a group of assets that is a
business or nonprofit activity. The ASU also requires expanded disclosures. The
adoption of this ASU did not have a material impact on our consolidated
financial statements; however, it may affect future divestitures of subsidiaries
or groups of assets within its scope.
On
October 1, 2009, we adopted ASU No. 2010-01, “Equity (Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and Cash—a
consensus of the FASB Emerging Issues Task Force,” as codified in ASC 505,
“Equity.” ASU No. 2010-01 clarifies the treatment of certain distributions
to shareholders that have both stock and cash components. The stock portion of
such distributions is considered a share issuance that is reflected in earnings
per share prospectively and is not a stock dividend. The adoption of this ASU
did not have a material impact on our consolidated financial statements;
however, it may affect any future stock distributions.
On
October 1, 2009, we adopted ASU No. 2009-12, “Fair Value Measurements
and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent),” as codified in ASC 820-10, “Fair
Value Measurements and Disclosures—Overall.” ASU No. 2009-12 permits a
reporting entity to measure the fair value of certain alternative investments
that do not have a readily determinable fair value on the basis of the
investments’ net asset value per share or its equivalent. This ASU also requires
expanded disclosures. The adoption of this ASU did not have a material impact on
our consolidated financial statements; however, it may impact the valuation of
our future investments.
Earnings
(Loss) Per Share of Common Stock
Basic
earnings per share is computed on the basis of the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
potentially dilutive effect of outstanding stock options and warrants using the
“treasury stock” method and convertible securities using the “if-converted”
method.
The
Company reports earnings per share in accordance with the Statement of Financial
Accounting Standards No. 128, “Earnings Per Share.” The following table
sets forth the computation of basic and diluted earnings per common
share:
|
Six Months Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Numerator:
|
||||||||
|
Net
loss
|
$ | (670,873 | ) | $ | (530,663 | ) | ||
|
Denominator:
|
||||||||
|
Denominator
for earnings per share (basic and diluted) — weighted average
shares
|
60,932,981 | 45,000,000 | ||||||
|
Loss
per common share (basic and diluted):
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
10
|
Three Months Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Numerator:
|
||||||||
|
Net
loss
|
$ | (156,116 | ) | $ | (183,557 | ) | ||
|
Denominator:
|
||||||||
|
Denominator
for earnings per share (basic and diluted) — weighted average
shares
|
61,915,981 | 45,000,000 | ||||||
|
Income
(loss) per common share (basic and diluted):
|
$ | (0.00 | ) | $ | (0.00 | ) | ||
Basic and
diluted earnings per share are the same in periods of a net loss, thus there is
no effect of dilutive securities when a net loss is recorded. There were
approximately 5,650,849 and 438,456 securities excluded from the calculation of
diluted loss per share because their effect was anti-dilutive for the six months
ended December 31, 2009 and 2008, respectively.
Seasonality
Our
business has a seasonal pattern. In the past three years, we have realized an
average of approximately 28% of our annual revenues in our second quarter, which
includes Christmas, and an average of approximately 29% of our revenues in the
third quarter, which includes Valentine’s Day.
NOTE 3
– STOCK-BASED COMPENSATION
Options
On
October 16, 2009, the Company’s Board of Director approved the 2009 Stock Option
Plan (the “Plan”), subject to approval by a majority vote of the shareholders.
The Plan reserves a total of 5,000,000 shares of common stock for issuance under
the Plan. On that date, the Board of Directors also approved the grant of
1,077,000 stock options to 80 employees, including two officers of the
Company. These options have a five year term and are exercisable at
25% a year, beginning on the first anniversary of the grant date. As
of December 31, 2009, 3,923,000 shares of common stock were available for
grant under the Company’s Plan.
Stock-based
employee compensation cost is measured at the grant date, based on the estimated
fair value of the award, and is recognized as expense over the requisite service
period. The Company has no awards with market or performance
conditions.
Stock-based
compensation expense recognized in the condensed consolidated statements of
operations for the six-month periods ended December 31, 2009 and 2008 are based
on awards ultimately expected to vest, and is reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Pre-vesting forfeitures are estimated to be approximately
25%, based on historical experience.
The
following table summarizes the Company’s stock option activities for the six
months ended December 31, 2009:
|
Number of
Shares
Underlying
Outstanding
Options
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding as of June 30, 2009
|
438,456 | 1.9 | $ | .228 | $ | 9,646 | ||||||||||
|
Granted
|
1,077,000 | 4.9 | $ | .25 | $ | — | ||||||||||
|
Exercised
|
— | — | $ | — | — | |||||||||||
|
Forfeited
|
— | — | $ | — | — | |||||||||||
|
Options
outstanding as of December 31, 2009
|
1,515,456 | 4.0 | $ | .244 | $ | 9,646 | ||||||||||
|
Options
exercisable as of December 31, 2009
|
438,456 | 1.9 | $ | .228 | $ | 9,646 | ||||||||||
11
The
weighted average fair value per underlying share of options granted during the
three months ended December 31, 2009 was $.056. The aggregate intrinsic
value in the table above is before applicable income taxes and represents the
amount optionees would have received if all options had been exercised on the
last business day of the period indicated. Since the Company’s stock has no
significant trading volume, the stock price is assumed to be $.25 per
share.
Options
outstanding by exercise price at December 31, 2009 were as
follows:
|
Options Outstanding
|
||||||||||||||||||||
|
Exercise Price
|
Number of Shares
Underlying
Outstanding
Options
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Options Exercisable
|
||||||||||||||||
|
Number of Shares
Underlying
Vested and
Exercisable
Options
|
Weighted
Average
Exercise Price
|
|||||||||||||||||||
|
$0.228
|
438,456 | $ | 0.228 | 1.9 | 438,456 | $ | 0.228 | |||||||||||||
|
$0.25
|
1,077,000 | $ | 0.25 | 4.9 | — | $ | — | |||||||||||||
| 1,515,456 | $ | 0.244 | 4.0 | 438,456 | $ | 0.228 | ||||||||||||||
Stock-based
compensation
The
following table summarizes stock-based compensation expense by line item in the
Condensed Consolidated Statements of Operations, all relating to employee stock
plans:
|
Three Months Ended December 31,
|
Six Months Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Cost
of Goods Sold
|
$ | 742 | $ | — | $ | 742 | $ | — | ||||||||
|
Other
Selling and Marketing
|
841 | — | 841 | — | ||||||||||||
|
General
and Administrative
|
1,002 | — | 1,002 | — | ||||||||||||
|
Total
|
$ | 2,585 | $ | — | $ | 2,585 | $ | — | ||||||||
As
stock-based compensation expense recognized in the Condensed Consolidated
Statement of Operations is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures in accordance with authoritative
guidance. The Company estimates forfeitures at the time of grant and
revises the original estimates, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
As of
December 31, 2009, the Company’s total unrecognized compensation cost was
$75,753, which will be recognized over the vesting period of 5 years. The
Company calculated the fair value of stock-based awards in the periods presented
using the Black-Scholes option pricing model and the following weighted average
assumptions:
|
Three Months Ended December 31,
|
Six Months Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Stock Option Plans:
|
||||||||||||||||
|
Risk-free
interest rate
|
2.50 | % | 2.5 | % | ||||||||||||
|
Expected
life (in years)
|
3.5 | 3.5 | ||||||||||||||
|
Volatility
|
25 | % | 25 | % | ||||||||||||
|
Dividend
yield
|
0 | % | 0 | % | ||||||||||||
NOTE 4
– INVENTORIES
Inventories
are stated at the lower of cost (which approximates first-in, first-out) or
market. Market is defined as sales price less cost to dispose and a normal
profit margin. Inventories consisted of the following:
|
December 31, 2009
|
June 30, 2009
|
|||||||
|
Raw
materials
|
$ | 410,778 | $ | 366,355 | ||||
|
Work
in process
|
275,694 | 176,637 | ||||||
|
Finished
goods
|
203,485 | 157,411 | ||||||
| $ | 889,957 | $ | 700,403 | |||||
12
NOTE 5 – EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Equipment
and leasehold improvements are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives for
equipment and furniture and fixtures, or the shorter of the remaining lease term
or estimated useful lives for leasehold improvements.
|
Factory
Equipment
|
7
to 10 years
|
||
|
Furniture
and fixtures, computer equipment and software
|
5
to 7 years
|
||
|
Leasehold
improvements
|
7
to 10 years
|
Equipment
and leasehold improvements consisted of the following:
|
December 31, 2009
|
June 30, 2009
|
|||||||
|
Factory
Equipment
|
$ | 1,522,479 | $ | 1,506,147 | ||||
|
Computer
Equipment and Software
|
790,075 | 665,135 | ||||||
|
Office
Equipment and Furniture
|
166,996 | 166,996 | ||||||
|
Leasehold
Improvements
|
318,033 | 312,433 | ||||||
| 2,797,583 | 2,650,711 | |||||||
|
Less
accumulated depreciation and amortization
|
(1,649,873 | ) | (1,515,194 | ) | ||||
|
Construction-in-progress
|
- | - | ||||||
|
Equipment
and leasehold improvements, net
|
$ | 1,147,710 | $ | 1,135,517 | ||||
Management
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. Recoverability of these assets is measured by a comparison of the
carrying amount to forecasted undiscounted future cash flows expected to be
generated by the asset. If the carrying amount exceeds its estimated future cash
flows, then an impairment charge is recognized to the extent that the carrying
amount exceeds the asset’s fair value. Management has determined no asset
impairment occurred during the three months ended December 31,
2009.
NOTE 6 – NOTE PAYABLE -
EQUIPMENT
Note
payable – equipment consisted of the following:
|
December 31, 2009
|
June 30, 2009
|
|||||||
|
Note
payable to Fidelity Bank in monthly installments of $5,364 including
interest at 8%, maturing October 25, 2010, secured by
equipment
|
$ | 43,092 | $ | 72,812 | ||||
|
Less:
Current Portion
|
(43,092 | ) | (61,244 | ) | ||||
|
Long-term
Note Payable
|
$ | – | $ | 11,568 | ||||
The
schedule of minimum maturities of the note payable for fiscal years subsequent
to June 30, 2009 is as follows:
|
Year
ending June 30,
|
||||
|
2010
(six months)
|
$ | 31,232 | ||
|
2011
|
11,860 | |||
|
Total
note payments
|
$ | 43,092 | ||
13
NOTE 7 – REVOLVING
LINE OF CREDIT
On
November 10, 2009, the Company entered into a loan agreement for a revolving
line of credit with a commercial finance company that provides credit to 80% of
domestic accounts receivable aged less than 90 days up to $250,000. Borrowings
under the agreement bear interest at Prime rate plus six percent (9.25 percent
as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly
collateral monitoring fee, as defined in the agreement. On December
31, 2009, the balance owed under this revolving line of credit was
$243,967.
On March
19, 2008, the Company entered into a loan agreement for a revolving line of
credit with a commercial finance company that provides credit to 85% of accounts
receivable aged less than 90 days up to $500,000 and eligible inventory (as
defined in the agreement) up to a sub-limit of $220,000, such inventory loan not
to exceed 30% of the accounts receivable loan. Borrowings under the agreement
bear interest at the Prime rate plus two percent (5.25 percent at June 30,
2009), payable monthly, plus a monthly service charge of 1.25% to 1.5%,
depending on the underlying collateral. On June 30, 2009, the balance
owed under this revolving line of credit was $171,433, and the loan was fully
repaid on August 11, 2009.
Management
believes cash flows generated from operations, along with current cash and
borrowing capacity under the line of credit should be sufficient to finance
operating and capital requirements during the next 12 months. If new business
opportunities do arise, additional outside funding may be required.
NOTE 8 – CREDIT CARD
ADVANCE
On July
2, 2008, the Company received $350,000 from a finance company under the
terms of a credit facility that is secured by the Company's future credit
card receivables. Terms of the credit facility require repayment on
each business day of principal and interest at a daily rate of $1,507 over a
twelve month period. The credit facility had a financing fee of 12% (equal to
$42,000) on the principal amount, which equates to an effective annual
interest rate of 21.1%. The credit facility is personally guaranteed
by the Company's CEO and majority shareholder, Louis Friedman. On
June 3, 2009, the Company borrowed an additional $200,000 under this credit
facility. Terms of the current loan require repayment on each business day of
principal and interest at a daily rate of $1,723.08 over a six month period. The
current loan has a financing fee of 12% (equal to $24,000) on the principal
amount, which equates to an effective annual interest rate of
43.2%. The amount owed on the credit card advance was $0 at December
31, 2009 and $198,935 at June 30, 2009.
NOTE 9 – UNSECURED LINES OF
CREDIT
The
Company has drawn cash advances on three unsecured lines of credit that are in
the name of the Company and Louis S. Friedman. The terms of these unsecured
lines of credit call for monthly payments of principal and interest, with
interest rates ranging from 12% to 18%. The aggregate amount owed on the three
unsecured lines of credit was $112,790 at December 31, 2009 and $124,989 at June
30, 2009.
NOTE 10 – COMMITMENTS AND
CONTINGENCIES
Operating
Leases
The
Company leases its facility under a ten year operating lease that was signed in
September 2005 and expires December 31, 2015. The lease is on an escalating
schedule with the final year on the lease at $34,358 per month. The liability
for this difference in the monthly payments is accounted for as a deferred rent
liability, and the balance in this account at December 31, 2009 was $346,599 and
$337,155 at June 30, 2009. The rent expense under this lease for the three
months ended December 31, 2009 and 2008 was $80,931 and for the six months ended
December 31, 2009 and 2008 was $161,862.
The lease
for the facility requires the Company to provide a standby letter of credit
payable to the lessor in the amount of $225,000 until December 31, 2010. The
majority shareholder agreed to provide this standby letter of credit on the
Company's behalf. Upon expiration of the initial letter of credit, a
letter of credit in the amount of $25,000 in lieu of a security deposit is
required to be provided.
14
The
Company leases certain material handling equipment under an operating
lease. The monthly lease amount is $4,082 per month and expires
September 2012.
The
Company also leases certain warehouse equipment under an operating
lease. The monthly lease is $508 per month and expires February
2011.
The
Company also leases certain postage equipment under an operating
lease. The monthly lease is $144 per month and expires January
2013.
Future
minimum lease payments under non-cancelable operating leases at
December 31, 2009 are as follows:
|
Year
ending June 30,
|
||||
|
2010
(six months)
|
$ | 205,241 | ||
|
2011
|
413,263 | |||
|
2012
|
420,348 | |||
|
2013
|
395,798 | |||
|
2014
|
391,685 | |||
|
Thereafter
through 2016
|
1,002,816 | |||
|
Total
minimum lease payments
|
$ | 2,829,151 | ||
Capital
Leases
The
Company has acquired equipment under the provisions of long-term leases. For
financial reporting purposes, minimum lease payments relating to the equipment
have been capitalized. The leased properties under these capital leases have a
total cost of $349,205. These assets are included in the fixed assets listed in
Note 5 and include computers, software, furniture, and equipment. The capital
leases have stated or imputed interest rates ranging from 7% to
21%.
The
following is an analysis of the minimum future lease payments subsequent to the
year ended June 30, 2009:
|
Year
ending June 30
|
||||
|
2010
(six months)
|
$ | 40,184 | ||
|
2011
|
77,010 | |||
|
2012
|
33,974 | |||
|
2013
|
22,930 | |||
|
2014
|
6,835 | |||
|
Present
value of capital lease obligations
|
$ | 180,933 | ||
|
Imputed
interest
|
34,134 | |||
|
Future
minimum lease payments
|
$ | 215,067 | ||
Common
Stock Issuance
On
September 2, 2009, Liberator, Inc. acquired the majority of the issued and
outstanding common stock of the Company in accordance with a common
stock purchase agreement (the “Stock Purchase Agreement”) by and among
Liberator, Inc. (“Liberator” or the “Purchaser”) and Belmont Partners, LLC, a
Virginia limited liability company (“Belmont” or the “Seller”) and the
Company. At closing, Liberator acquired 972,000 shares (80.7%) of the
Company from the Seller for a total of two hundred and forty thousand and five
hundred dollars ($240,500) in addition to the issuance by the Company of two
hundred and fifty thousand (250,000) warrants to Belmont purchase an equal
number of shares of the Company’s common stock with an exercise price of twenty
five cents ($0.25), the issuance by the Company to Belmont of a total of one
million five hundred thousand (1,500,000) shares of the Company’s
common stock with seven hundred and fifty thousand (750,000) shares delivered at
closing and the balance of seven hundred fifty thousand (750,000) shares to be
delivered on the one (1) year anniversary of the closing.
The
Company will deliver the balance 750,000 shares of common stock provided,
however, that in the event that the Company or the Buyer makes a claim for
indemnification pursuant to Section 7(a) of the Stock Purchase Agreement prior
to the one (1) year anniversary, the number of balance shares will be reduced by
the result of the following amount: (a) the amount of the indemnity claim
pursuant to Section 7(a); divided by (b) the five (5) day average price per
share of the Company’s common stock as quoted on the Over-the-Counter Bulletin
Board or other electronic quotation system.
15
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. Pursuant to Rule 506, all shares purchased in the Regulation D
Rule 506 offering were restricted in accordance with Rule 144 of the Securities
Act of 1933.
NOTE 11–
INCOME
TAXES
There is
no income tax provision (benefit) for federal or state income taxes as the
Company has incurred operating losses since inception. Deferred income taxes
reflect the net tax effects of net operating loss and tax credit carryovers and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Utilization
of the net operating loss and tax credit carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The Company may have experienced a change of control that could result in a
substantial reduction to the previously reported net operating losses at June
30, 2009; however, the Company has not performed a change of control study and
therefore has not determined if such change has taken place and if such a change
has occurred the related reduction to the net operating loss
carryforwards. As of December 31, 2009, the net operating loss
carryforwards continue to be fully reserved and any reduction in such amounts as
a result of this study would also reduce the related valuation allowances
resulting in no net impact to the financial results of the Company.
The
Company applies the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” As of December 31,
2009, there was no significant liability for income tax associated with
unrecognized tax benefits.
With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
and non-U.S. income tax examination by tax authorities for tax years before
2003.
NOTE 12 –
EQUITY
Common
Stock– The Company’s authorized common stock was 175,000,000 shares at
December 31, 2009 and June 30, 2009. Common stockholders are entitled
to dividends if and when declared by the Company’s Board of Directors, subject
to preferred stockholder dividend rights. At December 31, 2009 and June 30,
2009, the Company had reserved the following shares of common stock for
issuance:
|
December
31,
|
June
30,
|
|||||||
|
(in shares)
|
2009
|
2009
|
||||||
|
Non-qualified
stock options
|
438,456
|
438,456
|
||||||
|
Shares
of common stock subject to outstanding warrants
|
2,712,393
|
2,462,393
|
||||||
|
Shares
of common stock reserved for issuance under the 2009 Stock Option
Plan
|
5,000,000
|
–
|
||||||
|
Share
of common stock issuance upon conversion of the Preferred Stock
(convertible after July 1, 2011)
|
4,300,000
|
4,300,000
|
||||||
|
Shares
of common stock issuable upon conversion of Convertible
Notes
|
2,500,000
|
1,500,000
|
||||||
|
Total
shares of common stock equivalents
|
14,950,849
|
8,700,849
|
||||||
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
Partners LLC 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 fair market value of the 750,000 shares of
common stock issued was determined to be $187,500 ($.25 per share) and was
charged to expense during the three months ended September 30,
2009.
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. Pursuant to Rule 506, all shares purchased in the Regulation D
Rule 506 offering were restricted in accordance with Rule 144 of the Securities
Act of 1933.
16
Preferred Stock
– 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”).
Pursuant
to the Merger Agreement, each 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 Merger Agreement, the Company was not authorized to issue any
preferred stock, and the parties agreed that within ten (10) days of the closing
of the Merger the Company will take the appropriate steps to file an amendment
to its Articles of Incorporation authorizing the issuance of the WES Preferred
Stock, and at such time the WES Preferred Stock will be exchanged pursuant to
the terms of the Merger Agreement. The WES Preferred Stock will have
the same rights and preferences as the Liberator Preferred Shares and will be
convertible into 4,300,000 shares of common stock after July 1,
2011.
At such
time as the Company has filed an amendment to its Articles of Incorporation
authorizing the issuance of the WES Preferred Stock, the Company will have
10,000,000 authorized shares of preferred stock, par value $.0001 per share, of
which 4,300,000 shares will be designated as Series A Convertible Preferred
Stock.
Warrants –
As of September 30, 2009, outstanding warrants to purchase approximately
2,712,393 shares of common stock at exercise prices of $.25 to $1.00 will expire
at various dates within five years of December 31, 2009.
The
Company issued 2,462,393 warrants during fiscal 2009 in conjunction with the
reverse merger with OneUp Innovations. All of these warrants are exercisable
immediately and expire five years from the date of issuance, June 26, 2014.
These warrants were valued using a volatility rate of 25% and a risk-free
interest rate of 4.5%, as more fully described below:
|
|
1.
|
A
total of 1,462,393 warrants were issued for services rendered by the
placement agent in the private placement that closed on June 26, 2009.
These warrants have fixed exercise prices of $.50 per share (292,479
warrants), $.75 per share (292,479 warrants) and $1.00 per share (877,435
warrants.) The Company valued these warrants at $8,716 using the above
assumptions and the expense was fully recognized during fiscal
2009.
|
|
|
2.
|
A
total of 1,000,000 warrants were issued to Hope Capital at a fixed
exercise price of $.75. The Company valued the warrants at $4,500 using
the above assumptions and the expense was fully recognized during fiscal
2009.
|
On
September 2, 2009, the Company issued 250,000 warrants to Belmont Partners LLC
in conjunction with the purchase of majority control by Liberator to purchase
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. These
warrants were valued using a volatility rate of 25%, a risk-free interest rate
of 4.5% and a fair market value on the date of grant of $.25. The
warrants were valued at $14,458 and were expensed as an expense related to the
purchase of majority control by Liberator during the three months ended
September 30, 2009.
NOTE 13 – RELATED
PARTIES
On June
30, 2008, the Company had a subordinated note payable to its majority
shareholder and CEO in the amount of $310,000 and its majority shareholder's
wife in the amount of $395,000. During fiscal 2009, the majority shareholder
loaned the Company an additional $91,000, and a director loaned the Company
$29,948. On June 26, 2009, in connection with the merger between
OneUp and Liberator, the majority shareholder and his wife agreed to convert
$700,000 of principal balance and $132,120 of accrued but unpaid interest to
preferred stock. Interest during fiscal 2009 was accrued at the
prevailing prime rate (which is currently at 3.25%) and totaled $34,647. The
interest accrued on these notes for the year ended June 30, 2008 was $47,576.
The accrued interest balance on these notes, as of June 30, 2009, was $8,210.
The notes are subordinate to all other credit facilities currently in place. As
of December 31, 2009, the Company owes a Liberator director $29,948 and the
majority shareholder’s wife (who is
also an officer) $76,000.
On June
24, 2009, the Company issued a 3% convertible note payable to Hope Capital with
a face amount of $375,000. Hope Capital is a shareholder of the Company and was
the majority shareholder of Liberator, then named “Remark Enterprises, Inc.,”
before Liberator’s merger with OneUp. The note is convertible, at the
holder’s option, into common stock at $.25 per share and may be converted at any
time prior to the maturity date of August 15, 2012. Upon maturity, the issuer
has the option to either repay the note plus accrued interest in cash or issue
the equivalent number of shares of common stock at $.25 per share. As of
December 31, 2009, the 3% Convertible Note Payable is carried net of the fair
market value of the embedded conversion feature of $74,375. This
amount will be amortized over the remaining life of the note as additional
interest expense.
17
On
September 2, 2009, the Company issued a 3% convertible note payable to Hope
Capital with a face amount of $250,000. Hope Capital is a shareholder of the
Company and was the majority shareholder of Liberator, then named “Remark
Enterprises, Inc.,” before Liberator’s merger with OneUp. The note is
convertible, at the holder’s option, into common stock at $.25 per share and may
be converted at any time prior to the maturity date of September 2, 2012. As of
December 31, 2009, the 3% Convertible Note Payable is carried net of the fair
market value of the embedded conversion feature of $51,407. This
amount will be amortized over the life of the note as additional interest
expense.
NOTE 14 – CONVERTIBLE NOTES
PAYABLE - SHAREHOLDER
On June
24, 2009, the Company issued a 3% convertible note payable to Hope Capital with
a face amount of $375,000. Hope Capital is a shareholder of the Company and was
Liberator’s majority shareholder, then named “Remark
Enterprises, Inc.,” before Liberator’s merger with OneUp
Innovations. The note is convertible, at the holder’s option, into
common stock at $.25 per share and may be converted at any time prior to the
maturity date of August 15, 2012. Upon maturity, the issuer has the option to
either repay the note plus accrued interest in cash or issue the equivalent
number of shares of common stock at $.25 per share. As of December 31, 2009, the
3% Convertible Note Payable is carried net of the fair market value of the
embedded conversion feature of $74,375. This amount will be amortized
over the remaining life of the note as additional interest expense.
On
September 2, 2009, the Company issued a 3% convertible note payable to Hope
Capital with a face amount of $250,000. Hope Capital is a shareholder of the
Company and was Liberator’s majority shareholder, then named “Remark
Enterprises, Inc.,” before Liberator’s reverse merger with OneUp. The
note is convertible, at the holder’s option, into common stock at $.25 per share
and may be converted at any time prior to the maturity date of September 2,
2012. As of December 31, 2009, the 3% Convertible Note Payable is carried net of
the fair market value of the embedded conversion feature of
$51,407. This amount will be amortized over the life of the note as
additional interest expense.
NOTE 15 – MERGER
COSTS
Expenses
related to the merger with Liberator during the first quarter of fiscal 2010
totaled $192,167. This item consists of $192,167 for the discounted
face value of the $250,000 convertible note payable to Hope
Capital.
Costs
incurred by the Company prior to the merger totaled $201,958 and included
$14,458 for the fair market value of the warrant to purchase 250,000 shares
issued to Belmont Partners LLC, and $187,500 for the fair market value of the
750,000 Company shares issued to Belmont Partners LLC. All of the
expenses related to the merger included in other income (expense) are non-cash
expenses.
NOTE 16 – SUBSEQUENT
EVENTS
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. Pursuant to Rule 506, all shares purchased in the Regulation D
Rule 506 offering were restricted in accordance with Rule 144 of the Securities
Act of 1933.
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 private placement.
Such securities were not registered under the Securities Act of 1933. The
issuance of these shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933. In addition, the Company paid
New Castle Financial Services a fee of 10% of the gross proceeds, plus a 2%
non-accountable expense allowance plus reimburse them for $12,500 in
expenses.
On
February 17, 2010, OneUp Innovations, Inc. (“OneUp”), the indirect
wholly owned subsidiary of the Company, entered into a Distributorship Agreement
with TENGA Co., Ltd (“TENGA”). Pursuant
to the terms of the agreement, OneUp will exclusively distribute TENGA’s
products in the United States for a period of three years. The
agreement will be renewed and extended for one additional year upon consultation
and acceptance by both parties. The purchase price of the products to
be distributed will be determined by mutual written consent under the pricing
schedule provided to OneUp by TENGA. OneUp’s estimated minimum
purchase obligations are as follows: (i) between 200,000,000 Yen (approximately
$2.2 million) to 300,000,000 Yen (approximately $3.3 million) in the first year,
(ii) between 400,000,000 Yen (approximately $4.4 million) to 600,000,000 Yen
(approximately $6.6 million) in the second year, and (iii) between 900,000,000
(approximately $9.9 million) Yen to 1,000,000,000 Yen (approximately $11
million) in the third year. Delivery must be made within seventy days
of TENGA confirming the purchase order. OneUp must maintain product
liability insurance with coverage against personal and property damage for at
least $2 million. Either party may terminate the agreement with
thirty days’ prior written notice if the non-terminating party fails to fulfill
the conditions set forth in the agreement. TENGA provides a one (1)
year warranty for its products.
18
FORWARD
LOOKING STATEMENTS
Certain
statements in this Management’s Discussion and Analysis section, other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements
generally are identified by the words “believe,” “project,” “expect,”
“anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar
expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties that
may cause actual results to differ materially from the forward-looking
statements. A detailed discussion of risks and uncertainties that could cause
actual results and events to differ materially from such forward-looking
statements is included in the “Risk Factors” section of our most recent Annual
Report on Form 10-K filed with the Securities and Exchange Commission. We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
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.
Overview
Comparisons
of selected consolidated statements of operations data as reported herein follow
for the periods indicated:
|
Total:
|
Three Months Ended
December 31, 2009
|
Three Months Ended
December 31, 2008
|
Change
|
|||||||||
|
Net
sales:
|
$ | 3,034,664 | $ | 2,705,471 | 12 | % | ||||||
|
Gross profit
|
$ | 1,076,632 | $ | 1,042,371 | 3 | % | ||||||
|
Loss
from operations
|
$ | (105,758 | ) | $ | (110,541 | ) | 61 | % | ||||
|
Diluted
(loss) per share
|
$ | (0.00 | ) | $ | (0.00 | ) | — | |||||
|
Net Sales by Channel:
|
Three Months Ended
December 31, 2009
|
Three Months Ended
December 31, 2008
|
Change
|
|||||||||
|
Direct
|
$ | 1,381,818 | $ | 1,261,141 | 10 | % | ||||||
|
Wholesale
|
$ | 1,347,777 | $ | 1,136,165 | 19 | % | ||||||
|
Other
|
$ | 305,069 | $ | 308,165 | (1 | )% | ||||||
|
Total
Net Sales
|
$ | 3,034,664 | $ | 2,705,471 | 12 | % | ||||||
Other
revenues consist principally of shipping and handling fees derived from our
Direct business.
|
Gross Profit by Channel:
|
Three Months Ended
December 31, 2009
|
Margin
%
|
Three Months Ended
December 31, 2008
|
Margin
%
|
Change
|
||||||||||||||||
|
Direct
|
$ | 724,040 | 52 | % | $ | 590,317 | 47 | % | 23 | % | |||||||||||
|
Wholesale
|
$ | 352,792 | 26 | % | $ | 393,068 | 35 | % | (10 | )% | |||||||||||
|
Other
|
$ | (200 | ) | $ | 58,986 | (100 | )% | ||||||||||||||
|
Total
Gross Profit
|
$ | 1,076,632 | 35 | % | $ | 1,042,371 | 39 | % | 3 | % | |||||||||||
19
Comparison
of Three Months Ended December 31, 2009 and Three Months Ended December 31,
2008
Net sales
for the three months ended December 31, 2009 increased from the comparable prior
year period by $329,193, or 12%. The increase in sales was the result
of higher sales in the Consumer and Wholesale channels. Direct sales (which
includes product sales through our three e-commerce sites and our retail store)
increased from $1,261,141 in the second quarter of fiscal 2009 to $1,381,818 in
the second quarter of fiscal 2010, an increase of approximately 12%, or
$120,677. We attribute this improvement to a general improvement in
the economy resulting in overall increases in consumer online spending during
the quarter, leading to consumers to purchase more of our products, as our
products are typically a discretionary purchase. According to a comScore, Inc.
report, online consumer spending in the United States increased 3% during the
quarter ended December 31, 2009, reversing a 3% decline from the prior year-over
year period. As a result of an increased focus on our Wholesale business, sales
to wholesale customers increased approximately 19% from the prior year. Sales to
Wholesale customers was expected to increase during the second quarter of fiscal
2010 (the three months ended December 31, 2009) as a result of new accounts
being added and as Wholesale customers increased their inventory levels prior to
the Christmas holiday. Wholesale customers include Liberator products sold to
distributors and retailers and private label items sold to other resellers. The
Wholesale category also includes contract manufacturing services, which consists
of specialty items that are manufactured in small quantities for certain
customer, and which, to date, has not been a material part of our
business.
One of
the most frequent consumer discount offers during the three months ended
December 31, 2009 was “free” or significantly reduced shipping and handling,
which accounts for the decrease in the Other category revenue and gross profit
from the prior year comparable period. In the current economic
environment, we anticipate the need to continue to offer “free” or reduced
shipping and handling to consumers as a promotional tool.
Gross
profit, derived from net sales less the cost of product sales, includes the cost
of materials, direct labor, manufacturing overhead, and
depreciation. Gross margin as a percentage of sales decreased to 35%
for the three months ended December 31, 2009 from 39% in the comparable prior
year period. This is primarily the result of a decrease in the margin on
Wholesale sales during the quarter (from 35% to 26%) and a decrease in the Other
margin to slightly less than zero. This was offset to some extent by the
increase in the Direct margin to 52% from 47% in the comparable prior year
period. We attribute the decrease in the Wholesale margin to an
increase in private label manufacturing, which has a slightly lower margin than
Liberator products sold to distributors and retailers. The improvement in the
Direct margin was the result of a price increase that was implemented earlier
this year and a slight decrease in certain raw material costs.
Total
operating expenses for the three months ended December 31, 2009 were 39% of net
sales, or $1,182,390, compared to 43% of net sales, or $1,152,912, for the same
period in the prior year. This 3% increase in operating expenses was
primarily the result of lower advertising and promotion costs, offset by
slightly higher Other Selling and Marketing expense and General and
Administrative expense.
Other
income (expense) during the second quarter decreased from expense of ($73,016)
in fiscal 2009 to expense of ($50,358) in fiscal 2010. Interest
expense and financing costs in the current quarter included $15,947 from the
amortization of the debt discount on the convertible notes.
No
expense or benefit from income taxes was recorded in the three months ended
December 31, 2009 or 2008. We do not expect any U.S. federal or state
income taxes to be recorded for the current fiscal year because of available net
operating loss carry-forwards.
We had a
net loss of $156,116, or ($0.00) per diluted share, for the three months ended
December 31, 2009 compared with a net loss of $183,557, or ($0.00) per diluted
share, for the three months ended December 31, 2008.
Comparison
of Six Months Ended December 31, 2009 and Six Months Ended December 31,
2008
Comparisons
of selected consolidated statements of operations data as reported herein follow
for the periods indicated:
|
Total:
|
Six Months Ended
December 31, 2009
|
Six Months Ended
December 31, 2008
|
Change
|
|||||||||
|
Net
sales:
|
$ | 5,069,656 | $ | 5,351,294 | (5 | )% | ||||||
|
Gross profit
|
$ | 1,734,808 | $ | 1,859,206 | (7 | )% | ||||||
|
Loss
from operations
|
$ | (371,770 | ) | $ | (395,881 | ) | 22 | % | ||||
|
Diluted
(loss) per share
|
$ | (0.00 | ) | $ | (0.00 | ) | — | |||||
20
|
Net Sales by Channel:
|
Six Months Ended
December 31, 2009
|
Six Months Ended
December 31, 2008
|
Change
|
|||||||||
|
Direct
|
$ | 2,551,606 | $ | 2,648,368 | (4 | )% | ||||||
|
Wholesale
|
$ | 2,033,140 | $ | 2,086,888 | (3 | )% | ||||||
|
Other
|
$ | 484,910 | $ | 616,038 | (21 | )% | ||||||
|
Total
Net Sales
|
$ | 5,069,656 | $ | 5,351,294 | (5 | )% | ||||||
Other
revenues consist principally of shipping and handling fees derived from our
Direct business.
|
Gross Profit by Channel:
|
Six Months Ended
December 31, 2009
|
Margin
%
|
Six Months Ended
December 31, 2008
|
Margin
%
|
Change
|
|||||||||||||||
|
Direct
|
$ | 1,225,924 | 48 | % | $ | 1,155,551 | 44 | % | 6 | % | ||||||||||
|
Wholesale
|
$ | 536,507 | 26 | % | $ | 586,695 | 28 | % | (9 | )% | ||||||||||
|
Other
|
$ | (27,623 | ) | (6 | )% | $ | 116,960 | 19 | % | (124 | )% | |||||||||
|
Total
Gross Profit
|
$ | 1,734,808 | 34 | % | $ | 1,859,206 | 35 | % | (7 | )% | ||||||||||
Net sales
for the six months ended December 31, 2009 decreased from the comparable prior
year period by $281,638, or 5%. The decrease in sales was experienced
in all sales channels. Consumer sales decreased from $2,648,368 in the first six
months of fiscal 2009 to $2,551,606 in the first six months of fiscal 2010, a
decrease of approximately 4%, or $96,762. One of the most frequent
consumer discount offers during the three months ended September 30, 2009 was
“free” or significantly reduced shipping and handling, which accounted for the
decrease in the Other category revenue and gross profit from the prior year
comparable six month period. Sales to Wholesale customers during the
six months ended December 31, 2009 was essentially flat from the prior year
comparable period, with a 3% decrease. Sales to Direct and Wholesale
customers is expected to increase during the remainder of fiscal 2010, as the
Company introduces new product lines for consumers and wholesale distribution
(see Footnote 16-Subsequent Events) and general economic conditions
continue to improve.
Gross
profit, derived from net sales less the cost of product sales, includes the cost
of materials, direct labor, manufacturing overhead, and
depreciation. Gross margin as a percentage of sales decreased
slightly to 34% for the six months ended December 31, 2009 from 35% in the
comparable prior year period. This is primarily the result of a decrease
in the margin on Wholesale sales during the second quarter (from 35% to 26%) and
a decrease in the Other margin to slightly less than zero. This was offset to
some extent by the increase in the Direct margin to 44% from 48% in the six
month period from the comparable prior year period. We
attribute the decrease in the Wholesale margin to an increase in private label
manufacturing during the quarter ended December 31, 2009, which has a slightly
lower margin than Liberator products sold to distributors and retailers. The
gross profit on the Other category decreased from a positive $116,960 to a
negative margin of $27,623 as a result of the “free” or reduced shipping and
handling charge promotions that were offered during the first and second
quarters of fiscal 2010. In the current economic environment, we
anticipate the need to continue to offer “free” or reduced shipping and handling
to consumers as a promotional tool.
Total
operating expenses for the six months ended December 31, 2009 were 42% of net
sales, or $2,106,578, compared to 42% of net sales, or $2,255,087, for the same
period in the prior year. This 7% decrease in operating expenses was
the result of lower expenses in the categories including advertising and
promotion costs, other selling and marketing costs and depreciation
expense.
Advertising
and promotion expenses decreased by 24% (or $133,232) from $551,234 in the first
six months of fiscal 2009 to $418,002 in the first six months of fiscal
2010. Advertising and promotion expenses were reduced during the
first half of fiscal 2010 as part of an on going program to improve the
targeting, timing and effectiveness of advertising spending. Other
Selling and Marketing costs decreased 8% (or $48,517) from the first half of
fiscal 2009 to the first half of fiscal 2010, primarily as a result of lower
professional fees, salaries, and graphic services cost, which was partially
offset by higher trade show and travel costs.
Other
income (expense) during the first six months increased from expense of $134,782
in fiscal 2009 to expense of $299,103 in fiscal 2010. Interest
(expense) and financing costs in the six months ended December 31 included
$21,301 from the amortization of the debt discount on the convertible notes.
Expenses related to the merger of Liberator, Inc. during the first quarter of
fiscal 2010 totaled $192,167. This item consists of the discounted
face value of the $250,000 convertible note payable to Hope Capital by
Liberator, who is the acquirer pursuant to ASC Topic 805 (formerly SFAS
141(revised)). The expense related to the merger included in other
income (expense) are non-cash expenses.
21
No
expense or benefit from income taxes was recorded in the six months ended
December 31, 2009 or 2008. We do not expect any U.S. federal or state
income taxes to be recorded for the current fiscal year because of available net
operating loss carry-forwards.
We had a
net loss of $670,873, or ($0.01) per diluted share, for the six months ended
December 31, 2009 compared with a net loss of $530,663, or ($0.01) per diluted
share, for the six months ended December 31, 2008.
Variability of
Results
We have
experienced significant quarterly fluctuations in operating results and
anticipates that these fluctuations may continue in future periods. As described
in previous paragraphs, operating results have fluctuated as a result of changes
in sales levels to consumers and wholesalers, competition, costs associated with
new product introductions, and increases in raw material costs. In addition,
future operating results may fluctuate as a result of factors beyond our control
such as foreign exchange fluctuation, changes in government regulations, and
economic changes in the regions in which we operate and sell. A
portion of our operating expenses are relatively fixed and the timing of
increases in expense levels is based in large part on forecasts of future sales.
Therefore, if net sales are below expectations in any given period, the adverse
impact on results of operations may be magnified by our inability to
meaningfully adjust spending in certain areas, or the inability to adjust
spending quickly enough, as in personnel and administrative costs, to compensate
for a sales shortfall. We may also choose to reduce prices or increase spending
in response to market conditions, and these decisions may have a material
adverse effect on financial condition and results of operations.
Financial
Condition
Cash and
cash equivalents decreased $1,609,332 to $206,301 at December 31, 2009 from
$1,815,633 at June 30, 2009. This decrease in cash resulted from cash used in
operating activities of $1,230,041, cash used in investing activities
of $146,872, and by cash used in financing activities of $232,419, as more fully
described below.
Cash used
in operating activities for the six months ended December 31, 2009 represents
the results of operations adjusted for non-cash depreciation ($134,679) and the
non-cash deferred rent accrual reversal of $9,709, the non-cash expenses related
to the merger of $192,163, and amortization of the debt discount on the
convertible notes of $21,305. Changes in operating assets and liabilities
include an increase in accounts receivable of $181,612, an increase in inventory
of $189,554 and an increase in prepaid expenses and other assets of
$35,738. Additional cash was used to reduce accounts payable by
$372,232 during the six months ended December 31, 2009, and reduce accrued
compensation and accrued expenses and interest by $33,260 and $85,210,
respectively.
Cash
flows used in investing activities reflects capital expenditures during the six
months ended December 31, 2009. The largest component of capital expenditures
during the period was our project to upgrade its e-commerce platform and ERP
system. Expenditures on the e-commerce platform and ERP system, as of December
31, 2009, total approximately $397,337 and the systems were operational and in
use as of September 1, 2009.
Cash
flows used in financing activities are attributable to the repayment of the
revolving line of credit of $1,426,705, repayment of the credit card cash
advance of $198,935, and principal payments on notes payable and capital leases
totaling $73,819.
As of
December 31, 2009, our net accounts receivable increased by $181,612, or 52%, to
$528,042 from $346,430 at June 30, 2009. The increase in accounts receivable is
primarily the result of increased sales to certain wholesale accounts during
December 2009 as these customers typically increase their purchases in advance
of Christmas and Valentine’s Day. Management believes that our accounts
receivable are collectible net of the allowance for doubtful accounts of $15,178
at December 31, 2009.
Our net
inventory increased by $189,554, or 27%, to $889,957 as of December 31, 2009
compared to $700,403 as of June 30, 2009. The increase reflects an increase in
finished goods inventory in anticipation of increased product sales during the
three months ended March 31, 2010.
Accounts payable decreased by $672,232,
or 17%, to $1,875,613 as of December 31, 2009 compared to $2,247,845 as of June
30, 2009. The decrease in accounts payable was the result of our improved
working capital position that resulted from the net proceeds of the private
placement of Liberator, Inc.’s common stock that closed on June 26,
2009.
22
Liquidity and Capital
Resources
At
December 31, 2009, our working capital deficiency was $670,566, a decrease of
$564,442 compared to the deficiency of $106,124 at June 30,
2009. Cash and cash equivalents at December 31, 2009 totaled
$206,301, a decrease of $1,609,332 from $1,815,633 at June 30,
2009.
On
November 10, 2009, the Company entered into a loan agreement for a revolving
line of credit with a commercial finance company that provides credit to 80% of
domestic accounts receivable aged less than 90 days up to $250,000. Borrowings
under the agreement bear interest at Prime rate plus six percent (9.25 percent
as of February 16, 2010) plus a 2% annual facility fee and a .25% monthly
collateral monitoring fee, as defined in the agreement. The unpaid
balance on this revolving line of credit was $243,967 as of December 31,
2009.
Management
believes anticipated cash flows generated from operations during the third
quarter of fiscal 2010, along with current cash and cash equivalents as well as
borrowing capacity under the line of credit should be sufficient to finance
working capital requirements required by operations during the next twelve
months. However, if product sales are less than anticipated during the three
months ended March 31, 2010, we will need to raise additional funding in the
near term to meet its working capital requirements. If we raise additional
capital by issuing equity securities, our existing stockholders’ ownership will
be diluted. We cannot provide assurance that additional financing
will be available in the near term when needed, particularly in light of the
current economic environment and adverse conditions in the financial markets, or
that, if available, financing will be obtained on terms favorable to the Company
or to our stockholders. If we require additional financing in the
near-term and are unable to obtain it, this will adversely affect our ability to
operate as a going concern and may require the Company to substantial scale back
operations or cease operations altogether.
Sufficiency of
Liquidity
The
accompanying financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. We incurred a net loss of $670,873 for the six
months ended December 31, 2009 and a net loss of $3,754,982 for the year ended
June 30, 2009. As of December 31, 2009, we have an accumulated deficit of
$686,838 and a working capital deficit of $670,566.
In view
of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon our ability to meet our financing
requirements, and the success of our future operations. Management believes that
actions presently being taken to revise our operating and financial requirements
provide the opportunity for the Company to continue as a going
concern.
These
actions include initiatives to increase gross profit margins through improved
production controls and reporting. To that end, we recently implemented a new
Enterprise Resource Planning (ERP) software system. We also plan to reduce
discretionary expense levels to be better in line with current revenue levels.
Furthermore, our plan of operation in the next twelve months continues a
strategy for growth within our existing lines of business with an on-going focus
on growing domestic sales. We estimate that the operational and strategic
development plans we have identified will require approximately $2,300,000 of
funding. We expect to invest approximately $500,000 for additional inventory of
sexual wellness products and $1,800,000 on sales and marketing programs,
primarily sexual wellness advertising in magazines and on cable television. We
will also be exploring the opportunity to acquire other compatible
businesses.
We plan
to finance the required $2,300,000 with a combination of cash flow from
operations as well as cash on hand and cash raised through equity and debt
financings.
Capital
Resources
We do not
currently have any material commitments for capital expenditures. We expect
total capital expenditures for the remainder of fiscal 2010 to be under $50,000
and to be funded by capital leases and, to a lesser extent, anticipated
operating cash flows and borrowings under the revolving line of credit. This
includes capital expenditures in support of our normal operations, and
expenditures that we may incur in conjunction with initiatives to further
upgrade our e-commerce platform and enterprise resource planning system (ERP
system.)
23
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.
Not
applicable.
ITEM 4. Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures
We
maintain a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that we file or
submit under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms and to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosures. As of the end of the period covered by
this quarterly report, an evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures,
as of the end of the period covered by this Quarterly Report on Form 10-Q, were
effective at the reasonable assurance level to ensure that information required
to be disclosed by the Company in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in United States Securities and Exchange Commission rules and
forms and to ensure that information required to be disclosed by the Company in
the reports that we file or submit under the Exchange Act is accumulated and
communicated to the management, including CEO and CFO, as appropriate to allow
timely decisions regarding required disclosures.
Changes in Internal Control Over
Financial Reporting
There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
There
have been no material developments during the quarter ended December 31, 2009 in
any material pending legal proceedings to which the Company is a party or of
which any of our property is the subject.
There
were no unregistered sales of equity securities during the quarter ended
December 31, 2009 to report that have not already been disclosed in a Current
Report on Form 8-K.
None.
None.
24
(a) None.
(b) There
were no changes to the procedures by which security holders may recommend
nominees to our board of directors.
|
Exh. No.
|
Description
|
|
|
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 *
|
|
*
|
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.
|
25
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 19,
2010
|
By:
|
/s/ Louis
S. Friedman
|
|
|
(Date)
|
Louis
S. Friedman
|
||
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|||
|
February 19,
2010
|
By:
|
/s/
Ronald P. Scott
|
|
|
(Date)
|
Ronald
P. Scott
|
||
|
Chief
Financial Office and Secretary
(Principal
Financial & Accounting
Officer)
|
26