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Luvu Brands, Inc. - Quarter Report: 2013 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2013

 

OR

 

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

For the transition period from                      to                     

 

Commission File Number: 000-53314

 

Liberator, Inc.

(Exact name of registrant as specified in this charter)

     

Florida

(State or other jurisdiction

of incorporation or organization)

 

59-3581576

(I.R.S. Employer

Identification No.)

 

2745 Bankers Industrial Drive, Atlanta, Georgia 30360

(Address of principal executive offices and zip code)

 

(770) 246-6400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No x

 

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

 

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

 

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

(Do not check if a smaller reporting company)

   

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

 

As of May 8, 2013 there were 70,702,596 shares of the registrant’s common stock outstanding.

 
 

LIBERATOR, INC.

TABLE OF CONTENTS

    Page Number
  PART I – FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets –  
  At March 31, 2013 (unaudited) and June 30, 2012 3
     
  Condensed Consolidated Statements of Operations –  
  For the Quarters and Nine Months Ended  
  March 31, 2013 and March 31, 2012 (unaudited) 4
     
  Condensed Consolidated Statements of Cash Flows –  
  For the Nine Months Ended  
  March 31, 2013 and March 31, 2012 (unaudited) 5
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 6
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 24
     
ITEM 4. Controls and Procedures 25
     
  PART II – OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 26
     
ITEM 1A. Risk Factors 26
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
ITEM 4. Mine Safety Disclosures 26
     
ITEM 6. Exhibits 26
     
SIGNATURE   27

 

 

 

 

 


 
 

PART I   FINANCIAL INFORMATION

 

ITEM 1.                        FINANCIAL STATEMENTS

 

LIBERATOR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

   

March 31,
2013

(unaudited)

   

June 30,
2012

 
ASSETS                
Current assets:                
    Cash and cash equivalents   $ 376,571     $ 494,420  
    Accounts receivable, net     571,945       755,303  
    Inventories, net     1,469,431       1,141,769  
    Prepaid expenses    

139,842

     

67,042

 
        Total current assets     2,557,789       2,458,534  
                 
Equipment and leasehold improvements, net     791,621       735,677  
Other assets    

4,479

     

9,082

 
        Total assets   $

3,353,889

    $

3,203,293

 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
Current liabilities:                
    Accounts payable   $ 1,593,780     $ 1,643,405  
    Accrued compensation     301,202       255,105  
    Accrued expenses and interest     200,944       173,063  
    Line of credit     417,142       506,753  
    Current portion of leases payable     51,653       31,538  
Current portion of deferred rent payable     15,949       25,669  
Merchant cash advance (net of $19,200 in discount)     178,336       -  
    Convertible notes payable - shareholder     625,000       625,000  
    Short-term unsecured notes payable     784,021       843,040  
    Notes payable - related party    

116,000

     

116,000

 
        Total current liabilities     4,284,027       4,219,573  
Long-term liabilities:                
    Leases payable     19,007       42,028  
Deferred rent payable     193,062       224,505  
Unsecured note payable     200,000       -  
Unsecured lines of credit    

19,447

     

38,980

 
    Total long-term liabilities    

431,516

     

305,513

 
        Total liabilities     4,715,543       4,525,086  
                 
Commitments and contingencies (note 16)     -        -   
Stockholders’ equity (deficit):                
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding     -       -  
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000,000 as of March 31, 2013 and June 30, 2012     430       430  
Common stock of $0.01 par value, 175,000,000 shares authorized; 70,702,596 shares issued and outstanding at March 31, 2013 and at June 30, 2012     707,026       707,026  
    Additional paid-in capital     5,759,170       5,729,951  
    Accumulated deficit    

(7,828,280

)    

(7,759,200

)
        Total stockholders’ equity (deficit)    

(1,361,654

)    

(1,321,793

)
        Total liabilities and stockholders’ equity (deficit)   $

3,353,889

    $

3,203,293

 

 

See accompanying notes to unaudited interim financial statements.

 

3


 
 

LIBERATOR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

 

 

Three Months Ended

March 31,

 

Nine Months Ended

March 31,

 
   

2013

   

2012

 

2013

   

2012

 
           
Net Sales   $ 3,568,115     $ 3,961,059   $ 10,759,146     $ 11,208,681  
Cost of goods sold    

2,568,743

     

2,709,453

   

7,570,255

     

7,835,682

 
Gross profit     999,372       1,251,606     3,188,891       3,372,999  
Operating expenses                              
Advertising and promotion     118,633       130,507     382,996       340,657  
Other selling and marketing     393,609       366,410     1,091,440       983,406  
General and administrative     434,045       594,677     1,290,402       1,604,073  
Depreciation and amortization    

44,561

     

54,114

   

133,524

     

157,611

 
Total operating expenses    

990,848

     

1,145,708

   

2,898,362

     

3,085,747

 
Income from continuing operations     8,524       105,898     290,529       287,252  

 

Other Income (Expense):

                             
Interest income     241       214     552       535  
Interest (expense) and financing costs     (102,978 )     (95,820   (272,308 )     (258,493 )
Loss on disposal of assets     (85,052 )     -     (87,853 )      
Debt issuance costs    

-

     

(12,257

 

-

     

(36,771

)
Total Other Income (Expense)    

(187,789

)    

(107,863

 

(359,609

)    

(294,729

)
Loss from continuing operations before income taxes     (179,265 )     (1,965 )     (69,080 )   (7,477 )
Provision for income taxes    

-

     

-

   

-

     

-

 
Loss from continuing operations     (179,265 )     (1,965 )   (69,080 )   (7,477 )

Loss from discontinued operations, including loss on disposal of $101,432

   

-

     

-

   

-

     

(127,473

)
Net loss  

$

 

(179,265

)  

$

(1,965

$

(69,080

)   $

(134,950

 

)

Net loss per share                              
          Basic  

$

(0.00

)  

$

(0.00

)

$

(0.00

)

$

(0.00

)
          Diluted  

$

(0.00

)  

$

(0.00

$

(0.00

)

$

(0.00

)
                               
Shares used in computing net loss per share                              
            Basic    

70,702,596

     

69,593,750

   

70,702,596

     

87,151,237

 
          Diluted    

70,702,596

     

69,632,805

   

70,702,596

     

87,185,121

 
                                   

 

 

 

 

 

 

See accompanying notes to unaudited interim financial statements.

 

4


 
 

LIBERATOR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

    Nine Months Ended  
   

March 31,

 
   

2013

   

2012

 
OPERATING ACTIVITIES:                
Net loss from continuing operations   $ (69,080 )   $ (7,477 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization     133,524       157,611  
Amortization of debt discount     28,800       36,771  
Common stock issued for services     -       55,000  
Stock based compensation expense     29,219       26,469  
Loss on disposal of fixed asset     87,853       -  
Provision for bad debt     20,759       (7,347 )
Deferred rent payable     (41,163 )     (33,183 )
Changes in operating assets and liabilities:                
Accounts receivable     162,599       (95,668
Inventories     (327,662     (208,772 )
Prepaid expenses and other assets     (68,197 )     (4,231
Accounts payable     (49,624 )       35,522  
Accrued compensation     46,097       107,608  
Accrued expenses and interest    

27,881

     

(31,327

Cash provided by (used in) operating activities - continuing operations     (18,994 )     30,976  
Cash used in operating activities - discontinued operations    

-

     

(98,859

Net cash used in operating activities     (18,994 )     (67,883
INVESTING ACTIVITIES:                
              Investment in equipment and leasehold improvements    

(253,471

)    

(50,712

)
       Cash used in investing activities - continuing operations     (253,471 )     (50,712 )
Cash provided by investing activities - discontinued operations    

-

     

642,602

 
Net cash provided by (used in) investing activities    

(253,471

)    

591,890

 
                 
FINANCING ACTIVITIES:                
 Net cash used in line of credit     (89,611 )     (31,645
 Net proceeds (repayment) of credit card cash advance     149,536       (389,926
 Repayment of related party loans     -       (29,948 )
 Repayment of unsecured line of credit     (19,534 )     (23,127 )
 Proceeds from issuance of debt     -       100,000  
 Net proceeds of short-term debt     140,981       5,749  
 Principal payments on equipment note payable and capital leases    

(26,756

)    

(27,153

)
Cash provided by (used in) financing activities - continuing operations     154,616       (396,050 )
Cash used in financing activities - discontinued operations    

-

     

-

 
Net cash provided by (used in) financing activities    

154,616

     

(396,050

)
                 
Net increase (decrease) in cash and cash equivalents     (117,849 )     127,957  
Cash and cash equivalents at beginning of period    

494,420

     

514,048

 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  

$

376,571

   

$

642,005

 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Non cash item:                
Additions to capital leases   $ 23,850     $ -  
Cash paid during the period for:                
Interest   $ 262,366     $ 251,620  
Income taxes   $ -     $ -  

 

See accompanying notes to unaudited interim financial statements.

 

5


 
 

LIBERATOR, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTHS ENDED MARCH 31, 2013 AND 2012

 

 

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS

 

 The accompanying unaudited condensed interim consolidated financial statements of Liberator, Inc. and all of its wholly-owned subsidiaries (collectively, the "Company" “we” or "Liberator") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the three and nine months ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire year. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

 

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. As of March 31, 2013, the Company has an accumulated deficit of $7,828,280 and a working capital deficit of $1,726,238.

 

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

 

These actions include an ongoing initiative to increase gross profit margins through improved production controls and reporting. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels.  Furthermore, our plan of operation for the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational growth plans we have identified will require approximately $600,000 of funding. We expect to invest approximately $400,000 on sales and marketing programs, primarily sexual wellness advertising in magazines, on the internet and on cable television. We will also be exploring the opportunity to acquire other compatible businesses.

 

We plan to finance the required $600,000 with a combination of anticipated cash flows from operations over the next twelve months as well as cash on hand and cash we will seek to obtain through equity and debt financings.

 

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

 

 

 

6


 
 

 NOTE 2. DISCONTINUED OPERATIONS

 

Effective October 1, 2011 the Company sold Web Merchants, Inc. to Web Merchants Atlanta, LLC.

 

The following table sets forth the components of discontinued operations:

 

       

For the Period

July 1, 2011 to September 30, 2011

 
  Net sales   $ 2,626,608  
  Cost of sales    

1,739,277

 
  Gross profit     887,331  
  Advertising expenses     315,551  
  Other sales and marketing expenses     376,693  
  General and administrative expenses     216,117  
  Depreciation and amortization expenses    

5,011

 
  Total operating expenses    

913,372

 
  Loss from Operations of Discontinued Operations   $ (26,041 )

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc. For the period July 1, 2011 to October 1, 2011, Web Merchants, Inc. is classified as discontinued operations on the statement of operations. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

 

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements.  These consolidated condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s report on Form 10-K for the year ended June 30, 2012 filed on October 11, 2012.

 

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

 

Revenue Recognition     

 

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

 

7


 
 

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

 

Cash and Cash Equivalents

 

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

 

Allowance for Doubtful Accounts

 

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

 

The following is a summary of Accounts Receivable as of March 31, 2013 and June 30, 2012.

 

   

March 31,

2013

 

June 30,

2012

Accounts receivable   $ 611,736     $ 803,342  
Allowance for doubtful accounts      (19,658 )     (9,503
Allowance for discounts and returns    

(20,133

)    

(38,536

Total accounts receivable, net   $

571,945

    $

755,303

 

 

Inventories and Inventory Reserves

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose and a normal profit margin.  Inventory costs include materials, labor, depreciation and overhead. The company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or market may be adjusted in response to changing conditions.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable.  As of March 31, 2013, substantially all of our cash and cash equivalents were held at a single financial institution. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

 

Fair Value of Financial and Derivative Instruments

 

At March 31, 2013, 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.

 

The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

 

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

 

8


 
 

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

 

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

 

Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

 

The valuation techniques that may be used to measure fair value are as follows:

 

A. Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

 

B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method.

 

C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

 

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 $71,926 at March 31, 2013 and $17,340 at June 30, 2012. Advertising expense for the three months ended March 31, 2013 and 2012 was $118,633 and $130,507, respectively. Advertising expense for the nine months ended March 31, 2013 and 2012 was $382,996 and $340,657, respectively.

  

Research and Development

 

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $27,577 and $19,255 for the three months ended March 31, 2013 and 2012, respectively. Expenses for new product development totaled $80,775 and $76,896 for the nine months ended March 31, 2013 and 2012, respectively. Research and development costs are included in general and administrative expense.

  

Property and Equipment

 

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

 

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

 

Impairment or Disposal of Long Lived Assets

 

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at March 31, 2013.

 

Operating Leases

 

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability, and the balance in this account at March 31, 2013 was $209,011. The rent expense under this lease for the three months ended March 31, 2013 and 2012 was $80,931. The Company also leases certain equipment under operating leases, as more fully described in Note 16 - Commitments and Contingencies.

 

9


 
 

Stock Based Compensation

 

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

 

Segment Information

 

We have identified three reportable sales channels:  Direct, Wholesale and Other.  Direct includes product sales through our two e-commerce sites and our single retail store. Wholesale includes Liberator branded products sold to distributors and retailers, non-Liberator products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Other consists principally of shipping and handling fees and costs derived from our Direct business and fulfillment service fees.

 

The following is a summary of sales results for the Direct, Wholesale, and Other channels.

                                 
   

Three Months Ended

(unaudited)

   

Nine Months Ended

(unaudited)

 
    March 31,
2013
    March 31,
2012
    March 31,
2013
    March 31,
2012
 
       
Net Sales:                                
Direct   $ 1,335,099     $ 1,308,859     $ 3,937,583     $ 3,964,646  
Wholesale     2,017,092       2,353,379       6,095,155       6,321,329  
Other    

215,924

     

298,821

     

726,408

     

922,706

 
Total Net Sales   $ 3,568,115     $ 3,961,059     $ 10,759,146     $ 11,208,681  
                                 
Gross Margin:                                
Direct   $ 661,267     $ 649,020     $ 1,965,861     $ 1,952,111  
Wholesale     374,698       511,112       1,291,816       1,235,141  
Other    

(36,593

)    

91,474

     

(68,786

   

185,747

 
Total Gross Margin   $ 999,372     $ 1,251,606     $ 3,188,891     $ 3,372,999  

 

Income Taxes

 

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

 

As a result of the implementation of accounting for uncertain tax positions effective July 1, 2008, the Company did not recognize a liability for unrecognized tax benefits and, accordingly, was not required to record any cumulative effect adjustment to beginning of year retained earnings. As of both the date of adoption and March 31, 2013, there was no significant liability for income tax associated with unrecognized tax benefits.

 

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

 

The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its consolidated statements of operations. As of the date of adoption and during the nine months ended March 31, 2013 and 2012, there was no accrual for the payment of interest and penalties related to uncertain tax positions.

 

10


 
 

Recently Adopted Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board, which we refer to as the FASB, issued new accounting guidance amending fair value measurement to achieve common fair value measurement and disclosure requirements in U.S. GAAP, and International Financial Reporting Standards. We adopted the new accounting guidance on January 1, 2012. As the new accounting guidance primarily amended the disclosure requirements related to fair value measurement, the adoption did not have any impact on our financial condition or results of operations.

 

In June 2011, the FASB issued new accounting guidance on the presentation of other comprehensive income, which was subsequently revised in December 2011. The new guidance eliminates the current option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Instead, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted the new accounting guidance on July 1, 2012 which resulted in reporting the components of comprehensive loss in the Consolidated Statements of Operations, rather than in the Consolidated Statements of Stockholders' Equity, as previously reported. As these standards impact presentation requirements only, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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

 

In July 2012, the FASB issued ASU 2012-02, Intangible-Goodwill and Other (Topic 350): Testing indefinite- Lived Intangible Assets for Impairment. Under the guidance, testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill has been simplified.  The guidance allows an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test.  An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired.  The guidance is effective for impairment tests for fiscal years beginning after September 15, 2012 (our fiscal 2014).  The Company does not believe the adoption of ASU 2012-02 will have a material impact on its consolidated financial statements.

 

In October 2012, the FASB issued accounting guidance containing technical corrections and improvements to the Accounting Standards Codification, which we refer to as the Codification. The technical corrections are relatively minor corrections and clarifications. These corrections, which affect various Codification topics and apply to all reporting entities within the scope of those topics, are divided into three main categories: (1) Source literature amendments which carry forward the original intent of certain pre-Codification authoritative literature that was inadvertently altered during the Codification process; (2) Guidance clarification and reference corrections which resulted in changes to wording and references to avoid misapplication or misinterpretation of guidance; and (3) Relocated guidance which moved guidance from one part of the Codification to another to correct instances in which the scope of pre-Codification guidance may have been unintentionally narrowed or broadened during the Codification process. The guidance also made conforming changes for the use of the term "fair value" in certain pre-Codification standards. The FASB did not provide transition guidance for Codification amendments that are not expected to change current practice. However, it did for those amendments that are more substantive and these will be effective for fiscal periods beginning after December 15, 2012. We are still evaluating the impact these technical corrections will have, if any, on our financial condition or results of operations.

 

We have determined that all other recently issued accounting standards will not have a material impact on our Consolidated Financial Statements, or do not apply to our operations.

 

Net Loss Per Share

 

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period.  Basic and diluted net loss per share is the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive.

 

11


 
 

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

 

    March 31,  
    2013   2012  
Common stock options   3,991,500   3,221,831  
Common stock warrants   2,462,393   2,712,393  
Convertible preferred stock   4,300,000   4,300,000  
Convertible notes   4,375,000   2,500,000  
 Total   15,128,893   12,734,224  

 

NOTE 4. STOCK-BASED COMPENSATION

 

Options

 

At March 31, 2013, the Company had the 2009 Stock Option Plan (the “Plan”), which is shareholder-approved and under which 5,000,000 shares are reserved for issuance until the Plan terminates on October 20, 2019.

 

Under the Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of March 31, 2013, the number of shares available for issuance under the Plan was 1,008,500.

 

The following table summarizes the Company’s stock option activities during the nine months ended March 31, 2013:

 

 

Number of Shares

Underlying

Outstanding

Options

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

Weighted

Average

Exercise

Price

 

Intrinsic

Value

Options outstanding as of June 30, 2012   3,506,956     3.4   $ .20   $ -
Granted   2,444,000     4.8   $ .06   $ -
Exercised   -     -   $ -   $ -
Forfeited or expired  

(1,959,456)

    2.9   $ .17   $ -
Options outstanding as of March 31, 2013  

3,991,500

    3.8   $ .12   $ -
Options exercisable as of March 31, 2013  

840,500

    2.5   $ .20   $ -

 

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $.07 for such day. 

 

There were 2,444,000 stock options granted during the nine months ended March 31, 2013. There were 1,488,000 stock options granted during the nine months ended March 31, 2012. The value assumptions related to options granted during the nine months ended March 31, 2013 were as follows:

  

 

    Nine Months 
Ended March 31,2013
 
Exercise Price:   $.06 - $.10  
Volatility:   40% - 47%  
Risk Free Rate:   0.43% - .60%  
Vesting Period:   4 years  
Forfeiture Rate:   25%  
Expected Life   4.5 years  
Dividend Rate   0%  

 

12


 
 

A summary of the Company’s non-vested options for the nine months ended March 31, 2013 is presented below:

 

   

Shares

   

Weighted

Average

Grant-Date

Fair Value

 
Non-vested options at June 30, 2012     2,569,625      $ .10    
Granted     2,444,000      $ .02    
Vested     (511,625    $ .09    
Forfeited    

(1,351,000

)    $ .07    
Non-vested options at March 31, 2013    

3,151,000

    $ .05    

 

The following table summarizes the weighted average characteristics of outstanding stock options as of March 31, 2013:

    Outstanding Options     Exercisable Options  

Exercise Prices

 

Number

of Shares

   

Remaining
Life 
(Years)

   

Weighted

Average 
Price

   

Number of

Shares

   

Weighted

Average
 Price

 
$ .06 to .10     2,088,000       4.8     $ .06     -       -  
$ .15 to .16     1,434,500       3.6     $ .16     488,750     $ .16  
$ .20 to $.25    

469,000

      1.8      $ .25      

351,750

    $ .25  
Total stock options    

3,991,500

      4.0     $ .12       840,500     $ .20  

 

Stock-based compensation

 

We account for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period.

 

Stock option-based compensation expense recognized in the condensed consolidated statements of operations for the nine month period ended March 31, 2013 and 2012 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures.

 

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

 

   

Three Months 
Ended March 31,

 

Nine Months 
Ended March 31,

 
   

2013

 

2012

 

2013

 

2012

 
Cost of Goods Sold   $ 2,369   $ 2,267   $ 8,511   $ 6,399  
Other Selling and Marketing   5,872   4,218   7,699   11,571  
General and Administrative  

1,370

 

3,077

 

13,009

 

8,499

 
Total Stock-based Compensation Expense   $

9,611

  $

9,562

  $

29,219

  $

26,469

 

 

 As of March 31, 2013, the Company’s total unrecognized compensation cost was $114,844, which will be recognized over the weighted average vesting period of 3 years.

 

 

 

13


 
 

NOTE 5. INVENTORIES

 

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

 

   

March 31,
2013

 

June 30,
2012

 
Raw materials   $ 484,628   $ 442,254  
Work in process   118,568   110,270  
Finished goods  

866,235

 

589,245

 
 Inventories, net   $

1,469,431

  $

1,141,769

 

 

NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

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

 

Equipment and leasehold improvements consisted of the following:

 

 

March 31,

2013

 

June 30,

2012

 

Estimated

Useful Life 

Factory Equipment   $ 1,692,620     $ 1,620,463   2-10 years
Computer Equipment and Software     860,259       894,824   5-7 years
Office Equipment and Furniture     166,996       166,996   5-7 years
Construction in Progress     -       39,241    
Leasehold Improvements    

343,120

     

336,461

  10 years
Subtotal     3,062,995       3,057,985    
Accumulated Depreciation    

(2,271,374

)    

(2,322,308

)  
Total equipment and leasehold improvements, net   $

791,621

    $

735,677

   

 

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the nine months ended March 31, 2013.

 

 

 

 

 

 14


 
 

NOTE 7. NOTES PAYABLE

 

Notes payable consisted of the following:

 

March 31,
2013

   

June 30,
2012

 
Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing January 11, 2013. Secured by personal guarantee of principal stockholder. The note was repaid on January 11, 2013.    $ -      $ 140,784  
Unsecured note payable for $130,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing April 2, 2013. Secured by personal guarantee of principal stockholder. The note was repaid on April 2, 2013.     -       102,256  
Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing December 6, 2013.  Secured by personal guarantee of principal stockholder.     178,311       -  
Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing January 10, 2014.  Secured by personal guarantee of principal stockholder.     205,710       -  
Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2012. Subsequent to June 30, 2012, the due date on this note was extended to July 31, 2013. Secured by personal guarantee of principal stockholder.     100,000       100,000  
Unsecured note payable for $300,000 to an individual, with interest at 20%, principal and interest originally due in full on January 3, 2012; extended to January 3, 2013, then extended to January 3, 2014, with interest payable monthly and principal due on maturity.  Secured by personal guarantee of principal stockholder.     300,000       300,000  
Unsecured note payable for $200,000 to an individual, with interest at 16%, principal and interest originally due on January 3, 2011, extended to May 1, 2013. Beginning May 31, 2011, the interest rate was increased to 20%, with interest payable monthly, and the principal due in full on May 1, 2013. Secured by personal guarantee of principal stockholder. (see Note 17- Subsequent Events)    

200,000

     

200,000

 
Total unsecured notes payable     984,021       843,040  
Less: current portion    

(784,021

)    

(843,040

)
Long-term unsecured notes payable   $

200,000

    $

-

 

 

NOTE 8. SHORT TERM NOTES PAYABLE-RELATED PARTY

 

   

March 31,
2013

   

June 30,
2012

Unsecured note payable to an officer, with interest at 3.25%, due on demand   $ 40,000     $ 40,000
Unsecured note payable to an officer, with interest at 3.25%, due on demand    

76,000

     

76,000

Total unsecured notes payable     116,000       116,000
Less: current portion    

116,000

     

116,000

Long-term unsecured notes payable   $

-

    $

-

 

NOTE 9. LINE OF CREDIT

 

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”) entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital.  The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of March 31, 2013 the lenders Index Rate was 4.75%).  In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month. The Company’s CEO, has personally guaranteed the repayment of the facility.  In addition, the Company has provided its corporate guaranty of the credit facility.  On March 31, 2013, the balance owed under this line of credit was $417,142.  On March 31, 2013, we were current and in compliance with all terms and conditions of this line of credit.

 

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

 

15


 
 

NOTE 10. CREDIT CARD ADVANCE

 

On October 4, 2012, the Company entered into an agreement with Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten month after the funding date. The one-time finance charge will be amortized to interest expense during the ten month term of the loan. Repayment will be accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman. As of March 31, 2013, the principle amount is $178,336 net of a discount of $19,200.

 

NOTE 11. UNSECURED LINES OF CREDIT

 

The Company has drawn cash advances on two 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 7% to 18%. The aggregate amount owed on the two unsecured lines of credit was $19,447 at March 31, 2013 and $38,980 at June 30, 2012.

 

NOTE 12. CONVERTIBLE NOTES PAYABLE - SHAREHOLDER

 

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations, Inc.  The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.20 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. As of March 31, 2013, the principle balance was $375,000 and accrued interest was $42,257.

 

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital, Inc. with a face amount of $250,000. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of March 31, 2013, the principle balance was $250,000 and the accrued interest was $26,836.

 

NOTE 13.  TAXES

 

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

 

 Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company may have experienced a change of control that could result in a substantial reduction to the previously reported net operating loss carryforwards at June 30, 2012; however, the Company has not performed a change of control study and, therefore, has not determined if such change has taken place and if such a change has occurred the related reduction to the net operating loss carryforwards.  As of March 31, 2013, the net operating loss carryforwards continue to be fully reserved and any reduction in such amounts as a result of this study would also reduce the related valuation allowances resulting in no net impact to the financial results of the Company.

 

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48 (FIN 48”) Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”  As of March 31, 2013, there was no significant liability for income tax associated with unrecognized tax benefits. 

 

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

 

 

16


 
 

NOTE 14. STOCKHOLDERS’ EQUITY

 

Common Stock- The Company’s authorized common stock was 175,000,000 shares at March 31, 2013 and June 30, 2012.  Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At March 31, 2013, the Company had reserved the following shares of common stock for issuance:

    March 31,
       

2013

Shares of common stock subject to outstanding warrants     2,462,393
Shares of common stock reserved for issuance under the 2009 Stock Option Plan     5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock     4,300,000
Shares of common stock issuable upon conversion of Convertible Notes    

4,375,000

Total shares of common stock equivalents    

16,137,393

         

 

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

Stock Purchase Warrants - As of March 31, 2013, the following share purchase warrants were outstanding:

Number of Warrants

   

Exercise

Prices

 

Expiration

Dates

292,479     $ .50   June 26, 2014
1,292,479     $ .75   June 26, 2014

877,435

    $ 1.00   June 26, 2014

2,462,393

           
                   

 

The following table summarizes the continuity of the Company’s share purchase warrants:

     

Shares

   

Weighted Average

Exercise Prices

Balance June 30, 2012     2,712,393     $ .76
Expired    

(250,000

)     .25
Balance March 31, 2013    

2,462,393

    $ .81

 

NOTE 15. RELATED PARTIES

 

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 9 – Line of Credit).  In addition, Liberator, Inc. has provided its corporate guarantees of the credit facility.  On March 31, 2013, the balance owed under this line of credit was $417,142.

 

The loan from Credit Cash (see Note 10 – Credit Card Advance) was guaranteed by the Company (including OneUp and Foam Labs) and was personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.  

 

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the loan will accrue at the prevailing prime rate (which was 3.25% on March 31, 2013) until paid and totaled $3,205 as of March 31, 2013. Interest expense for the nine months ended March 31, 2013 was $976.

 

17


 
 

On January 3, 2011, an individual loaned the Company $300,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on January 3, 2012; extended to January 3, 2013; then extended to January 3, 2014 with interest payable monthly and principle due on maturity. Mr. Friedman personally guaranteed the repayment of the loan obligation.

 

On July 20, 2011, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum), with the principal amount due in full on July 31, 2012. On July 31, 2012, the note was extended to July 31, 2013 under the same terms. Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

 

On April 2, 2012, the Company issued an unsecured promissory note to Hope Capital for $130,000. Terms of the note call for bi-weekly principal and interest payments of $5,536. Mr. Friedman personally guaranteed the repayment of the loan obligation. This loan was repaid in full on March 29, 2013.

 

On January 14, 2013, the Company issued an unsecured promissory note to Hope Capital and Jabro Funding Corp. for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on January 10, 2014. Mr. Friedman has personally guaranteed the repayment of the loan obligation.

 

The Company has a subordinated notes payable to the majority shareholder’s wife in the amount of $76,000. Interest on the note during the nine months ended March 31, 2013 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $1,854. The accrued interest on the note as of March 31, 2013 was $8,648. This note is subordinate to all other credit facilities currently in place.

 

On December 10, 2012, the Company issued an unsecured promissory note to Hope Capital and Jabro Funding Corp. for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on December 6, 2013. Mr. Friedman has personally guaranteed the repayment of the loan obligation.

 

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations.  The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.20 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. As of March 31, 2013, the principle balance was $375,000 and accrued interest was $42,257.

 

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital.  The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of March 31, 2013, the principle balance was $250,000 and the accrued interest was $26,836.

 

NOTE 16. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases its facility under a ten year operating lease that was signed in September 2005 and expires December 31, 2015. Lease payments are on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability, and the balance in this account at March 31, 2013 was $209,011 and $250,174 at June 30, 2012. The rent expense under this lease for the three months ended March 31, 2013 and 2012 was $80,931.

 

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

 

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

 

 

18


 
 

 

Future minimum lease payments under non-cancelable operating leases at March 31, 2013 are as follows:

 

Years ending June 30,   
2013 (three months)  $101,497 
2014   411,974 
2015   425,274 
2016   210,569 
Thereafter through 2017   1,038 
Total minimum lease payments  $1,150,352 
      

 

Capital Leases

 

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

 

The following is an analysis of the minimum future lease payments subsequent to March 31, 2013:

 

Years ending June 30,

     
2013 (three months)    $ 11,078  
2014     29,111  
2015     19,975  
2016     18,879  
Thereafter through 2018    

11,321

 
Total minimum lease payments     90,364  
Less amount representing interest    

(19,704

)
Present value of net minimum lease payments     70,660  
Less current portion    

(51,653

Long-term obligations under leases payable   $

19,007

 

 

 

Legal Proceedings

 

As of the date of this Quarterly Report on Form 10-Q, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

NOTE 17. SUBSEQUENT EVENTS

 

On April 5, 2013, the Company issued a 20% unsecured promissory note to Hope Capital and Jabro Funding Corp. for $130,000. Terms call for a bi-weekly principal and interest payments of $5,536 with the note due in full on April 4, 2014. Mr. Friedman has personally guaranteed the repayment of the loan obligation.

 

On April 30, 2013, the 20% unsecured note payable in the principal amount of $200,000, originally due May 1, 2013 was extended until May 1, 2015 under the same terms.

 

 

 

 

 

 

19


 
 

 

  

 

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

Results of Operations

 

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

    Three Months Ended  
    March 31,  
   

2013

   

2012

 
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold    

72.0

%    

68.4

%
Gross Margin     28.0 %     31.6 %
                 
Selling, General and Administrative Expenses    

27.8

%    

28.9

%
                 
Income From Continuing Operations     0.2 %     2.7 %

 

    Nine Months Ended  
    March,  
   

2013

   

2012

 
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold    

70.4

%    

69.9

%
Gross Margin     29.6 %     30.1 %
                 
Selling, General and Administrative Expenses    

26.9

%    

27.5

%
                 
Income From Continuing Operations     2.7 %     2.6 %

 

The following table represents percentage of net sales by product type:

                                 
   

Three Months Ended

(unaudited)

   

Nine Months Ended

(unaudited)

 
    March 31,
2013
    March 31,
2012
    March 31,
2013
    March 31,
2012
 
Net Sales:                                
Liberator     52     43     48     39
Jaxx     10  %     9  %     13  %     14  %
Resale     34  %     37  %     32  %     36  %
Other    

4

 %    

11

 %    

7

 %    

11

 %
              Total Net Sales     100  %     100  %     100  %     100  %

 

Liberator- Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market. Liberator products are sold to distributors and retailers as well as directly through our e-commerce site and single retail store. Net sales of Liberator products increased 10% during the three and 18% during the nine month periods ending in March 31, 2013, from the comparable year earlier periods. This increase is primarily related to the launching of our new compression packaging, increased sales internationally and improved sales conversion from our new Liberator.com e-commerce platform, which was launched on February 1, 2013.

 

Jaxx- Jaxx products are casual and contemporary furniture products manufactured by us and sold under the Jaxx brand. Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site. Net sales decreased slightly during the three and nine month periods ending March 31, 2013, compared to the prior year periods. This decrease is primarily due to a shift in our sales staff focus to Liberator products and resale products.

 

20


 
 

Resale- Resale products are non-Liberator branded products (including Tenga) that we purchase from others at wholesale or distributor prices and resell through our sales channels to retailers, distributors, or through one of our e-commerce sites and single retail store. Net sales of resale products decreased 18% during the three month period ending March 31, 2013, from the comparable prior year period due to lower sales of non-Tenga products to certain customers. Sales of Tenga products accounted for approximately 23% and 21% in each of the three month periods ended March 31, 2013 and 2012, respectively, and approximately 24% and 15% of the gross profit in those same periods, respectively. Net sales of resale products decreased 16% during the nine month period ending March 31, 2013, from the comparable prior year period. This decrease is due to significantly lower sales of non-Tenga resale products and, to a lesser extent, lower sales of Tenga products.

 

Other- Other products include sales from contract manufacturing and fulfillment services. Net sales during the three and nine month periods ending March 31, 2013 have decreased compared to the three and nine month periods in the prior year. This decline is due to a decrease in the number of contract manufacturing projects and fulfillment contracts during fiscal year 2013 from the prior fiscal year.

 

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

 

Net sales. Net sales for the three months ended March 31, 2013 decreased from the comparable prior year period by $392,944, or 9.9%.  The decrease in net sales was primarily due to lower sales in the Wholesale channel. Sales through the Wholesale channel decreased by 14.3%, or $336,287 during the three months ended March 31, 2013, from the comparable year earlier period. The Wholesale channel includes Liberator branded products sold to distributors and retailers, non-Liberator products sold to retailers, and private label items sold to other resellers. The Wholesale channel also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business.

 

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation.  Gross profit decreased to $999,372 for the three months ended March 31, 2013 from $1,251,606 in the comparable prior year period (a decrease of 20%) and primarily resulted from the decrease in margin from the Wholesale sales channel.

 

Operating expenses. Total operating expenses for the three months ended March 31, 2013 were 27.8% of net sales, or $990,848, compared to 28.9% of net sales, or $1,145,708, for the same period in the prior year.  The decrease in operating expenses was primarily the result of reduced General and administrative expense. Advertising and promotion expense decreased from $130,507 to $118,633 in the current year, as the Company purchased fewer internet and print advertising during the current year quarter. Other selling and marketing expense increased by $27,199, primarily as a result of higher employee-related costs, including salaries and travel expenses. General and administrative expense decreased by $160,632 from the prior year quarter, primarily as a result of lower investor relation costs and legal-related expenses.

 

Other income (expense). Other income (expense) during the third quarter increased from expense of ($107,863) in fiscal 2012 to expense of ($187,789) in fiscal 2013. Interest expense increased from $95,820 in the prior year second quarter to $102,978 in the current year quarter. During the three months ending March 31, 2013 a loss on disposal of assets of $85,052 was recognized. This was the remaining net book value of the former e-commerce platform.

 

Income taxes. Income taxes expense of $0 was recorded in the three months ended March 31, 2013 and 2012.  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.

 

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012

 

Net sales. Net sales for the nine months ended March 31, 2013 decreased from the comparable prior year period by $449,535, or 4%.  The decrease in net sales was primarily due to lower sales in the Other channel, and to a lesser extent, lower sales through the Wholesale channel. The Wholesale channel (which includes Liberator branded products sold to distributors and retailers, non-Liberator products sold to retailers, and private label items sold to other resellers) decreased by 7.9%, or $526,174 during the nine months ended March 31, 2013, from the comparable year earlier period. The Other channel (which consists principally of shipping and handling fees derived from our Direct category) decreased by 21.3% or $196,298 compared to the prior year.

 

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation.  Total gross profit for the nine months ended March 31, 2013 decreased to $3,188,891 from $3,372,999 (a decrease of 5.5%) in the comparable prior year period. Gross profit as a percentage of sales decreased slightly to 29.6% for the nine months ended March 31, 2013 from 30.1% in the comparable prior year period and primarily resulted from a decrease in sales in the Other channel.

  

21


 
 

 Operating expenses. Total operating expenses for the six months ended March 31, 2013 were 26.9% of net sales, or $2,898,362, compared to 27.5% of net sales, or $3,085,747, for the same period in the prior year and represents a decrease of 6.1%.  The decrease in operating expenses was primarily the result of lower legal and investor relations expense, partially offset by higher employee-related sales and marketing costs. Advertising and promotion expense increased from $340,567 to $382,996 or 12.4% as the Company purchased additional internet and print advertising to build awareness of the Liberator brand.

 

Other income (expense). Other income (expense) increased from an expense of ($294,729) in fiscal 2012 to an expense of ($359,609) in fiscal 2013.  Interest expense and financing costs in the prior year included $36,771 from the amortization of the debt discount on the convertible notes. Interest expense increased from $258,493 in the nine months of the prior fiscal year to $272,308 in the current comparable year period due to higher borrowing balances. A loss on disposal of assets of $87,853 was recognized during fiscal 2013. Of this amount $85,052 was the remaining net book value of the former e-commerce system.

 

Income taxes. Income taxes expense of $0 was recorded in the nine months ended March 31, 2013 and 2012.  We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

 

Variability of Results

 

We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. Operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, seasonality 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 increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

 

Liquidity and Capital Resources

 

     The following table summarizes our cash flows:                  
    Nine Months Ended  
   

March 31,

 
   

2013

   

2012

 
    (Unaudited)  
Cash flow data from continuing operations:                
Cash provided by (used in) operating activities   $ (18,994   $ 30,976  
Cash used in investing activities     (253,471 )     (50,712 )
Cash provided by (used in) financing activities     154,616       (396,050 )

    

As of March 31, 2013, our cash and cash equivalents totaled $376,571, compared to $642,005 in cash and cash equivalents as of March 31, 2012.

 

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Our principal sources of liquidity are our cash flow that we generate from our operations, availability of borrowings under our line of credit and cash raised through equity and debt financings.

 

Operating Activities

 

  Net cash provided by operating activities from continuing operations primarily consists of net loss adjusted for certain non-cash items, including depreciation, stock-based compensation, and the effect of changes in working capital. Net cash used in operating activities was $18,994 in the nine months ended March 31, 2013 compared to cash provided by operating activities of $30,976 in the nine months ended March 31, 2012.  The primary reasons for the decrease in cash provided by (used in) operating activities is an increase in inventory ($327,662), which was offset in part by a decrease in accounts receivable, $162,599 and the loss on disposal of assets of $87,853.

 

Investing Activities

 

Cash used in investing activities in the nine months ended March 31, 2013 and 2012 of $253,471 and $50,712, respectively, was primarily attributable to the costs associated with the new e-commerce platform. The new e-commerce platform became operational on February 1, 2013.

 

22


 
 

 

Financing Activities

 

Cash provided by financing activities during the nine months ended March 31, 2013 of $154,616 was primarily attributable to the borrowings of debt obligations, partially offset by repayments under the line of credit and credit card advance.

 

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

 

Inflation

 

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

 

Sufficiency of Liquidity

 

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We had a net loss of $69,080 for the nine months ended March 31, 2013 and a net loss of $782,417 for the year ended June 30, 2012. As of March 31, 2013, we have an accumulated deficit of $7,828,280 and a working capital deficit of $1,726,238.

 

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

 

These actions include an ongoing initiative to increase gross profit margins through improved production controls and reporting. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels.  Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational growth plans we have identified will require approximately $600,000 of funding, primarily for working capital. We expect to invest approximately $400,000 on sales and marketing programs, primarily sexual wellness advertising in magazines, on the internet, and on cable television. We will also be exploring the opportunity to acquire other compatible and related businesses.

 

We plan to finance the required $600,000 with a combination of anticipated cash flows from operations over the next twelve months as well as cash on hand and cash we are able to obtain through equity and debt financings.

 

Capital Resources

 

We do not currently have any material commitments for capital expenditures. We expect total capital expenditures for the remainder of fiscal 2013 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 line of credit. This includes capital expenditures that we may incur in conjunction with initiatives to further upgrade our e-commerce platform and our computer network infrastructure.

 

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

 

At March 31, 2013, we had $417,142 outstanding on our line of credit, compared to an outstanding balance of $506,753 at June 30, 2012. The line of credit is to provide an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital.  

 

23


 
 

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

 

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements. Those statements include, but may not be limited to, all statements regarding management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as believe,” anticipate,” expect,” will,” may,” should,” intend,” plan,” estimate,” predict,” potential,” continue,” likely” and similar expressions are intended to identify forward-looking statements.

 

In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

 

Non-GAAP Financial Measures

 

Reconciliation of net loss to Adjusted EBITDA income for the nine months ended March 31, 2013 and 2012: 

 

    Nine months ended March 31,  
   

2013

   

2012

 
Net loss   $ (69,080 )   $ (134,950 )
Less interest income     (552 )     (535 )
Plus interest expense     272,308       258,493  
Plus depreciation and amortization expense     133,524       157,611  
Plus stock-based compensation     29,219       26,469  
Plus amortization of debt issuance costs    

-

     

36,771

 
Adjusted EBITDA income   $

365,419

    $

343,859

 

  

As used herein, Adjusted EBITDA represents net loss before interest income, interest expense, income taxes, depreciation, amortization, amortization of debt issuance costs and stock-based compensation expense. We have excluded the non-operating item, amortization of debt issuance costs, because it represents a non-cash charge that is not related to the Company’s operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for amortization of debt issuance costs and stock-based compensation expense.

 

ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.

 

 

 

24


 
 

 

ITEM 4.                        CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control Over Financial Reporting

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

 

 

 

 

 

 

 

 

 

 

25


 
 

 

PART II                        OTHER INFORMATION

 

ITEM 1.                        LEGAL PROCEEDINGS

 

We are not currently subject to any material legal proceedings, nor, to our knowledge, is there any legal proceeding threatened against us. However, from time to time, we may become a party to certain legal proceedings in the ordinary course of business.

 

ITEM 1A.                    RISK FACTORS

 

This item is not required for a smaller reporting company.

 

ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES

 

None.

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                        MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 6.                        EXHIBITS

 

The following exhibits are furnished with this report:

 

Exh. No.   Description
     
31.1   Section 302 Certification by the Corporation’s Principal Executive Officer
31.2   Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer
32.1   Section 906 Certification by the Corporation’s Principal Executive Officer
32.2   Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*

 

 

 

 

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

 

   

 

 

26


 
 

 

 


SIGNATURES

 

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

 

      LIBERATOR, INC.
      (Registrant)
       
       
May 9, 2013   By:   /s/ Louis S. Friedman
(Date)     Louis S. Friedman
     

President and Chief Executive Officer

(Principal Executive Officer)

       
       
 May 9, 2013   By:   /s/ Ronald P. Scott
(Date)     Ronald P. Scott
     

Chief Financial Officer and Secretary

(Principal Financial & Accounting Officer)

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27