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

FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 2009
Or 
oþ Transition Report Pursuant to SectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________to ____________quarterly period ended December 31, 2009
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File NumberNumber: 333-141022
WES Consulting, Inc.
(Exact name of registrant as specified in itsthis charter)
FLORIDA 59-3581576
Florida
(State or other jurisdiction
(IRS Employer
of incorporation or organization)
 
59-3581576
(I.R.S. Employer
Identification Number)No.)
2745 Bankers Industrial Drive
Atlanta, GAGeorgia 30360
 (Address(Address of principal executive offices)offices and zip code)

(770) 246-6400
(Registrant’s telephone number)number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934 during the pastpreceding 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 xþ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitionsdefinition of “large accelerated filer,” “accelerated filer,”filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company xþ
(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).Act.) Yes o No xþ

As of November 13, 2009,February 18, 2010 there were 61,915, 98163,015,981 shares outstanding of the registrant’s common stock.stock outstanding.


WES Consulting, Inc.CONSULTING, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q
INDEXTABLE OF CONTENTS
 
  Page 
 
PART I.  FINANCIAL INFORMATION
 
   
Item 1.Financial Statements (unaudited)3
 Consolidated Condensed Balance Sheets as of  September 30,December 31, 2009 and June 30, 20093
 Consolidated Condensed Statements of Operations for the three and six month periods ended September 30,December 31, 2009 and 20084
 Consolidated Condensed Statements of Cash Flows for the threesix month periods ended September 30,December 31, 2009 and 20085
 Notes to Consolidated Condensed Financial Statements6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1719
Item 3.Quantitative and Qualitative Disclosures About Market Risk21
24
Item 4.Controls and Procedures22
24
 PART II.  OTHER INFORMATION 
   
Item 1.Legal Proceedings22
24
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds22
24
Item 3.Defaults upon Senior Securities22
24
Item 4.Submission of Matters to a Vote of Security Holders22
24
Item 5.Other Information22
25
Item 6.Exhibits23
25
SIGNATURES2426

 
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PART 1.I: FINANCIAL INFORMATION
Item 1.  Financial Statements (Unaudited)
ITEM 1.Condensed Consolidated Financial Statements

WES CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETSCondensed Consolidated Balance Sheets
 (Unaudited)
      
 December 31,  June 30, 
 2009  2009 
 
September 30,
2009
  
June 30,
2009
  (unaudited)    
ASSETS            
Current assets:            
Cash and cash equivalents $229,355  $1,819,846  $206,301  $1,815,663 
Accounts receivable, net of allowance for doubtful accounts of $15,178 at September 30, 2009 and $5,740 at June 30, 2009  431,303   346,430 
Accounts receivable, net of allowance for doubtful accounts of $15,178 at December 31, 2009 and $5,740 at June 30, 2009  528,042   346,430 
Inventories  774,544   700,403   889,957   700,403 
Prepaid expenses  146,777   95,891   131,629   95,891 
Total current assets  1,581,979   2,962,570   1,755,929   2,958,357 
                
Equipment and leasehold improvements, net  1,174,456   1,135,992   1,147,710   1,135,517 
Other assets  —   —   —   — 
Total assets $2,756,435  $4,098,562  $2,903,639  $4,093,874 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts Payable $1,666,212  $2,247,845  $1,875,613  $2,247,845 
Accrued compensation  121,501   154,994   121,734   154,994 
Accrued expenses and interest  76,162   145,793   60,583   145,793 
Revolving line of credit  —   171,433   243,967   171,433 
Current portion of long-term debt  152,318   145,481   124,598   145,481 
Credit card advance  102,609   198,935   —   198,935 
Total current liabilities  2,118,802   3,064,481   2,426,495   3,064,481 
Long-term liabilities:                
Note payable – equipment  58,110   72,812   43,092   72,812 
Leases payable  202,814   225,032   180,933   225,032 
Notes payable – related party  105,948   157,330   105,948   125,948 
Convertible note payable – shareholder, net of discount of $141,729  483,271   285,750 
Convertible notes payable – shareholder, net of discount  499,218   285,750 
Unsecured lines of credit  119,071   124,989   112,790   124,989 
Deferred rent payable  351,454   356,308   346,599   356,308 
Less: current portion of long-term debt  (152,318)  (145,481)  (124,598)  (145,481)
Total long-term liabilities  1,168,350   1,076,740   1,163,982   1,045,358 
Total liabilities  3,287,152   4,141,221   3,590,477   4,109,839 
                
Commitments and contingencies                
        
Stockholders’ equity:        
Series A Convertible Preferred Stock, $.0001 par value, 10,000,000 shares Authorized, 4,300,000 shares issued and outstanding on September 30 and June 30, 2009, liquidation preference of $1,000,000  430   430 
Common stock of $0.01 par value, shares authorized 175,000,000; 61,915,981 shares issued and outstanding at September 30, 2009 and 62,137,981 shares issued and outstanding at June 30, 2009  619,160   621,380 
Stockholders’ Equity:        
Series A Convertible Preferred stock, $.0001 par value, 10,000,000 shares
Authorized, 4,300,000 shares issued and outstanding on December 31 and June 30, 2009, liquidation preference of $1,000,000
  430   430 
Common stock of $0.01 par value, shares authorized 175,000,000; 61,915,981 shares
issued and outstanding at December 31, 2009 and 60,932,981 shares issued and
outstanding at June 30,2009
  619,160   609,330 
Additional paid-in capital  4,889,401   4,685,219   4,673,903   4,683,733 
Accumulated deficit  (6,039,708)  (5,349,688)  (5,980,331)  (5,309,458)
Total stockholders’ equity (deficit)  (530,717)   (42,659)   (686,838)  (15,965)
                
Total liabilities and stockholders’ equity $2,756,435  $4,098,562  $2,903,639  $4,093,874 

See accompanying Notesnotes to Consolidated Condensed Financial Statements.unaudited condensed consolidated financial statements.

 
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WES CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONSCondensed Consolidated Statements of Operations
 (Unaudited)
 Three Months Ended  Six Months Ended 
 December 31,  December 31, 
 Three Months Ended September 30,  2009  2008  2009  2008 
 2009  2008  (unaudited)  (unaudited) 
                  
NET SALES $2,039,292  $2,666,072  $3,034,664  $2,705,471  $5,069,656  $5,351,294 
COST OF GOODS SOLD  1,376,816   1,828,988   1,958,032   1,663,100   3,334,848   3,492,088 
Gross Profit  662,476   837,084 
        
Gross profit  1,076,632   1,042,371   1,734,808   1,859,206 
OPERATING EXPENSES:                        
Advertising and Promotion  178,132   260,780   239,871   290,454   418,002   551,234 
Other Selling and Marketing  251,970   305,552   295,934   290,949   547,493   596,010 
General and Administrative  444,119   484,134 
General and administrative  570,655   495,579   1,006,404   955,983 
Depreciation  58,749   76,123   75,930   75,930   134,679   151,860 
Total operating expenses  932,970   1,126,589   1,182,390   1,152,912   2,106,578   2,255,087 
                        
Loss from operations  (270,494)  (289,505) 
Operating loss  (105,758)  (110,541)  (371,770)  (395,881)
                        
OTHER INCOME (EXPENSE):        
OTHER INCOME (EXPENSE)                
Interest income  3,388   1,123   133   347   3,522   1,469 
Interest (expense) and financing costs  (59,968)  (62,888)
Gain on forgiveness of debt  31,179   — 
Expenses related to reverse acquisition  (394,125)   — 
Interest expense and financing costs  (50,491)  (73,363)  (110,458)  (136,251)
Expenses related to merger  —   —   (192,167)  — 
Total other expense, net  (419,526)  (61,765)  (50,358)  (73,016)  (299,103)  (134,782)
                        
Loss before income taxes  (690,020)   (351,270) 
        
Loss from continuing operations before income taxes  (156,116)  (183,557)  (670,873)  (530,663)
PROVISION (BENEFIT) FOR INCOME TAXES  —   —   —   —   —   — 
                        
NET LOSS $(690,020) $(351,270) $(156,116) $(183,557) $(670,873) $(530,663)
                        
NET LOSS PER SHARE:                        
Basic $0.01  $0.01  $(0.00) $(0.00) $(0.01) $(0.01)
Diluted $0.01  $0.01  $(0.00) $(0.00) $(0.01) $(0.01)
                        
SHARES USED IN CALCULATION OF NET LOSS PER SHARE:                        
Basic  62,070,416   46,200,001   61,915,981   45,000,000   60,932,981   45,000,000 
Diluted  62,070,416   46,200,001   61,915,981   45,000,000   60,932,981   45,000,000 

See accompanying Notesnotes to Consolidated Condensed Financial Statements.unaudited condensed consolidated financial statements.

 
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WES CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSCondensed Consolidated Statements of Cash Flows
 (Unaudited)

 Six Months Ended 
 
Three Months Ended
September 30,
  December 31, 
 2009  2008  2009  2008 
       (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $(690,020) $(351,270) $(670,873) $(530,663)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation and amortization  58,749   76,123  134,679  151,860 
Amortization of debt discount  5,358   —  21,305  — 
Loss on disposal of assets  475   — 
Expenses related to reverse acquisition  394,125   — 
Gain on forgiveness of debt  (31,179)  — 
Expenses related to merger 192,163   — 
Deferred rent payable  (4,854)  14,433  (9,709) 28,862 
Changes in operating assets and liabilities:                
Accounts receivable  (84,873)  (72,582) (181,612) (148,303)
Inventories  (74,141)   (20,890) (189,554) (143,492)
Prepaid expenses and other assets  (50,886)   (12,497)  (35,738) 10,444 
Accounts payable  (581,633)   161,755  (372,232) 286,351 
Accrued compensation  (33,493)   (56,274)  (33,260) (95,683)
Accrued expenses and interest  (69,631)   18,876   (85,210)  43,925 
Net cash used in operating activities  (1,162,003)   (242,326)  (1,230,041) (396,699)
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Investment in equipment and leasehold improvements  (97,688)  (14,783)  (146,872)  (42,220)
Cash used in investing activities  (97,688)  (14,783) (146,872) (42,220)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Repayments under revolving line of credit  (171,433)  (567,908) (1,426,705) (1,002,687)
Borrowings under revolving line of credit  —   579,357  1,499,239  1,147,778 
Proceeds from credit card cash advance  —   350,000  —  350,000 
Repayment of credit card cash advance  (96,326)  (76,293) (198,935) (159,530)
Repayment of unsecured line of credit  (5,918)  (5,193) (12,199) (10,697)
Repayment of loans from related parties  (20,203)  —  (20,000) — 
Borrowings from related party loans  —   56,447  —  193,948 
Proceeds from short-term note payable —  100,000 
Principal payments on notes payable and capital leases  (36,920)  (48,855)  (73,819)  (99,006)
Cash (used in) provided by financing activities  (330,800)  287,555  (232,419) 519,806 
                
Net (decrease) increase in cash and cash equivalents  (1,590,491)  30,446  (1,609,332) 80,887 
        
Cash and cash equivalents at beginning of period  1,819,846   90,843   1,815,633   89,519 
        
Cash and cash equivalents at end of period $229,355  $121,289  $206,301  $170,406 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid during the period for:                
Interest $57,358  $49,387  88,138  137,447 
Income taxes $—  $—  —  — 

See accompanying Notesnotes to Consolidated Condensed Financial Statements.unaudited condensed consolidated financial statements.

 
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WES CONSULTING, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
As of September 30,December 31, 2009
(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

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

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

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

 Liberator, Inc. (formerly known as Remark Enterprises, Inc.) was founded in Nevada on October 31, 2007.  Liberator’s executive offices are located at 2745 Bankers Industrial Drive, Atlanta, Georgia 30360.  Liberator is a Georgia-based sexual wellness retailer, providing goods and information to customers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life. 

Liberator, Inc is the creator and exclusive manufacturer of LIBERATOR®, a luxury lovestyle brand that celebrates intimacy by inspiring romantic imagination. Established with the conviction that sensual pleasure and fulfillment are essential to a well-lived life, LIBERATOR Bedroom Adventure Gear empowers exploration, fantasy and the communication of desire, for persons of all shapes, sizes and abilities. Products include LIBERATOR Shapes and positioning systems, original lingerie, couture latex and exotic dress-up fashions, and sensual accessoriesOur unaudited condensed consolidated financial statements for the bodythree and home décor.

six months ended December 31, 2009 exclude the results of operations of the Company that existed prior to our merger with Liberator Inc.(“Old WES”), commencing as of October 19, 2009. Disclosures required for material business combinations have been limited due to the immateriality of the Old WES financial results to our consolidated financial statements. No supplemental pro forma information is currently housed in a 140,000 sq. ft. vertically integrated manufacturing facility in a suburbpresented for the merger due to the immaterial effect of Atlanta, Georgia. Liberator has grown to over 100 employees, with products being sold directly to consumers and through hundredsOld WES on our results of domestic resellers, on-line affiliates and licensees worldwide.operations.

Going Concern – The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company incurred a net loss of $690,020$156,116 and $351,270$183,557 for the three months ended September 30,December 31, 2009 and 2008, respectively, and asa net loss of September 30,$670,873 and $530,663 for the six months ended December 31, 2009 and 2008, respectively. As of December 31, 2009, the Company has an accumulated deficit of $530,717$686,838 and a working capital deficit of $536,823.$670,566.

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

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

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

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements.  These consolidated condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s report on Form 10-K for the year ended December 31, 2008 filed on February 18, 2009 and Amendment to Form 10-K filed on May 28, 2009. In addition, these consolidated condensed financial statements and notes should also be read in conjunction with the Company’s Current Report on Form 8-K filed on October 22, 2009 and Form 10-Q for the three months ended September 30, 2009 filed on November 18, 2009.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the period reported.  Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary.  Actual results could differ from those estimates and assumptions.

Use of Estimates

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

Revenue Recognition    

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

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.

7

Cash and Cash Equivalents

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

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management's best estimate of probable credit losses inherent in the accounts receivable balance.  The Company determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence.  The Company reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.  At September 30,December 31, 2009, accounts receivable totaled $431,303$528,042 net of $15,178 in the allowance for doubtful accounts.

Inventories

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

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable.  As of September 30,December 31, 2009, substantially all of our cash and cash equivalents were managed by a number of financial institutions.  As of September 30,December 31, 2009, our cash and cash equivalents with certain of these financial institutions exceed FDIC insured limits.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in the United States and Canada.

Fair Value of Financial and Derivative Instruments

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

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

At September 30,December 31, 2009, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other long-term debt.

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

Advertising Costs

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $52,658$61,233 at September 30,December 31, 2009 and $57,625 at June 30, 2009. Advertising expense for the three months ended September 30,December 31, 2009 and 2008 was $178,132$239,871 and $260,780,$290,454, respectively.



 
8
 

Research and Development

Research and development expenses for new products are expensed as they are incurred.  Expenses for new product development totaled $51,522$37,580 for the three months ended September 30, 2008December 31, 2009 and $31,120$68,375 for the three months ended September 30, 2009.December 31, 2008. Research and development costs are included in general and administrative expense.

Shipping and Handling

Net sales for the three months ended September 30,December 31, 2009 and 2008 includes amounts charged to customers of $162,938$302,715 and $301,803,$294,807, respectively, for shipping and handling charges.

Property and Equipment

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

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

Operating Leases

The Company leases its facility under a ten year operating lease whichthat 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 September 30,December 31, 2009 is $351,454.was $346,599.  The Rent expense under this lease for the three months ended September 30,December 31, 2009 and 2008 was $80,931.

Income Taxes

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

Segment Information

During the three and six months ended September 30,December 31, 2009 and 2008, the Company only operated in one segment; therefore, segment information has not been presented.

New Accounting Pronouncements

In JuneMay 2009, the Financial Accounting Standards Board (“FASB”)FASB issued new guidance onSFAS No. 165, “Subsequent events”, (now known as ASC 855). The objective of this Statement is to establish general standards of accounting for, transfersand disclosure of, events that occur after the balance sheet date but before financial assets. The new guidance removesstatements are issued or are available to be issued. In particular, this Statement sets forth: 1. the conceptperiod after the balance sheet date during which management of a qualifying special-purposereporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, 2. the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and removes a certain exception from applying previous FASB interpretations on3. the consolidation of variable interest entitiesdisclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this Statement, an entity should apply the requirements to qualifying special-purpose entities. The new guidance is effective forinterim or annual and interim reportingfinancial periods beginningending after NovemberJune 15, 2009. The Company hasadopted ASC 855 during the first quarter of fiscal 2010. The adoption of ASC 855 did not yet adopted the new guidance and does not expect that the new guidance will have anya material impact on the Company’s financial statements.

statements or condition. In June 2009,accordance with ASC 855, management has evaluated subsequent events through the FASBdate and time the financial statements were issued new accounting guidance on accounting for the consolidation of variable interest entities. The guidance amends certain previously existing guidance for determining whether an entity is a variable interest entity, requires an enterprise to perform an analysis to determine whether an enterprise’s variable interest or interests give it a controlling financial interestFebruary 19, 2010, and has disclosed such subsequent events in a variable interest entity, and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. An identified primary beneficiary of a variable interest entity is an enterprise that has both the power to direct the activities of significant impact on a variable interest entity and the obligation to absorb losses or receive benefits from the variable interest entity that could potentially be significant to the variable interest entity. The new guidance is effective for annual and interim reporting periods beginning after November 15, 2009. The Company has not yet adopted the new guidance and does not expect that the new guidance will have any impact on the Company’s financial statements.Note 16.

 
9
 


Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update No. 2009-01, which amends ASC 105, Generally Accepted Accounting Principles. This guidance states that the ASC will become the source of authoritative U.S. GAAP recognized by the FASB accounting standards codificationto be applied by nongovernmental entities. Once effective, the Codification’s content will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and the hierarchy of generally accepted accounting principles. The primary purpose of this new accounting guidance is to improve clarity and use of existing standards by grouping authoritative literature under common topics. The new guidance does not change or alter existing GAAP. The new guidancenon-authoritative. This is effective for annualfinancial statements issued for interim and interimannual periods ending after September 15, 2009.  The Company adoptedWe have incorporated the new guidance on JulyCodification citations in place of the corresponding references to legacy accounting pronouncements. Our adoption of the codification did not impact our financial position or results of operations.

On October 1, 2009, we adopted ASU No. 2010-02, “Consolidation (Topic 810) Accounting and determined itReporting for Decreases in Ownership of a Subsidiary—a Scope Clarification,” as codified in ASC 810, “Consolidation.” ASU No. 2010-02 applies retrospectively to April 1, 2009, our adoption date for ASC 810-10-65-1. This ASU clarifies the applicable scope of ASC 810 for a decrease in ownership in a subsidiary or an exchange of a group of assets that is a business or nonprofit activity. The ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect future divestitures of subsidiaries or groups of assets within its scope.

On October 1, 2009, we adopted ASU No. 2010-01, “Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the Company’sFASB Emerging Issues Task Force,” as codified in ASC 505, “Equity.” ASU No. 2010-01 clarifies the treatment of certain distributions to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The adoption of this ASU did not have a material impact on our consolidated financial statements.statements; however, it may affect any future stock distributions.

On October 1, 2009, we adopted ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” as codified in ASC 820-10, “Fair Value Measurements and Disclosures—Overall.” ASU No. 2009-12 permits a reporting entity to measure the fair value of certain alternative investments that do not have a readily determinable fair value on the basis of the investments’ net asset value per share or its equivalent. This ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may impact the valuation of our future investments.

Earnings (Loss) Per Share of Common Stock

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

Reconciliations betweenThe Company reports earnings per share in accordance with the numerator andStatement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following table sets forth the denominatorcomputation of the basic and diluted earnings per share computations for the three months ended September 30, 2009 and September 30, 2008 are as follows:common share:

  Three Months Ended September 30, 2009 
  Net Loss  Shares  Per Share 
  (Numerator)  (Denominator)  Amount 
       
Basic loss per share $690,020   62,070,416  $0.01 
Dilutive effect of common stock equivalents  —   —   — 
Diluted loss per share $690,020   62,070,416  $0.01 
  Six Months Ended December 31, 
  2009  2008 
       
Numerator:      
Net loss $(670,873) $(530,663)
         
Denominator:        
Denominator for earnings per share (basic and diluted) — weighted average shares  60,932,981   45,000,000 
         
Loss per common share (basic and diluted): $(0.01) $(0.01)


 
10


  Three Months Ended September 30, 2008 
  Net Loss  Shares  Per Share 
  (Numerator)  (Denominator)  Amount 
       
Basic loss per share $351,270   46,200,001  $0.01 
Dilutive effect of common stock equivalents  —   —   — 
Diluted loss per share $351,270   46,200,001  $0.01 
  Three Months Ended December 31, 
  2009  2008 
       
Numerator:      
Net loss $(156,116) $(183,557)
         
Denominator:        
Denominator for earnings per share (basic and diluted) — weighted average shares  61,915,981   45,000,000 
         
Income (loss) per common share (basic and diluted): $(0.00) $(0.00)

Basic and diluted earnings per share are the same in periods of a net loss, thus there is no effect of dilutive securities when a net loss is recorded.  There were approximately 5,650,849 and 4,400,849438,456 securities excluded from the calculation of diluted loss per share because their effect was anti-dilutive for the threesix months ended September 30,December 31, 2009 and 2008, respectively.

Seasonality

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

NOTE 3 –  STOCK-BASED COMPENSATION

Options

On October 16, 2009, the Company’s Board of Director approved the 2009 Stock Option Plan (the “Plan”), subject to approval by a majority vote of the shareholders. The Plan reserves a total of 5,000,000 shares of common stock for issuance under the Plan. On that date, the Board of Directors also approved the grant of 1,077,000 stock options to 80 employees, including two officers of the Company.  These options have a five year term and are exercisable at 25% a year, beginning on the first anniversary of the grant date.  As of December 31, 2009, 3,923,000 shares of common stock were available for grant under the Company’s Plan.

 Stock-based employee compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company has no awards with market or performance conditions.

Stock-based compensation expense recognized in the condensed consolidated statements of operations for the six-month periods ended December 31, 2009 and 2008 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Pre-vesting forfeitures are estimated to be approximately 25%, based on historical experience.

The following table summarizes the Company’s stock option activities for the six months ended December 31, 2009:
  
Number of
Shares 
Underlying
Outstanding
Options
  
Weighted
Average
Remaining
Contractual
Life (Years)
  
Weighted
Average
Exercise
Price
  
Intrinsic
Value
 
Options outstanding as of June 30, 2009  438,456   1.9  $.228  $9,646 
Granted  1,077,000   4.9  $.25  $— 
Exercised  —   —  $—   — 
Forfeited  —   —  $—   — 
Options outstanding as of December 31, 2009  1,515,456   4.0  $.244  $9,646 
Options exercisable as of December 31, 2009  438,456   1.9  $.228  $9,646 

11

The weighted average fair value per underlying share of options granted during the three months ended December 31, 2009 was $.056. The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount optionees would have received if all options had been exercised on the last business day of the period indicated. Since the Company’s stock has no significant trading volume, the stock price is assumed to be $.25 per share.

Options outstanding by exercise price at December 31, 2009 were as follows:
     Options Outstanding    
Exercise Price 
Number of Shares
Underlying
Outstanding
Options
  
Weighted
Average
Exercise Price
  
Weighted
Average
Remaining
Contractual
Life (Years)
  Options Exercisable 
 
Number of Shares
Underlying
Vested and
Exercisable
Options
  
Weighted
Average
Exercise Price
 
$0.228  438,456  $0.228   1.9   438,456  $0.228 
$0.25  1,077,000  $0.25   4.9   —  $— 
   1,515,456  $0.244   4.0   438,456  $0.228 

Stock-based compensation

The following table summarizes stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to employee stock plans:
  Three Months Ended December 31,  Six Months Ended December 31, 
  2009  2008  2009  2008 
             
Cost of Goods Sold $742  $—  $742  $— 
Other Selling and Marketing  841   —   841   — 
General and Administrative  1,002   —   1,002   — 
Total $2,585  $—  $2,585  $— 

As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures in accordance with authoritative guidance.  The Company estimates forfeitures at the time of grant and revises the original estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

As of December 31, 2009, the Company’s total unrecognized compensation cost was $75,753, which will be recognized over the vesting period of 5 years. The Company calculated the fair value of stock-based awards in the periods presented using the Black-Scholes option pricing model and the following weighted average assumptions:
  Three Months Ended December 31,  Six Months Ended December 31, 
  2009  2008  2009  2008 
Stock Option Plans:                
Risk-free interest rate  2.50%      2.5%    
Expected life (in years)  3.5       3.5     
Volatility  25%      25%    
Dividend yield  0%      0%    

NOTE 4 –  INVENTORIES

Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. Market is defined as sales price less cost to dispose and a normal profit margin.  Inventories consistconsisted of the following:
 
  September 30, 2009  June 30, 2009 
    
Raw materials $358,611  $366,355 
Work in process  156,886   176,637 
Finished goods  259,047   157,411 
         
  $774,544  $700,403 
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 151, fixed production related costs of approximately $5,279 and $0 were charged to cost of sales for the quarters ended September 30, 2009 and 2008, respectively, due to below normal production capacity in the most recent quarter.
  December 31, 2009  June 30, 2009 
    
Raw materials $410,778  $366,355 
Work in process  275,694   176,637 
Finished goods  203,485   157,411 
         
  $889,957  $700,403 

 
1012
 

NOTE 45 – EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, or the shorter of the remaining lease term or estimated useful lives for leasehold improvements.
 
Factory Equipment7 to 10 years
Furniture and fixtures, computer equipment and software5 to 7 years
Leasehold improvements7 to 10 years

Equipment and leasehold improvements consistconsisted of the following:
 
 September 30, 2009  June 30, 2009  December 31, 2009  June 30, 2009 
         
Factory Equipment $1,507,821  $1,506,147  $1,522,479  $1,506,147 
Computer Equipment and Software  757,249   669,179   790,075   665,135 
Office Equipment and Furniture  166,996   166,996   166,996   166,996 
Leasehold Improvements  316,333   312,433   318,033   312,433 
  2,748,399   2,654,755   2,797,583   2,650,711 
Less accumulated depreciation and amortization  (1,573,943)  (1,518,763)  (1,649,873)  (1,515,194)
Construction-in-progress  -   -   -   - 
Equipment and leasehold improvements, net $1,174,456  $1,135,992  $1,147,710  $1,135,517 

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the three months ended September 30,December 31, 2009.

NOTE 56 – NOTE PAYABLE - EQUIPMENT

Note payable – equipment at September 30 and June 30, 2009 consisted of the following:

 September 30, 2009  June 30, 2009  December 31, 2009  June 30, 2009 
Note payable to Fidelity Bank in monthly installments of $5,364 including interest at 8%, maturing October 25, 2010, secured by equipment
 $58,110  $72,812  $43,092  $72,812 
Less: Current Portion
  (58,110)   (61,244)   (43,092)  (61,244)
Long-term Note Payable $–  $11,568  $–  $11,568 
 
The schedule of minimum maturities of the note payable for fiscal years subsequent to June 30, 2009 is as follows:
 
Year ending June 30,      
2010 (nine months) $51,866 
2010 (six months) $31,232 
2011  6,244   11,860 
Total note payments $58,110  $43,092 

 
1113
 

NOTE 67  –  REVOLVING LINE OF CREDIT

On March 19, 2008,November 10, 2009, the Company (Liberator, Inc.) entered into a loan agreement for a revolving line of credit with a commercial finance company whichthat provides credit to 80% of domestic accounts receivable aged less than 90 days up to $250,000. Borrowings under the agreement bear interest at Prime rate plus six percent (9.25 percent as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as defined in the agreement.  On December 31, 2009, the balance owed under this revolving line of credit was $243,967.

On March 19, 2008, the Company entered into a loan agreement for a revolving line of credit with a commercial finance company that provides credit to 85% of accounts receivable aged less than 90 days up to $500,000 and eligible inventory (as defined in the agreement) up to a sub-limit of $220,000, such inventory loan not to exceed 30% of the accounts receivable loan. Borrowings under the agreement bear interest at the Prime rate plus two percent (5.25 percent at June 30, 2009), payable monthly, plus a monthly service charge of 1.25% to 1.5%, depending on the underlying collateral.  At September 30, 2009 andOn June 30, 2009, the balance owed under thethis revolving line of credit was $0$171,433, and $171,433, respectively.

On November 10, 2009, the Company entered into a loan agreement for a revolving line of credit with a different commercial finance company which provides credit to 80% of domestic accounts receivable aged less than 90 days up to $250,000. Borrowings under the agreement bear interest at Prime rate plus six percent (9.25 percent as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as defined in the agreement.was fully repaid on August 11, 2009.

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 operating and capital requirements required by operations.during the next 12 months. If new business opportunities do arise, additional outside funding may be required.

NOTE 78 – CREDIT CARD ADVANCE

On July 2, 2008, the Company received $350,000 from a finance company under the terms of a credit facility that is secured by the Company's future credit card receivables.  Terms of the credit facility require repayment on each business day of principal and interest at a daily rate of $1,507 over a twelve month period. The credit facility had a financing fee of 12% (equal to $42,000) on the principal amount, which equates to an effective annual interest rate of 21.1%.  The credit facility is personally guaranteed by the Company's CEO and majority shareholder, Louis Friedman.  On June 3, 2009, the Company borrowed an additional $200,000 under this credit facility. Terms of the current loan require repayment on each business day of principal and interest at a daily rate of $1,723.08 over a six month period. The current loan has a financing fee of 12% (equal to $24,000) on the principal amount, which equates to an effective annual interest rate of 43.2%.  The amount owed on the credit card advance was $102,609$0 at September 30,December 31, 2009 and $198,935 at June 30, 2009.

NOTE 89 – UNSECURED LINES OF CREDIT

The Company has drawn cash advances on three unsecured lines of credit that are personally guaranteed byin the name of the Company and Louis S. Friedman. The terms of these unsecured lines of credit call for monthly payments of principal and interest, with interest rates ranging from 12% to 18%. The aggregate amount owed on the three unsecured lines of credit was $119,071$112,790 at September 30,December 31, 2009 and $124,989 at June 30, 2009.

NOTE 910 – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facility under a ten year operating lease whichthat 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 September 30,December 31, 2009 was $351,454$346,599 and $337,155 at June 30, 2009. The rent expense under this lease for the three months ended September 30,December 31, 2009 and 2008 was $80,931.$80,931 and for the six months ended December 31, 2009 and 2008 was $161,862.

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


14

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

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

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

12


Future minimum lease payments under non-cancelable operating leases at September 30,December 31, 2009 are as follows:

   
Year ending June 30,      
2010 (nine months) $245,202 
2010 (six months) $205,241 
2011 413,263  413,263 
2012 420,348  420,348 
2013 395,798  395,798 
2014 391,685  391,685 
Thereafter through 2016  1,002,816   1,002,816 
       
Total minimum lease payments $2,869,112  $2,829,151 

Capital Leases

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

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

Year ending June 30      
2010 (nine months) $62,215 
2010 (six months) $40,184 
2011 77,010  77,010 
2012 33,974  33,974 
2013 22,930  22,930 
2014  6,835   6,835 
Present value of capital lease obligations $202,964  $180,933 
Imputed interest  40,631   34,134 
Future minimum lease payments $243,595  $215,067 

Common Stock Issuance

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

The Company will deliver the balance 750,000 shares of common stock one (1) year from the date of closing (the “Anniversary Stock”), provided, however, that in the event that the Company or the Buyer makes a claim for indemnification pursuant to Section 7(a) of the Stock Purchase Agreement prior to the one (1) year anniversary, the number of balance shares of the Anniversary Stock shallwill be reduced by the result of the following amount: (a) the amount of the indemnity claim pursuant to Section 7(a); divided by (b) the five (5) day average price per share of the Company’s common stock as quoted on the OTCBBOver-the-Counter Bulletin Board or other electronic quotation system.  The cost of the Anniversary Stock issuance will be recognized at the time of issuance.

 
1315
 

Pursuant to a private placement memorandum and subscription agreement, on January 29, 2010, the Company issued 1,000,000 shares of common stock to 12 individuals and entities in the aggregate amount of $300,000.  All of the shares were sold to “accredited investors” as defined in 501(a) of the Securities Act.  Pursuant to Rule 506, all shares purchased in the Regulation D Rule 506 offering were restricted in accordance with Rule 144 of the Securities Act of 1933.

NOTE 10–11–  INCOME TAXES
 
There is no income tax provision (benefit) for federal or state income taxes as the Company has incurred operating losses since inception. Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No.48 (���(“FIN 48”) “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”  As of September 30,December 31, 2009, there was no significant liability for income tax associated with unrecognized tax benefits. 

With few exceptions, the Company is no longer subject to U.S. federal, state and local, and non-U.S. income tax examination by tax authorities for tax years before 2002.2003.

NOTE 1112 – EQUITY

Common Stock– The Company’s authorized common stock was 175,000,000 shares at September 30,December 31, 2009 and June 30, 2009.  Common stockholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At September 30,December 31, 2009 and June 30, 2009, the Company had reserved the following shares of common stock for issuance:

 September 30, June 30,  December 31, June 30, 
(in shares) 2009 2009  2009 2009 
Non-qualified stock options 438,456 438,456  438,456 438,456 
Shares of common stock subject to outstanding warrants 2,712,393 2,462,393  2,712,393 2,462,393 
Share of common stock issuance upon conversion of Series A Convertible Preferred Stock (convertible after July 1, 2011) 4,300,000 4,300,000 
Shares of common stock reserved for issuance under the 2009 Stock Option Plan 5,000,000 – 
Share of common stock issuance upon conversion of the Preferred Stock (convertible after July 1, 2011) 4,300,000 4,300,000 
Shares of common stock issuable upon conversion of Convertible Notes  2,500,000  1,500,000   2,500,000  1,500,000 
Total shares of common stock equivalents  9,950,849  8,700,849   14,950,849  8,700,849 

In connection with the purchase of majority control of the Company by Liberator on September 2, 2009, the Company issued 750,000 shares of common stock to Belmont Partners LLC upon the closing of the transaction and agreed to issue an additional 750,000 share on the one-year anniversary of the transaction upon the non-occurrence of certain events. The fair market value of the 750,000 shares of common stock issued was determined to be $187,500 ($.25 per share) and was charged to expense during the three months ended September 30, 2009.

Pursuant to a private placement memorandum and subscription agreement, on January 29, 2010, the Company issued 1,000,000 shares of common stock to 12 individuals and entities in the aggregate amount of $300,000.  All of the shares were sold to “accredited investors” as defined in 501(a) of the Securities Act.  Pursuant to Rule 506, all shares purchased in the Regulation D Rule 506 offering were restricted in accordance with Rule 144 of the Securities Act of 1933.

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

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

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

Warrants – As of September 30, 2009, outstanding warrants to purchase approximately 2,712,393 shares of common stock at exercise prices of $.25 to $1.00 will expire at various dates within five years of September 30,December 31, 2009.

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

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

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

During the three months endedOn September 30,2, 2009, the Company issued 250,000 warrants to Belmont Partners LLC in conjunction with the purchase of majority control by Liberator Inc. to purchase 250,000 shares of common stock at a fixed price of $.25 per share. The warrants were fully vested when granted and expire on September 2, 2012.  These warrants were valued using a volatility rate of 25%, a risk-free interest rate of 4.5% and a fair market value on the date of grant of $.25.  The warrants were valued at $14,458 and were expensed as an expense related to the reverse acquisitionpurchase of majority control by Liberator during the three months ended September 30, 2009.

NOTE 1213 – RELATED PARTIES

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

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

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On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. Hope Capital is a shareholder of the Company and was the majority shareholder of Liberator, then named “Remark Enterprises, Inc.,” before Liberator’s merger with OneUp.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of September 2, 2012. As of December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $51,407.  This amount will be amortized over the life of the note as additional interest expense.

NOTE 14 – CONVERTIBLE NOTES PAYABLE - SHAREHOLDER

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was Liberator’s majority shareholder, then named “Remark Enterprises, Inc.,” before Liberator’s merger with OneUp Innovations.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the Companyissuer has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. As of September 30,December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $83,896.$74,375.  This amount will be amortized over the remaining life of the note as additional interest expense.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. Hope Capital is a shareholder of the Company and was theLiberator’s majority shareholder, of Remarkthen named “Remark Enterprises, Inc.,” before theLiberator’s reverse merger with OneUp Innovations.OneUp.  The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of September 2, 2012. As of September 30,December 31, 2009, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $57,833.$51,407.  This amount will be amortized over the life of the note as additional interest expense.

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NOTE 1315 – REVERSE ACQUISITIONMERGER COSTS

Expenses related to the reverse acquisition ofmerger with Liberator Inc. during the first quarter of fiscal 2010 totaled $394,125.$192,167.  This item consists of $192,167 for the discounted face value of the $250,000 convertible note payable to Hope Capital,Capital.

Costs incurred by the Company prior to the merger totaled $201,958 and included $14,458 for the fair market value of the warrant to purchase 250,000 shares issued to Belmont Partners LLC, and $187,500 for the fair market value of the 750,000 Company shares issued to Belmont Partners LLC.  All of the expenses related to the reverse acquisitionmerger included in other income (expense) are non-cash expenses.

NOTE 1416 – SUBSEQUENT EVENTS

Pursuant to a private placement memorandum and subscription agreement, on January 29, 2010, the Company issued 1,000,000 shares of common stock to 12 individuals and entities in the aggregate amount of $300,000.  All of the shares were sold to “accredited investors” as defined in 501(a) of the Securities Act.  Pursuant to Rule 506, all shares purchased in the Regulation D Rule 506 offering were restricted in accordance with Rule 144 of the Securities Act of 1933.

Pursuant to an engagement letter with New Castle Financial Services, on January 29, 2010, the Company issued 100,000 shares of common stock to New Castle Financial Services with respect to investment banking and financial services performed by New Castle Financial Services in connection with the above private placement. Such securities were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. In addition, the Company paid New Castle Financial Services a fee of 10% of the gross proceeds, plus a 2% non-accountable expense allowance plus reimburse them for $12,500 in expenses.

On November 10, 2009,February 17, 2010, OneUp Innovations, Inc. (“OneUp”), the indirect wholly owned subsidiary of the Company, entered into a loanDistributorship Agreement with TENGA Co., Ltd (“TENGA”).  Pursuant to the terms of the agreement, OneUp will exclusively distribute TENGA’s products in the United States for a revolving lineperiod of credit with a commercial finance company which provides creditthree years.  The agreement will be renewed and extended for one additional year upon consultation and acceptance by both parties.  The purchase price of the products to 80% of domestic accounts receivable aged less than 90 days up to $250,000. Borrowingsbe distributed will be determined by mutual written consent under the agreement bear interest at Prime rate plus six percent (9.25 percentpricing schedule provided to OneUp by TENGA.  OneUp’s estimated minimum purchase obligations are as of November 10, 2009) plus a 2% annual facility fee and a .25% monthly collateral monitoring fee, as definedfollows: (i) between 200,000,000 Yen (approximately $2.2 million) to 300,000,000 Yen (approximately $3.3 million) in the first year, (ii) between 400,000,000 Yen (approximately $4.4 million) to 600,000,000 Yen (approximately $6.6 million) in the second year, and (iii) between 900,000,000 (approximately $9.9 million) Yen to 1,000,000,000 Yen (approximately $11 million) in the third year.  Delivery must be made within seventy days of TENGA confirming the purchase order.  OneUp must maintain product liability insurance with coverage against personal and property damage for at least $2 million.  Either party may terminate the agreement with thirty days’ prior written notice if the non-terminating party fails to fulfill the conditions set forth in the agreement.  TENGA provides a one (1) year warranty for its products.

 
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ItemITEM 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD LOOKING STATEMENTS
 
 This ReportCertain statements in this Management’s Discussion and Analysis section, other presentations madethan purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by WES Consulting, Inc. ("WES")the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and its subsidiaries contain "forward-looking statements," which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as "expects," "anticipates," "intends," "plan," "believes," "predicts", "estimates" or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements.  Forward-looking statements are based uponon current expectations and projections about future events andassumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and the accuracy of assumptions concerning Liberatoruncertainties that could cause actual results and its subsidiaries (collectively, the "Company"), the performance of the industry in which they do business and economic and market factors, among other things. Theseevents to differ materially from such forward-looking statements are not guaranteesis included in the “Risk Factors” section of future performance.

        Forward-looking statements speak only as ofour most recent Annual Report on Form 10-K filed with the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, the Company undertakesand Exchange Commission. We undertake no obligation to publicly update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Our forward-looking statements

As used in this Report include, but are not limited to:

·statements relating to our business strategy;

·statements relating to our business objectives; and

·expectations concerning future operations, profitability, liquidity and financial resources.

        These forward-looking statements are subject to risk, uncertaintiesreport, unless the context requires otherwise, “we” or “us” or the “Company” or “WES” means WES Consulting, Inc., a Florida corporation, and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

·competition from other sexual wellness retailers and adult-oriented websites;

·our ability to generate significant sales revenue from magazine, radio and television advertising;

·our ability to maintain our brands;

·unfavorable economic and market conditions;

·our reliance on credit cards as a form of payment;

·our ability to keep up with new technologies and remain competitive;

·our ability to continue as a going concern;

·our history of operating losses and the risk of incurring additional losses in the future;

·security breaches may cause harm to our systems;

·supply interruptions from raw material vendors:

·our ability to enforce and protect our intellectual property rights;

·we may be subject to claims that we have violated the intellectual property rights of others;

·the loss of our main data center or other parts of our infrastructure;

·systems failures and interruptions in our ability to provide access to our websites and content;

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·companies providing products and services on which we rely may refuse to do business with us;

·changes in government laws affecting our business;

·we may not be successful in integrating any future acquisitions we make;

·our dependence on the experience and competence of our executive officers and other key employees;

·restrictions to access on the internet affecting traffic to our websites;

·risks associated with currency fluctuations; and

·risks associated with litigation and legal proceedings.

·other risks or uncertainties described elsewhere in this Report and in other periodic reports previously and subsequently filed by the Company with the Securities and Exchange Commission.

You should read the following description of WES’s financial condition and results of operations in conjunction with the financial statements and accompanying notes.its subsidiaries.

Overview
 
Comparisons of selected consolidated statements of operations data as reported herein follow for the periods indicated:
 
Total:
 
Three Months Ended
September 30, 2009
  
Three Months Ended
September 30, 2008
  Change  
Three Months Ended
December 31, 2009
  
Three Months Ended
December 31, 2008
  Change 
                  
Net sales: $2,039,292  $2,666,072   (24)% $3,034,664  $2,705,471   12%
Gross profit $662,476  $837,084   (21)% $1,076,632  $1,042,371   3%
Loss from operations $(270,494) $(289,505)  7% $(105,758) $(110,541)  61%
Diluted (loss) per share $(0.01) $(0.01)  —  $(0.00) $(0.00)  — 

Net Sales by Channel:
 
Three Months Ended
September 30, 2009
  
Three Months Ended
September 30, 2008
  Change  
Three Months Ended
December 31, 2009
  
Three Months Ended
December 31, 2008
  Change 
                  
Direct $1,169,788  $1,387,227   (16)% $1,381,818  $1,261,141   10%
Wholesale $685,363  $950,723   (28)% $1,347,777  $1,136,165   19%
Other $184,141  $328,122   (44)%  $305,069  $308,165   (1)%
Total Net Sales $2,039,292  $2,666,072   (24)%  $3,034,664  $2,705,471   12%
 
Other revenues consist principally of shipping and handling fees derived from our Direct business.

Gross Profit by Channel:
 
Three Months Ended
September 30, 2009
  %  
Three Months Ended
September 30, 2008
  %  Change  
Three Months Ended
December 31, 2009
  
Margin
%
  
Three Months Ended
December 31, 2008
  
Margin
%
  Change  
                               
Direct $501,884   43% $565,234   41%  (11)% $724,040   52% $590,317   47%  23%
Wholesale $183,715   27% $193,627   20%  (5)% $352,792   26% $393,068   35%  (10)%
Other $(23,123)  (13)% $78,223   24%  (130)%  $(200)     $58,986       (100)%
Total Gross Profit $662,476   32% $837,084   31%  (21)%  $1,076,632   35% $1,042,371   39%  3%

 
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First QuarterComparison of Fiscal 2010 Compared to First Quarter of FiscalThree Months Ended December 31, 2009 and Three Months Ended December 31, 2008

Net sales for the three months ended September 30,December 31, 2009 decreasedincreased from the comparable prior year period by $626,780,$329,193, or 24%12%.  The decreaseincrease in sales was experienced in allthe result of higher sales channels. Consumer sales decreased from $1,387,227 in the firstConsumer and Wholesale channels. Direct sales (which includes product sales through our three e-commerce sites and our retail store) increased from $1,261,141 in the second quarter of fiscal 2009 to $1,169,788$1,381,818 in the firstsecond quarter of fiscal 2010, a decreasean increase of approximately 16%12%, or $217,439.  $120,677.  We attribute this improvement to a general improvement in the economy resulting in overall increases in consumer online spending during the quarter, leading to consumers to purchase more of our products, as our products are typically a discretionary purchase. According to a comScore, Inc. report, online consumer spending in the United States increased 3% during the quarter ended December 31, 2009, reversing a 3% decline from the prior year-over year period. As a result of an increased focus on our Wholesale business, sales to wholesale customers increased approximately 19% from the prior year. Sales to Wholesale customers was expected to increase during the second quarter of fiscal 2010 (the three months ended December 31, 2009) as a result of new accounts being added and as Wholesale customers increased their inventory levels prior to the Christmas holiday. Wholesale customers include Liberator products sold to distributors and retailers and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customer, and which, to date, has not been a material part of our business.

One of the most frequent consumer discount offers during the three months ended September 30,December 31, 2009 was “free” or significantly reduced shipping and handling, which accounts for the decrease in the Other category revenue and gross profit from the prior year comparable period.  Sales to Wholesale customers had the largest decrease during the first quarter from the prior year first quarter, both in dollars and as a percentage, decreasing 28% or $265,360. Sales to wholesale customers is expected to increase during the second quarter of fiscal 2010 (the three months ended December 31, 2009) as a result of new accounts being added and as wholesale customers increase their inventory levels prior to the Christmas holiday. We attribute the overall decrease in sales toIn the current economic uncertaintyenvironment, we anticipate the need to continue to offer “free” or reduced shipping and overall decreases in domestic consumer spending,handling to consumers as our products are typically a discretionary purchase.    promotional tool.

Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead, and depreciation.  Gross margin as a percentage of sales increased slightlydecreased to 32%35% for the three months ended September 30,December 31, 2009 from 31%39% in the comparable prior year period.  This is primarily the result of an increasea decrease in the proportion of higher margin Direct to consumer sales to total neton Wholesale sales during the quarter (from 35% to 26%) and a decrease in the Other margin to slightly less than zero. This was offset to some extent by the increase in the Direct margin to 52% from 47% in the comparable prior year period.   We attribute the decrease in the Wholesale margin to an increase in private label manufacturing, which has a slightly lower margin than Liberator products sold to distributors and retailers. The improvement in the Direct margin was the result of a price increase that was implemented earlier this year and a slight decrease in certain raw material costs.

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

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

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

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

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

Comparisons of selected consolidated statements of operations data as reported herein follow for the periods indicated:
 Total:
 
Six Months Ended
December 31, 2009
  
Six Months Ended
December 31, 2008
  Change 
          
Net sales: $5,069,656  $5,351,294   (5)%
Gross profit $1,734,808  $1,859,206   (7)%
Loss from operations $(371,770) $(395,881)  22%
Diluted (loss) per share $(0.00) $(0.00)  — 
20
 Net Sales by Channel:
 
Six Months Ended
December 31, 2009
  
Six Months Ended
December 31, 2008
  Change 
         
Direct $2,551,606  $2,648,368   (4)%
Wholesale $2,033,140  $2,086,888   (3)%
Other $484,910  $616,038   (21)%   
           Total Net Sales $5,069,656  $5,351,294   (5)%  
Other revenues consist principally of shipping and handling fees derived from our Direct business.

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

Net sales for the six months ended December 31, 2009 decreased from the comparable prior year period. Direct to consumerperiod by $281,638, or 5%.  The decrease in sales accounted for 57% of total netwas experienced in all sales compared to 52%channels. Consumer sales decreased from $2,648,368 in the prior year first quarter. In addition,six months of fiscal 2009 to $2,551,606 in the gross profit margin on Direct tofirst six months of fiscal 2010, a decrease of approximately 4%, or $96,762.  One of the most frequent consumer sales increased to 43%discount offers during the three months ended September 30, 2009 was “free” or significantly reduced shipping and handling, which accounted for the decrease in the Other category revenue and gross profit from 41%the prior year comparable six month period.  Sales to Wholesale customers during the six months ended December 31, 2009 was essentially flat from the prior year comparable period, with a 3% decrease.  Sales to Direct and Wholesale customers is expected to increase during the remainder of fiscal 2010, as the Company introduces new product lines for consumers and wholesale distribution (see Footnote 16-Subsequent Events) and general economic conditions continue to improve.

Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead, and depreciation.  Gross margin as a percentage of sales decreased slightly to 34% for the six months ended December 31, 2009 from 35% in the comparable prior year period.  Gross profit onThis is primarily the Wholesale sales increased as a result of a price increase that was implementeddecrease in the margin on Wholesale sales during the thirdsecond quarter of fiscal 2009.(from 35% to 26%) and a decrease in the Other margin to slightly less than zero. This was offset to some extent by the increase in the Direct margin to 44% from 48% in the six month period from the comparable prior year period.   We attribute the decrease in the Wholesale margin to an increase in private label manufacturing during the quarter ended December 31, 2009, which has a slightly lower margin than Liberator products sold to distributors and retailers. The Grossgross profit on the Other category decreased from a positive $78,223$116,960 to a negative margin of $23,123$27,623 as a result of the “free” or reduced shipping and handling charge promotions that were offered during the first quarterand second quarters of fiscal 2010.  In the current economic environment, we anticipate the need to continue to offer “free” or reduced shipping and handling to consumers as a promotional tool.

Total operating expenses for the threesix months ended September 30,December 31, 2009 were 46%42% of net sales, or $932,970,$2,106,578, compared to 42% of net sales, or $1,126,589,$2,255,087, for the same period in the prior year.  This 17%7% decrease in operating expenses was the result of lower expenses in allthe categories including advertising and promotion costs, other selling and marketing costs, general and administrative costs and depreciation expense.

Advertising and promotion expenses decreased by 32%24% (or $82,648)$133,232) from $260,780$551,234 in the first quartersix months of fiscal 2009 to $178,132$418,002 in the first quartersix months of fiscal 2010.  Advertising and promotion expenses were reduced during the first quarterhalf of fiscal 2010 as part of an on going program to improve the targeting, timing and effectiveness of advertising spending.  Other Selling and Marketing costs decreased 18%8% (or $53,582)$48,517) from the first quarterhalf of fiscal 2009 to the current quarterfirst half of fiscal 2010, primarily as a result of lower professional fees, salaries, and graphic services cost, which was partially offset by higher trade show and travel costs.

General and administrative costs decreased by 8% (or $40,015) from $484,134 in the first quarter of fiscal 2009 to $444,119 in the first quarter of fiscal 2010. This was primarily the result of lower utility costs and lower product development payroll related costs during the current year first quarter.

Other income (expense) during the first quartersix months increased from expense of ($61,765)$134,782 in fiscal 2009 to expense of ($419,526)$299,103 in fiscal 2010.  Interest (expense) and financing costs in the current quartersix months ended December 31 included $5,358$21,301 from the amortization of the debt discount on the convertible note.notes. Expenses related to the reverse acquisitionmerger of Liberator, Inc. during the first quarter of fiscal 2010 totaled $394,125.$192,167.  This item consists of $192,167 for the discounted face value of the $250,000 convertible note payable to Hope Capital $14,458 forby Liberator, who is the fair market value of the warrantacquirer pursuant to purchase 250,000 shares issued to Belmont Partners LLC, and $187,500 for the fair market value of the 750,000 Company shares issued to Belmont Partners LLC.  All of the expensesASC Topic 805 (formerly SFAS 141(revised)).  The expense related to the reverse acquisitionmerger included in other income (expense) are non-cash expenses.

21

No expense or benefit from income taxes was recorded in the threesix months ended September 30,December 31, 2009 or 2008.  The Company doesWe do not expect any U.S. Federalfederal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

The CompanyWe had a net loss of $690,020,$670,873, or ($0.01) per diluted share, for the threesix months ended September 30,December 31, 2009 compared with a net loss of $351,270,$530,663, or ($0.01) per diluted share, for the yearsix months ended September 30,December 31, 2008.

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

Financial Condition
 
Cash and cash equivalents decreased $1,590,491$1,609,332 to $229,355$206,301 at September 30,December 31, 2009 from $1,819,846$1,815,633 at June 30, 2009. This decrease in cash resulted from cash used in operating activities of $1,162,003,$1,230,041, cash used in investing  activities of $97,688,$146,872, and by cash used in financing activities of $330,800,$232,419, as more fully described below.

Cash used in operating activities for the threesix months ended September 30,December 31, 2009 represents the results of operations adjusted for non-cash depreciation ($58,749)134,679) and the non-cash deferred rent accrual reversal $4,854,of $9,709, the non-cash expenses related to the reverse acquisitionmerger of $394,125, a non-cash gain$192,163, and amortization of the debt discount on the forgivenessconvertible notes of debt of $31,179.$21,305. Changes in operating assets and liabilities include an increase in accounts receivable of $84,873, and$181,612, an increase in inventory of $74,141$189,554 and an increase in prepaid expenses and other assets of $50,886.$35,738.  Additional cash was used to reduce accounts payable by $581,633$372,232 during the threesix months ended September 30,December 31, 2009, and reduce accrued compensation and accrued expenses and interest by $33,493$33,260 and $69,631,$85,210, respectively.

Cash flows used in investing activities reflects capital expenditures during the quartersix months ended September 30,December 31, 2009. The largest component of capital expenditures during the three months ended September 30, 2009,period was the Company’sour project to upgrade its e-commerce platform and ERP system. Expenditures on the e-commerce platform and ERP system, as of September 30,December 31, 2009, total approximately $344,000$397,337 and the systems were operational and in use as of September 1, 2009.

Cash flows used in financing activities are attributable to the repayment of the revolving line of credit of $171,433,$1,426,705, repayment of the credit card cash advance of $96,326,$198,935, and principal payments on notes payable and capital leases totaling $36,920.$73,819.

As of September 30,December 31, 2009, the Company’sour net accounts receivable increased by $84,873,$181,612, or 24%52%, to $431,303$528,042 from $346,430 at June 30, 2009. The increase in accounts receivable is primarily the result of increased sales to certain wholesale accounts near the endduring December 2009 as these customers typically increase their purchases in advance of September, 2009.Christmas and Valentine’s Day. Management believes that itsour accounts receivable are collectible net of the allowance for doubtful accounts of $15,178 at September 30,December 31, 2009.

The Company’sOur net inventory increased $74,141,by $189,554, or 11%27%, to $774,544$889,957 as of September 30,December 31, 2009 compared to $700,403 as of June 30, 2009. The increase reflects an increase in finished goods inventory in anticipation of increased product sales during the three months ended DecemberMarch 31, 2009.2010.

Accounts payable decreased $581,633by $672,232, or 26%17%, to $1,666,212$1,875,613 as of September 30,December 31, 2009 compared to $2,247,845 as of June 30, 2009. The decrease in accounts payable was the result of the Company’sour improved working capital position that resulted from the net proceeds of the private placement of Liberator, Inc.’s common stock that closed on June 26, 2009. 

 
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Liquidity and Capital Resources
 
At September 30,December 31, 2009, the Company’sour working capital deficiency was $536,823,$670,566, a decrease of $434,912$564,442 compared to the deficiency of $101,911$106,124 at June 30, 2009.  Cash and cash equivalents at September 30,December 31, 2009 totaled $229,355,$206,301, a decrease of $1,590,491$1,609,332 from $1,819,846$1,815,633 at June 30, 2009.

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

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

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

These actions include initiatives to increase gross profit margins through improved production controls and projected future resultsreporting. To that end, we recently implemented a new Enterprise Resource Planning (ERP) software system. We also plan to reduce discretionary expense levels to be better in line with current revenue levels. Furthermore, our plan of operations,operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic development plans we believe that our cash balanceshave identified will require approximately $2,300,000 of funding. We expect to invest approximately $500,000 for additional inventory of sexual wellness products and anticipated operating cash flows during$1,800,000 on sales and marketing programs, primarily sexual wellness advertising in magazines and on cable television. We will also be exploring the second and third quarters of fiscal 2010, together with additional borrowing of less than $250,000, will be sufficientopportunity to acquire other compatible businesses.

We plan to finance current operating requirements,the required $2,300,000 with a combination of cash flow from operations as well as cash on hand and cash raised through equity and debt service, and planned capital expenditures, for the next 12 months.financings.

Capital Resources

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

 
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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.
 
ItemITEM 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.Not applicable.

As of November 16, 2009 we have one loan which adjusts based on the prime rate. As such, we are exposed to the interest rate risk whereby a 1% increase in the prime rate would lead to an increase of approximately $2,500 in interest expense for the year ending June 30, 2010 (based on full utilization of the credit facility.)

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Item 4T.ITEM 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintainsWe maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it fileswe file or submitssubmit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of the Company’sour management, including itsour Chief Executive Officer and Chief Financial Officer, of the effectiveness of itsour disclosure controls and procedures.  Based on that evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer concluded that the Company’sour 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 it fileswe file or submitssubmit 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 it fileswe file or submitssubmit 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 have not been anywere no changes in the Company’sour internal control over financial reporting that occurred during the Company’s lastour most recent fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.      OTHER INFORMATION

ItemITEM 1.           Legal Proceedings

None.There have been no material developments during the quarter ended December 31, 2009 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.

ItemITEM 2.           Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended December 31, 2009 to report that have not already been disclosed in a Current Report on Form 8-K.

On September 2, 2009 (“Closing Date”), Liberator, Inc., a Georgia based sexual wellness retailer, acquired the majority of the issued and outstanding common stock of the Company in accordance with a common stock purchase agreement (the “Stock Purchase Agreement”) by and among Liberator, Inc., Nevada Corporation (“Liberator” or the “Purchaser”) and Belmont Partners, LLC, a Virginia limited liability company (“Belmont” or the “Seller”) and the Company.  On the Closing Date, pursuant to the terms of the Stock Purchase Agreement, Liberator acquired 972,000 shares ( 81%) of the Company from the Seller for a total of two hundred forty thousand five hundred dollars ($240,500) in addition to the issuance of two hundred fifty thousand (250,000) warrants to Belmont to purchase an equal number of shares of the Company’s common stock with an exercise price of twenty five cents ($0.25), the issuance of a total of one million  five hundred thousand (1,500,000) shares of the Company’s common stock with seven hundred fifty thousand (750,000) shares delivered on the Closing Date and the balance of seven hundred fifty thousand (750,000) shares delivered on the one (1) year anniversary of the Closing Date (collectively, the “Purchase Price”).

ItemITEM 3.           Defaults upon Senior Securities

None.

ItemITEM 4.           Submission of Matters to a Vote of Security Holders

None.

 
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ItemITEM 5.           Other Information
(a)           None.

 None.

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(b)           There were no changes to the procedures by which security holders may recommend nominees to our board of directors.

ItemITEM 6.           Exhibits

a)Exh. No.The following exhibits are furnished with this report:Description
  
3(i)2.1 
Merger and Recapitalization Agreement, between the registrant, the registrant’s majority shareholder, Liberator, Inc., and Liberator, Inc.’s majority shareholder, dated October 19, 2009 (2)
3.1Amended and Restated Articles of Incorporation.Incorporation (1)
3.2Bylaws (1)
31.1Section 302 Certification by the Corporation’s Principal Executive Officer *
31.2Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer *
32.1Section 906 Certification by the Corporation’s Principal Executive Officer *
32.2Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer *
*Filed herewith.
(1)Filed on March 2, 2007 as Exhibit 3(i)an exhibit to the registrant’sour Registration Statement on Form SB-2, (File No. 333-141022) and incorporated herein by reference.
(2)
3(ii)
Bylaws
Filed on March 2, 2007October 20, 2009 as Exhibit 3(ii)an exhibit to the registrant’s Registration Statementour Current Report on Form SB-2 (File No. 333-141022)8-K, and incorporated herein by reference.
10.13% Convertible Note Due August 15, 2012 of Remark Enterprises, Inc., dated June 24, 2009
10.23% Convertible Note Due September 2, 2012 of Liberator, Inc., dated September 2, 2009
10.3Common Stock Purchase Warrant dated June 26, 2009 between Remark Enterprises, Inc. and Hope Capital, Inc.
10.4Common Stock Purchase Warrant dated June 26, 2009 between Remark Enterprises, Inc. and New Castle Financial Services LLC
10.5Common Stock Purchase Warrant dated September 2, 2009 between the Company and Belmont Partners, LLC
10.6Loan and Security Agreement between Entrepreneur Growth Capital and OneUp Innovations, Inc.
21.1Subsidiaries
31.1Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of November 18, 2009.
31.2Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of November 18, 2009.
32.1Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of November 18, 2009.
32.2Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of November 18, 2009.

 
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SIGNATURES
SIGNATURES

In accordance with the requirementsSection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   WES CONSULTING, INC.
   (Registrant)
    
November 18, 2009February 19, 2010 By:  /s/ Louis S. Friedman
(Date)  Louis S. Friedman
   
President and Chief Executive Officer
(Principal Executive Officer)
    
November 18, 2009February 19, 2010 By:  /s/ Ronald P. Scott
(Date)  Ronald P. Scott
   
Chief Financial Office and Secretary
(Principal Financial & Accounting Officer)

 
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