Notes to Unaudited Consolidated Condensed
Financial Statements
Consolidation
The consolidated condensed financial statements
include the accounts of Empowered Products, Inc. and its direct and indirect wholly-owned subsidiaries, Empowered Products Nevada,
Inc., Empowered Products Limited, Empowered Products Asia Limited, and Empowered Products Pty Ltd. All material intercompany balances
have been eliminated in consolidation.
Reclassifications
Certain balances on the consolidated condensed
statement of operations have been reclassified to conform to current period presentation.
Revenue recognition
Revenue is recognized when all significant
contractual obligations, which involve the shipment of the products sold and reasonable assurance as to the collectability of the
resulting account receivable have been satisfied. Returns are permitted primarily due to damaged or unsalable items. Revenue is
shown after deductions for prompt payment, volume discounts and returns. The Company participates in various promotional activities
in conjunction with its retailers and distributors, primarily through the use of discounts. These costs have been subtracted from
revenue and for the nine months ended September 30, 2012 and 2011 approximated $25,000 and $50,000, respectively. For the three
months ended September 30, 2012 and 2011 the costs approximated $6,000 and $12,000 respectively. The allowances for sales returns
are established based on the Company’s estimate of the amounts necessary to settle future and existing obligations for such
items on products sold as of the balance sheet date.
Sales tax
Sales tax collected from customers and
remitted to various government agencies is on a net basis (excluded from revenues) in the statement of operations.
Cost of revenue
Cost of revenue includes the cost of raw
materials, packaging, inbound freight, direct labor, manufacturing facility costs, and depreciation. Other overhead costs, including
purchasing, receiving, quality control, and warehousing are classified as selling and distribution or general and administrative
expenses.
Shipping and delivery costs
Expenses for shipping and delivery of products
sold to customers are billed to and collected from customers. These expenses are recognized in the period in which they occur and
are classified as revenue if billed to the customer and cost of revenue if incurred by the Company.
Research and development
Research and development expenditures are
charged to expense as incurred.
Advertising
Advertising costs are expensed as incurred.
For the nine months ended September 30, 2012 and 2011, the Company incurred approximately $228,000 and $103,000, respectively,
in advertising and Company marketing expenses. For the three months ended September 30, 2012 and 2011, the Company incurred approximately
$69,000 and $78,000, respectively, in advertising and Company marketing expenses.
At times the Company provides free products
to various organizations and entities for promotional purposes. The cost of the product is recognized in advertising and marketing.
Depreciation
Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their estimated useful lives on the straight-line method.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Income taxes
The Company utilizes the asset and liability
method of accounting for income taxes pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 740,
Income Taxes
. FASB ACS 740 requires the recognition of deferred tax assets and liabilities
for both the expected future tax impact of differences between the financial statement and tax basis of assets and liabilities
and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. FASB ACS 740 additionally requires
the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company has evaluated
the net deferred tax asset, taking into consideration operating results, and determined that a full valuation allowance should
be maintained.
Uncertain tax positions
The Company accounts for uncertain tax
positions in accordance with FASB ASC 740
.
FASB ASC 740 prescribes a recognition threshold and measurement process for financial
statement recognition of uncertain tax positions
taken
or
expected
to be taken in a tax return. The interpretation
also provides guidance on recognition, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. The Company has determined that there are no uncertain tax positions, and therefore no interest or penalties related
to uncertain tax positions, to recognize at September 30, 2012 or December 31, 2011.
Use of estimates
Management uses estimates and assumptions
in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America.
Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenues and expenses. Such
estimates primarily relate to the collectability of accounts receivable, provision for sales returns and allowances, inventory
obsolescence, useful life of plant and equipment and the valuation of warrants. Actual results could vary from the estimates that
were used.
Fair value of financial instruments
The Company’s financial instruments
are cash and cash equivalents, restricted cash, accounts receivable, line of credit, and accounts payable. The recorded values
of cash and cash equivalents, restricted cash, accounts receivable, line of credit and accounts payable approximate their fair
values based on their short-term nature.
Cash and cash equivalents
For the purpose of reporting cash flows,
the Company has defined cash equivalents as those highly liquid investments purchased with an original maturity of three months
or less.
Restricted cash
Included in restricted cash is a certificate
of deposit securing the Company’s line of credit.
Accounts receivable
Accounts receivable are carried at the
outstanding amount due less an allowance for doubtful accounts, if an allowance is deemed necessary. Allowance for doubtful accounts
are established when there is a basis to doubt the full collectability of the accounts receivable. On a periodic basis, the Company
evaluates its accounts receivable and determines the requirement for an allowance, based on its history of past write-offs, collections
and current conditions. When an account receivable is ultimately determined to be uncollectible and due diligence for collection
has taken place, the account receivable is written-off.
Inventory
Inventory consists primarily of raw materials
and finished goods that the Company holds for sale in the ordinary course of business. Inventory is stated at the lower of cost
(determined on the first-in, first-out basis) or market. Other manufacturing overhead costs are also allocated to finished goods
inventory. The amount of these allocations to inventory was approximately $91,000 and $87,000 at September 30, 2012 and December
31, 2011, respectively.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Concentration of credit risk
The Company had one vendor that made up
approximately 18% of total purchases during the nine months ended September 30, 2012. The Company had one vendor that made up approximately
14% of total purchases during the nine months ended September 30, 2011.
Trademarks and other intangibles, net
The Company capitalizes fees in connection
with the development of various product trademarks. These assets are considered indefinite lived intangible assets and are reviewed
for impairment annually or when circumstances indicate that the carrying amount of the trademark may not be fully recoverable.
The amount attributable to trademarks at September 30, 2012 and December 31, 2011 was approximately $516,000 and $507,000, respectively.
An impairment loss would be recorded if the carrying amount of the indefinite lived intangible asset exceeds its estimated fair
value. At September 30, 2012 and December 31, 2011, other intangibles, in the amount of approximately $9,000 and $11,000, respectively,
consist of a customer list which is being amortized on the straight-line basis over the next four years. For the nine months ended
September 30, 2012 and 2011, the amortization expense associated with these assets were $2,025 and $675, respectively. For the
three months ended September 30, 2012 and 2011, the amortization expense associated with these assets was $675.
Long-lived assets
The Company follows accounting standards
concerning accounting for the impairment or disposal of long-lived assets in adjusting the book value of plant and equipment. These
accounting standards establish a single accounting model for long-lived assets to be disposed of by sale which includes measuring
a long-lived asset classified as held for sale at the lower of its carrying amount or its fair value less costs to sell. For assets
to be held and used, these accounting standards require the recognition of an impairment loss whenever events or changes in circumstances
have indicated that an asset may be impaired and the future cash flows from that asset are less than the asset’s carrying
amount. If the fair value less costs to sell is less than the carrying amount of the asset, an impairment loss must be recognized
to write down the asset to its estimated fair value. At September 30, 2012 and 2011, no impairment losses were recorded.
Note 4. Earnings (Loss) per Share (“EPS”)
Earnings (loss) per share are calculated
in accordance with the FASB ACS 260,
Earnings Per Share
. Basic net earnings (loss) per share are based upon the weighted
average number of common shares outstanding, but excluding shares issued as compensation that have not yet vested. Diluted net
earnings (loss) per share are based on the assumption that all dilutive convertible shares and stock options were converted or
exercised, and that all unvested shares have vested. Dilution is computed by applying the treasury stock method. Under this
method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
The following table illustrates the required
disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shares
|
|
$
|
(23,486
|
)
|
|
$
|
(301,582
|
)
|
|
$
|
(276,505
|
)
|
|
$
|
(532,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
62,388,856
|
|
|
|
62,388,856
|
|
|
|
62,388,856
|
|
|
|
183,302,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
62,388,856
|
|
|
|
62,388,856
|
|
|
|
62,388,856
|
|
|
|
183,302,189
|
|
|
Dilutive effect of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted average shares, diluted
|
|
|
62,388,856
|
|
|
|
62,388,856
|
|
|
|
62,388,856
|
|
|
|
183,302,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average anti-dilutive shares excluded from diluted EPS
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Note 5. Inventory
Inventory consists of the following at:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
576,204
|
|
|
$
|
418,576
|
|
|
Finished goods
|
|
|
367,627
|
|
|
|
349,179
|
|
|
|
|
$
|
943,831
|
|
|
$
|
767,755
|
|
Note 6. Plant and
Equipment, net
Depreciation for the nine months ended
September 30, 2012 and 2011 was approximately $50,000 and $41,000, respectively. Depreciation for the three months ended September
30, 2012 and 2011 was approximately $17,000 and $15,000, respectively. Cost, accumulated depreciation and estimated useful lives
are as follows:
|
|
|
Estimated
|
|
September 30,
|
|
|
December 31,
|
|
|
Category
|
|
Useful Lives
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing and computer equipment
|
|
5 - 7 Years
|
|
$
|
381,618
|
|
|
$
|
376,218
|
|
|
Office furniture and computer software
|
|
3 - 7 Years
|
|
|
78,490
|
|
|
|
75,692
|
|
|
Vehicles
|
|
5 Years
|
|
|
19,442
|
|
|
|
19,442
|
|
|
|
|
|
|
|
479,550
|
|
|
|
471,352
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(233,225
|
)
|
|
|
(183,559
|
)
|
|
|
|
|
|
$
|
246,325
|
|
|
$
|
287,793
|
|
Note 7. Line of
Credit
The Company has a $500,000 line of credit
with a financial institution bearing interest at prime plus 1% (prime was 3.25% at September 30, 2012 and December 31, 2011) and
an interest rate floor of 5%, secured by restricted cash and a personal guarantee of the Company’s majority stockholder with
a maturity date of November 1, 2012. The balance was $399,991 and $468,521 at September 30, 2012 and December 31, 2011, respectively.
The line of credit has been renewed with the same terms and a maturity date of November 1, 2013.
Note 8. Stockholders’ Equity
On June 30, 2011, the Company entered into
a subscription agreement with New Kaiser Limited (the “Investor”) to sell an aggregate of 2,000,000 shares of common
stock for $1.00 per share. In connection with the shares being issued, the Investor received five-year warrants which allow the
Investor to purchase 2,000,000 shares of its common stock at an exercise price of $1.25 per share. The warrants were deemed to
have a fair value of approximately $885,000 and are included in additional paid-in capital.
Note 9. Revenue by Geographic Area
Revenues by geographic area are determined
based on the location of the Company’s customers. The following provides financial information concerning the Company’s
operations by geographic area for the three and nine months ended September 30:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
688,434
|
|
|
|
89.3
|
%
|
|
$
|
737,766
|
|
|
|
88.6
|
%
|
|
$
|
2,042,381
|
|
|
|
89.9
|
%
|
|
$
|
2,023,561
|
|
|
|
90.1
|
%
|
|
Europe
|
|
|
50,157
|
|
|
|
6.5
|
%
|
|
|
56,545
|
|
|
|
6.8
|
%
|
|
|
136,091
|
|
|
|
6.0
|
%
|
|
|
150,748
|
|
|
|
6.7
|
%
|
|
Asia
|
|
|
32,020
|
|
|
|
4.2
|
%
|
|
|
38,715
|
|
|
|
4.6
|
%
|
|
|
93,460
|
|
|
|
4.1
|
%
|
|
|
70,755
|
|
|
|
3.2
|
%
|
|
|
|
$
|
770,611
|
|
|
|
100.0
|
%
|
|
$
|
833,026
|
|
|
|
100.0
|
%
|
|
$
|
2,271,932
|
|
|
|
100.0
|
%
|
|
$
|
2,245,064
|
|
|
|
100.0
|
%
|
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Note 10. Related Party Transactions
and Operating Leases
The Company rents office space from an
affiliate, EGA Research, LLC, that is controlled by the Company’s majority stockholder under a triple net lease expiring
on February 28, 2014. The lease calls for monthly rental payments of $7,000. Total rent expense for each of the nine months ended
September 30, 2012 and 2011 was $63,000. Total rent expense for each of the three months ended September 30, 2012 and 2011 was
$21,000.
The Company entered into an office lease
with an unrelated party for additional rental space in 2011 expiring on May 31, 2013. The lease calls for monthly rental payments
of $4,000. The Company has an option to purchase the building for fair value. Total rent expense for each of the nine months ended
September 30, 2012 and 2011 was $ $36,000 and $16,000, respectively. Total rent expense for each of the three months ended September
30, 2012 and 2011 was $12,000.
The Company also leases office equipment
under a non-cancelable operating lease agreement that provides for monthly rental payments of $270 through February 2013.
Included in selling and distribution expenses
for nine months ended September 30, 2012 and 2011 are marketing fees of approximately $192,495 and $63,574, respectively, and for
the three months ended September 30, 2012 and 2011 are marketing fees of approximately $57,282 and $63,574, respectively, paid
to a company owned by the Company’s majority stockholder.
Note 11. Income Taxes
Income taxes are calculated using the asset
and liability method of accounting. Deferred income taxes are computed by multiplying statutory rates applicable to estimated future
year differences between the financial statement and tax basis carrying amounts of assets and liabilities.
The Company has federal net operating loss
(“NOL”) carry forwards and other temporary differences which result in a deferred tax asset of approximately $1,317,000
at September 30, 2012 and $1,220,000 at December 31, 2011. A 35% statutory federal income tax rate was used for the calculation
of the deferred tax asset. Management has established a valuation allowance equal to the estimated deferred tax asset due to uncertainties
related to the ability to realize these tax assets. The valuation allowance increased by approximately $97,000 during the nine
months ended September 30, 2012.
The NOL carry forwards may be significantly
limited under Section 382 of the Internal Revenue Code (“IRC”). NOL’s are limited under Section 382 when there
is a significant “ownership change” as defined in the IRC. The availability of these carry forwards may expire as a
result of the Company’s reverse merger on June 30, 2011.
The limitation imposed by Section 382 would
place an annual limitation on the amount of the NOL carry forwards that can be utilized. If the necessary studies were completed,
the amount of the NOL carry forwards available may be reduced significantly. However, since the valuation allowance fully reserves
for all available carry forwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus,
the resolution of this matter would have no effect on the reported assets, liabilities, revenues, and expenses for the periods
presented.
Note 12. Stock
Based Incentive Plan
On April 19, 2012, the Company’s
Board of Directors and stockholders approved the 2012 Omnibus Incentive Plan (the “Plan”) reserving 5,000,000 common
shares for issuance under the Plan. Awards under the Plan may be in the form of a stock option, a restricted stock award, a restricted
stock unit award, a performance award, a dividend equivalent award, a deferred stock award, a stock payment award, a stock appreciation
right and other incentive award or a performance share award. The exercise price per share subject to each stock option granted
cannot be less than 100% of the fair market value of a share on the date of the stock option grant. In addition, in the case of
incentive stock options granted to a greater than 10% stockholder, such exercise price shall not be less than 110% of the fair
market value of a share on the date of the option grant.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion relates to a discussion of the financial
condition and results of operations of Empowered Products, Inc., a Nevada corporation (the “Company”) herein used in
this report, unless otherwise indicated, under the terms “we,” “our,” “Company” and “EPI,”
and its wholly-owned subsidiary Empowered Products Nevada, Inc., a Nevada corporation (“EP Nevada”), EP Nevada’s
wholly-owned subsidiary, Empowered Products Limited, a British Virgin Islands company (“EP BVI”), EP BVI’s wholly-owned
subsidiaries, Empowered Products Asia Limited, a Hong Kong company (“EP Asia”) and Empowered Products Pty Ltd., an
Australian company (“EP Australia”).
Forward-Looking Statements
This management’s discussion and analysis of financial
condition and results of operations should be read in conjunction with our unaudited consolidated condensed financial statements
and the related notes that are included in this Quarterly Report and the audited consolidated financial statements for the years
ended December 31, 2011 and 2010 and the related notes and Management’s Discussion and Analysis of Financial Condition and
Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities
and Exchange Commission on April 16, 2012 (the “Annual Report”).
The information contained in this
report includes some statements that are not purely historical and that are forward-looking statements. Such forward-looking
statements include, but are not limited to, statements regarding our management’s expectations, hopes, beliefs, intentions
or strategies regarding the future, including our financial condition, and results of operations. In addition, any statements
that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions,
are forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,”
“plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,”
“should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
These
statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow.
The forward-looking statements contained in this report are based on current expectations and beliefs
concerning future developments and the potential effects on the parties and the transaction. There can be no assurance
that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number
of risks, uncertainties (some of which are beyond the parties’ control) or other assumptions that may cause actual results
or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:
|
|
·
|
our reliance on third-party contractors to mix our products and manufacture our nutritional supplements;
|
|
|
·
|
our ability to grow and increase awareness of our brand;
|
|
|
·
|
the success of our new sales strategy to sell products directly to retail consumers;
|
|
|
·
|
our ability to control and reduce advertising and marketing costs;
|
|
|
·
|
our ability to obtain a minimum favorable Nielsen Rating;
|
|
|
·
|
the maintenance of favorable trade relations between China and the U.S.;
|
|
|
·
|
our ability to sell our products in South America and other new international markets;
|
|
|
·
|
our ability to develop a new online marketing strategy for our products;
|
|
|
·
|
our ability to obtain certification in individual countries in the European Union;
|
|
|
·
|
the occurrence of foul weather that disrupts our operations;
|
|
|
·
|
our ability to market our products to end-retailers successfully;
|
|
|
·
|
our vulnerability to interruptions in shipping lanes;
|
|
|
·
|
our ability to increase our production space, machinery and personnel in line with our expansion
plans;
|
|
|
·
|
our ability to increase our production capacity in a timely manner;
|
|
|
·
|
the willingness of third-parties to conduct business with us given the adult nature of our business;
|
|
|
·
|
our ability to protect our trademarks;
|
|
|
·
|
market acceptance of our new line of nutritional supplements;
|
|
|
·
|
the anticipated future growth in the market for nutritional supplements;
|
|
|
·
|
our inexperience in the nutritional supplement market;
|
|
|
·
|
our inexperience in dealing with the U.S. Food and Drug Administration and other regulatory agencies;
|
|
|
·
|
our reliance on the expected growth in demand for our products;
|
|
|
·
|
our ability to comply with regulations regarding the labeling of our products;
|
|
|
·
|
exposure to product liability claims;
|
|
|
·
|
exposure to intellectual property claims from third parties;
|
|
|
·
|
development of a public trading market for our securities;
|
|
|
·
|
our ability to raise additional capital;
|
|
|
·
|
the cost of complying with current and future governmental regulations and the impact of any changes in the regulations on
our operations; and
|
|
|
·
|
and various other matters, many of which are beyond our control.
|
Company Overview
We were incorporated in the State of Nevada on July 10, 2009.
On June 30, 2011, pursuant to an Agreement and Plan of Merger, EP Nevada merged with and into EPI Acquisition Corp., a wholly-owned
subsidiary of the Company, with EP Nevada as the surviving company (the “Merger”). Upon the closing of the Merger,
we (i) assumed the business and operations of EP Nevada and its subsidiaries, which is now our sole business operations, and
(ii) changed our name from “On Time Filings, Inc.” to “Empowered Products, Inc.”
Prior to the Merger, described below, our business included
the EDGARization of corporate documents that require filing on EDGAR, the Electronic Data Gathering, Analysis and Retrieval system
maintained by the Securities and Exchange Commission (“SEC”), and providing financial reporting and bookkeeping services.
Pursuant to an assignment agreement, the assets and liabilities of this business were transferred to OT Filings, Inc. immediately
after the Merger and the shares of OT Filings were transferred to Suzanne Fischer, one of our directors.
EP Nevada was incorporated in the State of Nevada on April 22,
2004. In March 2011, EP Nevada formed EP Asia to acquire certain assets of Polarin Limited, a company organized under
the laws of Hong Kong (“Polarin”). Upon acquiring the assets of Polarin on March 31, 2011, EP Nevada acquired
a new indirect subsidiary, Empowered Products Pty Ltd., an Australian company (“EP Australia”).
Through EP Nevada and its subsidiaries, we offer a line of topical
gels, lotions and oils, designed to enhance a person’s sex life and make people feel good about their sexual health in general. We
currently have 12 exclusively formulated skin lubricants sold under our PINK® for Women and GUN OIL® for Men trademarks
and intend to continue to expand our products offerings. Our proprietary formulated products are designed to increase
mental focus and to improve the bond of interpersonal relationships. Our trademarked products are currently sold in 30 countries
through more than 2,700 retail outlets.
In the third quarter of 2011, Empowered Products entered into
the health supplement market with the introduction of four nutritional supplements under the “Elevate for Women” and
“High Caliber for Men” brands. We intend to expand our proprietary line of supplements by targeting the growing number
of people who we believe are socially incapacitated and/or subdued by prescription anti-depressants.
Results of Operations
The following table sets forth information from our statements
of operations for the three and nine months ended September 30, 2012 and 2011 in dollars and as a percentage of revenue (unaudited):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
In Dollars
|
|
|
Percentage
of Revenue
|
|
|
In Dollars
|
|
|
Percentage
of Revenue
|
|
|
In Dollars
|
|
|
Percentage of
Revenue
|
|
|
In Dollars
|
|
|
Percentage
of Revenue
|
|
|
Revenues
|
|
$
|
770,611
|
|
|
|
100
|
%
|
|
$
|
833,026
|
|
|
|
100
|
%
|
|
$
|
2,271,932
|
|
|
|
100
|
%
|
|
$
|
2,245,064
|
|
|
|
100
|
%
|
|
Cost of revenue
|
|
|
333,251
|
|
|
|
43.25
|
%
|
|
|
460,295
|
|
|
|
55.26
|
%
|
|
|
1,027,207
|
|
|
|
45.21
|
%
|
|
|
1,297,476
|
|
|
|
57.79
|
%
|
|
Gross profit
|
|
|
437,360
|
|
|
|
56.75
|
%
|
|
|
372,731
|
|
|
|
44.74
|
%
|
|
|
1,224,725
|
|
|
|
53.91
|
%
|
|
|
947,588
|
|
|
|
42.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
224,511
|
|
|
|
29.13
|
%
|
|
|
271,295
|
|
|
|
32.57
|
%
|
|
|
754,428
|
|
|
|
33.21
|
%
|
|
|
509,293
|
|
|
|
22.69
|
%
|
|
General and administrative
|
|
|
230,508
|
|
|
|
29.91
|
%
|
|
|
397,511
|
|
|
|
47.72
|
%
|
|
|
749,655
|
|
|
|
33.00
|
%
|
|
|
951,786
|
|
|
|
42.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,659
|
)
|
|
|
(2.29
|
)%
|
|
|
(296,075
|
)
|
|
|
(35.54
|
)%
|
|
|
(259,358
|
)
|
|
|
(11.42
|
)%
|
|
|
(513,491
|
)
|
|
|
(22.87
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
119
|
|
|
|
0.02
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
119
|
|
|
|
0.01
|
%
|
|
|
500
|
|
|
|
0.02
|
%
|
|
Interest expense
|
|
|
(5,946
|
)
|
|
|
(0.77
|
)%
|
|
|
(5,507
|
)
|
|
|
(0.66
|
)%
|
|
|
(17,266
|
)
|
|
|
(0.76
|
)%
|
|
|
(19,608
|
)
|
|
|
(0.87
|
)%
|
|
Net loss
|
|
$
|
(23,486
|
)
|
|
|
(3.05
|
)%
|
|
$
|
(301,582
|
)
|
|
|
(36.20
|
)%
|
|
$
|
(276,505
|
)
|
|
|
(12.17
|
)
%
|
|
$
|
(532,599
|
)
|
|
|
(23.72
|
)%
|
|
Net loss per share
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
Three Months Ended September 30, 2012 and 2011
Revenues for the three months ended September 30, 2012 were
approximately $771,000 as compared to approximately $833,000 in the comparable period in 2011. The 7.5% decrease in revenue was
primarily due to slower sales in Europe and fewer sales of Herbal Supplements.
Cost of revenue primarily consists of costs related to the production
or purchase of products for sale. Cost of revenue for the three months ended September 30, 2012 was approximately $333,000
as compared to approximately $460,000 in the comparable period in 2011. The decrease in cost of revenues was primarily the
result of a lower volume of products being sold with new higher margins and significant efforts in improving the Company’s
purchasing and procurement practices.
For the three months ended September
30, 2012, our gross profit increased to approximately $437,000, from approximately $373,000 for the three months ended September
30, 2011. During the same periods, our gross profit margin increased to 56.8%, up from 44.7%. This increase in our gross profit
margin was mainly due to improved purchasing and procurement practices, as well as price increases on our finished products that
were implemented on January 1, 2012.
Selling and distribution expenses for the three months ended
September 30, 2012 were approximately $225,000, or approximately 29.1% of revenues, compared to approximately $271,000, or
32.6% of revenues, for the same period in the prior year, a decrease of 17.2%. The decrease in selling and distribution
expenses was primarily the result of reduced marketing through the trade show channel.
General and administrative expenses for the three months ended
September 30, 2012 were approximately $231,000, or 29.9% of revenues, compared to approximately $398,000, or 47.7% of revenues,
for the same period in the prior year, a 42.0% decrease. The decrease in general and administrative expenses was primarily
because of decreased professional fees that were previously associated with the early months of being a public company and the
Merger during the quarter ended June 30, 2011.
No expense or benefit from income taxes was recorded in the
three months ended September 30, 2012 or 2011 due to our net losses. We do not expect any U.S. federal income taxes
to be incurred for the current fiscal year because of available net operating loss carry forwards.
We had a net loss of approximately $23,000 for the three months
ended September 30, 2012 compared to a net loss of approximately $302,000 for the three months ended September 30, 2011.
Nine Months Ended September 30,
2012 and 2011
Revenues for the nine months ended September 30, 2012 were $2.3
million as compared to $2.2 million in the comparable period in 2011. The 1.2% increase in revenue was primarily caused
by the implementation of price increases on January 1, 2012.
Cost of revenue primarily consists
of costs related to the production or purchase of products for sale. Cost of revenue for the nine months ended September
30, 2012 was approximately $1.0 million compared to approximately $1.3 million in the comparable period in 2011. The
decrease in cost of revenues was primarily the result of a lower volume of products being sold and significant efforts in improving
the Company’s purchasing and procurement practices.
For the nine months ended September
30, 2012, our gross profit increased to approximately $1.2 million, from approximately $948,000. During the same periods, our gross
profit margin increased to 53.9%, up from 42.2%. This increase in our gross profit margin was mainly due to improved
purchasing and procurement practices, as well as price increases on our finished products that were implemented on January 1, 2012.
Selling and distribution expenses for the nine months ended
September 30, 2012 were approximately $754,000, or 33.2% of revenues, compared to approximately $509,000, or 22.7% of revenues,
for the same period in the prior year, an increase of 48.1%. The increase in selling and distribution expenses was primarily
the result of direct mail marketing campaigns and the continued development of our online retail store during the first part of
2012.
General and administrative expenses
for the nine months ended September 30, 2012 were approximately $750,000 or 33.0% of revenues, compared to approximately $952,000,
or 42.4% of revenues, for the same period in the prior year, a 21.2% decrease. The decrease in general and administrative
expenses was primarily because of decreased professional fees that were associated with becoming a public company and the Merger
during the nine months ended September 30, 2011.
No expense or benefit from income taxes
was recorded in the nine months ended September 30, 2012 or 2011 due to our net losses. 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 carryforwards.
We had a net loss of approximately
$277,000 for the nine months ended September 30, 2012 compared with a net loss of approximately $533,000 for the nine months ended
September 30, 2011.
Liquidity and Capital Resources
We had unrestricted cash and cash equivalents of approximately
$116,000 as of September 30, 2012, as compared to $864,000 as of December 31, 2011.
We generally finance our activities through our business operations,
with any shortfalls supplemented by our borrowings under a line of credit, contributions from our majority stockholder, or sales
of equity securities. We have a line of credit with Wells Fargo Bank providing for borrowings of up to $500,000. As
of September 30, 2012, we had borrowings of $399,991 outstanding under this line of credit. This line of credit is secured
by our restricted cash balance which amounted to $561,530 at September 30, 2012.
For the nine months ended September 30, 2012, net cash used
in operating activities was approximately $662,000, as compared to net cash used in operating activities of approximately $590,000
for the comparable period in 2011. The increase in net cash used in operating activities is primarily attributable an increase
in our raw materials inventory in anticipation of sales to large drug store chains and paydowns of our accounts payable and accrued
expense balances.
For the nine months ended September 30, 2012, net cash used
in investing activities was approximately $18,000, as compared to net cash used in investing activities of approximately $59,000
for the comparable period in 2011. The decrease in net cash used in investing activities is primarily attributable to the decrease
in payments of fees for trademarks and equipment from 2011 levels.
Net cash used in financing activities
was approximately $69,000 for the nine months ended September 30, 2012 as compared to net cash
provided by financing activities
of approximately $2,041,000 for the comparable period in 2011. The cash used in financing activities was primarily due to debt
payments on the line of credit, net of draws, during the nine months ended September 30, 2012. This compares to cash received
from financing activities during the nine months ended September 30, 2011 primarily due to a private placement of the Company’s
common stock.
For the nine months ended September 30, 2012 and 2011, our inventory
was valued at approximately $944,000 and $768,000, respectively. This buildup of inventory was primarily due to an increase of
raw material purchases in anticipation of increased sales to national drugstore chains. On February 1, 2012, we commenced product
shipments to select Walgreens retail stores through an initial order placed by its national purchasing office in Deerfield, Illinois.
We are currently expanding our pursuit of a national and regional drugstore chain presence.
Changes in our operating plans, lower than anticipated sales,
increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee
that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment
obligations and additional covenants and operating restrictions.
Off-Balance-Sheet Arrangements
In August 2011, the Company entered into an agreement to purchase
product sample packets of Gun Oil and PINK products. In connection with the agreement, the vendor provides the manufacturing equipment,
machine operator, and management of production. The Company is required to make minimum monthly purchases of $5,880 pursuant to
the agreement. Since the execution of the agreement, the Company made purchases of approximately $82,320 pursuant to the purchase
obligation.
Critical Accounting Policies
Management’s discussion and analysis of financial condition
and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates
and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially
from these estimates.
While our significant accounting policies are more fully described
in Note 3 to our audited financial statements included in the Annual Report, we believe that the following accounting policies
are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant
judgments and estimates that we use in the preparation of our financial statements.
Revenue recognition
We recognize revenue when all significant contractual obligations,
which involve the shipment of the products sold and reasonable assurance as to the collectability of the resulting account receivable,
have been satisfied. Returns are permitted for damaged or unsalable items only. Revenue is shown after deductions for
prompt payment, volume discounts and returns. We participate in various promotional activities in conjunction with our
retailers and wholesalers, primarily through the use of discounts. The allowances for sales returns are established
based on our estimate of the amounts necessary to settle future and existing obligations for such items on products sold as of
the balance sheet date.
Accounts receivable
Accounts receivable are carried at the outstanding amount due
less an allowance for doubtful accounts, if an allowance is deemed necessary. Allowance for doubtful accounts are established when
there is a basis to doubt the full collectability of the accounts receivable. We periodically evaluate our accounts receivable
and determine the requirement for an allowance, based on our history of past write-offs, collections and current conditions. When
an account receivable is ultimately determined to be uncollectible and due diligence for collection has taken place, the account
receivable is written-off.
Inventory
Inventory consists primarily of raw materials and finished goods
that we hold for sale in the ordinary course of business. Inventory is stated at the lower of cost (determined on the
first-in, first-out basis) or market. Other manufacturing overhead costs are also allocated to finished goods inventory. We
periodically evaluate the composition of inventory and estimates an allowance to reduce inventory for slow moving, obsolete or
damaged inventory.
