UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended September 30, 2014 |
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OR |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.: 000-54661
EMPOWERED PRODUCTS, INC.
(Exact name of Registrant as specified in
its charter)
Nevada |
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27-0579647 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number |
3367 West Oquendo Road, Las Vegas, Nevada
89118
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)(ZIP CODE)
800-929-0407
(COMPANY’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
_______________________________________________
(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) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer ¨ |
|
|
Non-accelerated filer ¨ |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 62,788,856 shares of common stock, par value
$0.001 per share, outstanding as of November 12, 2014.
EMPOWERED PRODUCTS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September
30, 2014
Table of Contents
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Page |
Part I | |
Financial Information | | |
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Item 1 | |
Financial Statements | | |
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(a) Consolidated Condensed Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013 | |
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(b) Consolidated Condensed Statements of Operations for the Three Months and Nine Months Ended September 30, 2014 and 2013 (Unaudited) | |
3 |
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(c) Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited) | |
4 |
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(d) Notes to Unaudited Consolidated Condensed Financial Statements | |
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Item 2 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
12 |
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Item 3 | |
Quantitative and Qualitative Disclosures About Market Risk | |
15 |
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Item 4 | |
Controls and Procedures | |
15 |
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Part II | |
Other Information | | |
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17 |
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Item 1 | |
Legal Proceedings | | |
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Item 1A | |
Risk Factors | |
17 |
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Item 2 | |
Unregistered Sale of Equity Securities and Use of Proceeds | |
17 |
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Item 3 | |
Default Upon Senior Securities | |
17 |
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Item 4 | |
Mine Safety Disclosures | |
17 |
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Item 5 | |
Other Information | |
17 |
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Item 6 | |
Exhibits | |
17 |
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Signatures | |
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18 |
Item 1. Financial Statements
Empowered Products, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
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September 30, | | |
December 31, | |
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2014 | | |
2013 | |
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(Unaudited) | | |
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Assets | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 423,972 | | |
$ | 157,396 | |
Restricted cash | |
| 502,000 | | |
| 502,000 | |
Accounts receivable, less allowance for doubtful
accounts of $48,372 and $36,532, respectively | |
| 655,646 | | |
| 697,851 | |
Inventory, net | |
| 857,397 | | |
| 1,093,466 | |
Prepaid and other current assets | |
| 165,449 | | |
| 343,873 | |
Total current assets | |
| 2,604,464 | | |
| 2,794,586 | |
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| | | |
| | |
Plant and equipment, net | |
| 156,458 | | |
| 183,106 | |
Trademarks and other intangibles, net | |
| 545,498 | | |
| 544,507 | |
Other assets | |
| 52,158 | | |
| 48,397 | |
Total assets | |
$ | 3,358,578 | | |
$ | 3,570,596 | |
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Liabilities and Stockholders' Equity | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Line of credit | |
$ | – | | |
$ | 100,000 | |
Accounts payable and other accrued expenses | |
| 362,253 | | |
| 230,133 | |
Deferred revenue | |
| 125,712 | | |
| 125,712 | |
Total current liabilities | |
| 487,965 | | |
| 455,845 | |
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Commitments and contingencies | |
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Stockholders' Equity: | |
| | | |
| | |
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding | |
| – | | |
| – | |
Common stock, $.001 par value, 2,200,000,000 shares authorized, 62,788,856 shares issued and outstanding | |
| 62,789 | | |
| 62,789 | |
Additional paid-in capital | |
| 7,051,317 | | |
| 6,759,633 | |
Accumulated deficit | |
| (4,243,493 | ) | |
| (3,707,671 | ) |
Total stockholders' equity | |
| 2,870,613 | | |
| 3,114,751 | |
Total liabilities and stockholders' equity | |
$ | 3,358,578 | | |
$ | 3,570,596 | |
See Notes to Unaudited Consolidated Condensed
Financial Statements.
Empowered Products, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Revenue | |
$ | 1,075,824 | | |
$ | 1,527,571 | | |
$ | 3,655,310 | | |
$ | 3,686,516 | |
Cost of revenue | |
| 509,637 | | |
| 522,856 | | |
| 1,596,751 | | |
| 1,335,507 | |
Gross profit | |
| 566,187 | | |
| 1,004,715 | | |
| 2,058,559 | | |
| 2,351,009 | |
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Selling and distribution | |
| 517,137 | | |
| 368,647 | | |
| 1,399,997 | | |
| 826,222 | |
General and administrative | |
| 332,986 | | |
| 362,515 | | |
| 1,191,891 | | |
| 1,210,519 | |
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Income (loss) from operations | |
| (283,936 | ) | |
| 273,553 | | |
| (533,329 | ) | |
| 314,268 | |
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Interest income | |
| 39 | | |
| 67 | | |
| 47 | | |
| 279 | |
Interest expense | |
| (669 | ) | |
| (4,464 | ) | |
| (2,540 | ) | |
| (12,653 | ) |
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Net income (loss) | |
$ | (284,566 | ) | |
$ | 269,156 | | |
$ | (535,822 | ) | |
$ | 301,894 | |
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Earnings (loss) per share: | |
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Basic | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.01 | ) | |
$ | 0.00 | |
Diluted | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.01 | ) | |
$ | 0.00 | |
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Weighted average common shares outstanding: | |
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Basic | |
| 62,788,856 | | |
| 62,588,856 | | |
| 62,788,856 | | |
| 62,522,189 | |
Diluted | |
| 62,788,856 | | |
| 63,591,493 | | |
| 62,788,856 | | |
| 62,691,216 | |
See Notes to Unaudited Consolidated Condensed Financial Statements.
Empowered Products, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
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Nine Months Ended | |
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September 30, | |
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2014 | | |
2013 | |
Cash flows from operating activities: | |
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Net income (loss) | |
$ | (535,822 | ) | |
$ | 301,894 | |
Adjustments to reconcile net income (loss) to cash flows provided by operating activities: | |
| | | |
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Depreciation and amortization | |
| 52,428 | | |
| 53,225 | |
Share based compensation | |
| 291,684 | | |
| 574,135 | |
Provision for doubtful accounts | |
| 11,840 | | |
| 58,415 | |
Inventory reserve | |
| – | | |
| 8,254 | |
Changes in assets and liabilities: | |
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Increase in restricted cash | |
| – | | |
| (210 | ) |
(Increase) decrease in accounts receivable | |
| 30,365 | | |
| (660,900 | ) |
(Increase) decrease in inventory | |
| 236,069 | | |
| (135,502 | ) |
(Increase) decrease prepaid and other current assets | |
| 178,424 | | |
| (255,779 | ) |
Increase other assets | |
| (3,761 | ) | |
| (12,037 | ) |
Increase accounts payable and other accrued expenses | |
| 132,120 | | |
| 125,645 | |
Increase in deferred revenue | |
| – | | |
| 282,881 | |
Cash flows provided by operating activities | |
| 393,347 | | |
| 340,021 | |
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Cash flows from investing activities: | |
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Purchase of plant and equipment | |
| (17,455 | ) | |
| (3,500 | ) |
Payment of fees for trademarks | |
| (9,316 | ) | |
| (4,320 | ) |
Cash flows used in investing activities | |
| (26,771 | ) | |
| (7,820 | ) |
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Cash flows from financing activities: | |
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Line of credit repayments | |
| (100,000 | ) | |
| (346,042 | ) |
Cash flows used in financing activities | |
| (100,000 | ) | |
| (346,042 | ) |
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Net increase (decrease) in cash and cash equivalents | |
| 266,576 | | |
| (13,841 | ) |
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Cash and cash equivalents at the beginning of the period | |
| 157,396 | | |
| 116,990 | |
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Cash and cash equivalents at the end of the period | |
$ | 423,972 | | |
$ | 103,149 | |
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Supplementary disclosure of cash flow information: | |
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Cash paid for interest | |
$ | 2,540 | | |
$ | 12,653 | |
See Notes
to Unaudited Consolidated Condensed Financial Statements.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Note 1. Nature of Operations
Empowered Products, Inc. and Subsidiaries (the “Company”)
is engaged in the manufacture, sale and distribution of personal care products, principally throughout the United States, Europe
and Asia. All of its business has been categorized as one segment.
Note 2. Basis of Presentation and
Accounting Policies
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the instructions from Form 10-Q pursuant to the rules and regulations of the United
States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and notes normally
provided in the audited financial statements and should be read in conjunction with the Company’s audited financial statements
for fiscal year ended December 31, 2013 filed with the SEC on March 31, 2014. The results of operations for the interim
periods presented in this report are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated condensed balance
sheets, statements of operations and cash flows reflect all adjustments, consisting of normal recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of the financial position of the Company at September 30,
2014, the results of operations for the three and nine months ended September 30, 2014 and 2013 and the statement of cash
flows for the nine months ended September 30, 2014 and 2013.
Liquidity
As of September 30, 2014, the Company has
cash and cash equivalents of approximately $424,000, restricted cash of $502,000 and an accumulated deficit of approximately $4,243,000.
The Company generated a net loss of approximately $536,000 for the nine months ended September 30, 2014, which included certain
non-cash transactions, such as stock compensation expenses. During the nine months ended September 30, 2014, the Company generated
positive cash flows from operating activities and has paid off its line of credit, on which, the Company can borrow up to $500,000.
With the accounts receivable balances from large retail chain customers and based on anticipated 2014 results, management believes
that it has sufficient evidence that it can continue as a going concern.
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 preparation of the consolidated condensed financial statements.
Revenue recognition
Revenue is recognized when all significant contractual obligations,
which involve the shipment of the products sold by the Company and reasonable assurance as to the collectability of the resulting
account receivable has 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 trade
discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well
as trade promotions and coupons. These incentive costs are recognized
at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive.
These costs have been subtracted from revenue and for the nine months ended September 30, 2014 and 2013 amounted to approximately
$619,000 and $24,000, respectively. These same costs have been subtracted from revenue and for the three months ended September
30, 2014 and 2013 amounted to approximately $91,000 and $16,000, 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. The Company regularly reviews and revises,
when deemed necessary, its estimates of sales returns based primarily upon the historical rate of actual product returns, planned
product discontinuances, new product launches and estimates of customer inventory and promotional sales. The Company records
deferred revenue when cash is received or goods are shipped in advance of the revenue recognition criteria being met.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Reclassifications
Reclassifications
have been made in the current year related to certain prior year reported amounts to provide consistent presentation. No individual
amounts were material.
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.
At times the Company provides free products to its customers.
These free products are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 605-50 Revenue Recognition-Customer Payments and Incentives and the cost of the product
is recognized in cost of revenue.
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 revenue 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 and stock options. 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.
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 is 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 $203,000 at September 30, 2014 and $239,000 at December 31, 2013, respectively.
Management periodically evaluates the composition of inventory and estimates an allowance to reduce inventory for slow moving,
obsolete or damaged inventory. An allowance of $65,000 was recorded at each of September 30, 2014 and December 31, 2013, respectively.
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, 2014 and December 31, 2013 was approximately $539,000 and $530,000, respectively. An impairment
loss would be recorded if the carrying amount of the indefinite lived intangible asset exceeds its estimated fair value. The Company
performed an impairment test as of December 31, 2013 and concluded that based on its undiscounted cash flows, the related trademarks
were not impaired.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Share-based compensation
The Company uses the fair value method of accounting for share-based
compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation
model. Share-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the
straight-line method.
Note 3. Earnings (Loss) per Share
Earnings (loss) per share are calculated in accordance with
FASB ASC 260, Earnings Per Share. Basic 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 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, | |
| |
| 2014 | | |
| 2013 | | |
| 2014 | | |
| 2013 | |
Net income (loss) available to common shares | |
$ | (284,566 | ) | |
$ | 269,156 | | |
$ | (535,822 | ) | |
$ | 301,894 | |
Basic: | |
| | | |
| | | |
| | | |
| | |
Weighted average shares | |
| 62,788,856 | | |
| 62,588,856 | | |
| 62,788,856 | | |
| 62,552,189 | |
Diluted: | |
| | | |
| | | |
| | | |
| | |
Weighted average shares, basic | |
| 62,788,856 | | |
| 62,588,856 | | |
| 62,788,856 | | |
| 62,522,189 | |
Dilutive effect of warrants and options | |
| – | | |
| 1,002,637 | | |
| – | | |
| 169,027 | |
Weighted average shares, diluted | |
| 62,788,856 | | |
| 63,591,493 | | |
| 62,788,856 | | |
| 62,691,216 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings (loss) per share | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.01 | ) | |
$ | 0.00 | |
Diluted earnings (loss) per share | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.01 | ) | |
$ | 0.00 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average anti-dilutive shares excluded from diluted earnings per shares | |
| 6,725,000 | | |
| 2,000,000 | | |
| 6,611,111 | | |
| 3,000,000 | |
Note 4. Inventory
Inventory consists of the following at:
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
Raw materials | |
$ | 287,267 | | |
$ | 328,345 | |
Finished goods | |
| 635,130 | | |
| 830,121 | |
| |
| 922,397 | | |
| 1,158,466 | |
Less: inventory reserve | |
| (65,000 | ) | |
| (65,000 | ) |
| |
$ | 857,397 | | |
$ | 1,093,466 | |
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Note 5. Plant and Equipment, net
Depreciation for the nine months ended September 30, 2014 and
2013 was approximately $44,000 and $45,000, respectively. Depreciation for the three months ended September 30, 2014 and 2013 was
approximately $14,500 and $15,000, respectively. Cost, accumulated depreciation and estimated useful lives are as follows:
Category | |
Estimated Useful Lives | |
September 30, 2014 | | |
December 31, 2013 | |
| |
| |
| | |
| |
Manufacturing and computer equipment | |
5 - 7 Years | |
$ | 395,622 | | |
$ | 388,190 | |
Office furniture and computer software | |
3 - 7 Years | |
| 87,003 | | |
| 87,003 | |
Vehicle | |
5 Years | |
| 19,442 | | |
| 19,442 | |
Leasehold improvements | |
10 Years | |
| 10,023 | | |
| – | |
| |
| |
| 512,090 | | |
| 494,635 | |
Less: accumulated depreciation | |
| |
| (355,632 | ) | |
| (311,529 | ) |
| |
| |
$ | 156,458 | | |
$ | 183,106 | |
Note 6. Line of Credit
The Company has a $500,000 line of credit with a financial institution
bearing interest at 2.3%, secured by restricted cash with a maturity date of October 28, 2014. The balance was $-0- and $100,000
at September 30, 2014 and December 31, 2013, respectively.
Note 7. 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 closing of the sale occurred subsequent to June 30, 2011
and included an exchange of the $500,000 note payable and the receipt of $1,500,000 in cash in exchange for 2,000,000 shares of
the Company’s common stock and the warrants. The warrants were deemed to have a fair value of approximately $885,000 and
are included in additional paid-in capital. The warrants have been valued using the Black-Scholes pricing model with assumptions
of a five year term, common stock price of $1.00 per share, 58% expected volatility, 1.54% risk-free interest rate and a dividend
yield of 0%. Expected volatility was based on average volatilities of a sampling of four companies with similar attributes to the
Company. The risk free rate for the contractual life of the warrants was based on the U.S. Treasury yield at the time of grant.
Share-Based Compensation
Stock Options
In April 2012, the Board of Directors adopted and the shareholders
approved the Empowered Products, Inc. 2012 Omnibus Incentive Plan (the “Plan”). The Plan provides for the grant of
stock options, stock appreciation rights, short-term cash incentive awards, restricted stock and restricted stock units. Stock
options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may be
subsequently re-priced by the Plan administrator without stockholder consent. Equity granted under the Plan vests in various increments
generally over one to three years and stock options expire in ten years. Only stock options are currently outstanding under the
Plan.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
The Plan provides for grants of awards to directors, employees
and consultants. The maximum number of awards which may be granted is 5.0 million of which 3,725,000 have been granted as of September
30, 2014. A summary of activity related to stock options is presented below:
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2013 | |
| 2,700,000 | | |
$ | 0.28 | | |
| 8.5 | | |
$ | 81,000 | |
Granted | |
| 1,025,000 | | |
| 0.40 | | |
| 9.3 | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | | |
| – | |
Forfeited | |
| – | | |
| – | | |
| – | | |
| – | |
Expired | |
| – | | |
| – | | |
| – | | |
| – | |
Outstanding at September 30, 2014 | |
| 3,725,000 | | |
$ | 0.34 | | |
| 8.9 | | |
$ | 81,000 | |
| |
| | | |
| | | |
| | | |
| | |
Fully vested and expected to vest at September 30, 2014 | |
| 2,908,335 | | |
$ | 0.31 | | |
| 8.7 | | |
$ | 64,000 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at September 30, 2014 | |
| 2,908,335 | | |
$ | 0.31 | | |
| 8.7 | | |
$ | 64,000 | |
For the year ended December 31, 2013, 2.7 million non-qualified
stock options were granted with an aggregate fair market value of approximately $484,000. For the year ended December 31, 2013,
no stock options were exercised; therefore, the tax effect/benefit from stock option exercises had no effect on our additional
paid-in capital or income tax provision. As of September 30, 2014, there was approximately $103,000 of unamortized compensation
expense related to stock options that is expected to be recognized as an expense over a weighted average period of 0.45 years.
During the nine months ended September 30, 2014, 1,025,000 non-qualified
stock options were granted with an aggregate fair market value of approximately $249,000. For the period ended September 30, 2014,
no stock options were exercised; therefore, the tax effect/benefit from stock option exercises had no effect on our additional
paid-in capital or income tax provision. As of September 30, 2014, there was approximately $61,000 of unamortized compensation
expense related to stock options that is expected to be recognized as an expense over a weighted average period of 0.08 years.
Option valuation models require the input of certain assumptions
and changes in assumptions used can materially affect the fair value estimate. The options have been valued using the Black-Scholes
pricing model with assumptions of a 5.5 year term, common stock price of $0.28 to $0.40 per share, 74% to 78% expected volatility,
0.88% to 1.55% risk-free interest rate and a dividend yield of 0%. Expected volatility was based on average volatilities of a sampling
of four companies with similar attributes to the Company as the Company has a limited trading activity and history. The risk free
rate for the contractual life of the options was based on the U.S. Treasury yield at the time of grant. The expected term of the
options granted is derived using the “simplified method” which computes the expected term as the average of the sum
of the vesting term and the contract term, as the Company had limited activity surrounding its options to provide a historical
term.
Warrants
In July 2013, the Company entered into Service Agreements with
two companies pursuant to which the Company agreed to issue five-year warrants to purchase an aggregate of 3,000,000 shares of
the Company’s common stock for services to be rendered. Of the issuable warrants, warrants to purchase 1,000,000 shares were
granted on July 29, 2013 and warrants to purchase an additional 1,000,000 shares were to be issued in each of July 2014 and July
2015, provided that the Company did not terminate the Service Agreements prior to the issuance dates, in which case the Company
would have no obligation to issue the remaining unissued warrants. The Company valued the warrants at $240,000 based on the Company’s
stock price on July 12, 2013, the date of the Service Agreements. In June 2014, the Company provided notice of termination for
the Service Agreements and therefore the warrants that would have otherwise issuable in July 2014 were not issued and no additional
warrants will be issued in July 2015.
Warrant valuation models require the input of certain assumptions
and changes in assumptions used can materially affect the fair value estimate. The warrants have been valued using the Black-Scholes
pricing model with assumptions of a 2.5 year term, common stock price of $0.43 per share, exercise price of $0.33 per share, 83%
expected volatility, 0.52% risk-free interest rate and a dividend yield of 0%. Expected volatility was based on average volatilities
of a sampling of four companies with similar attributes to the Company as the Company has a limited trading activity and history.
The risk free rate for the contractual life of the warrants was based on the U.S. Treasury yield at the time of grant.
Empowered Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed
Financial Statements
Note 8. Revenue by Geographic
Area
Revenue by geographic area is 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, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Revenue: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | 981,432 | | |
| 91.2 | % | |
$ | 1,464,845 | | |
| 95.9 | % | |
$ | 3,441,335 | | |
| 94.1 | % | |
$ | 3,499,226 | | |
| 94.9 | % |
Europe | |
| 65,365 | | |
| 6.1 | % | |
| 44,485 | | |
| 2.9 | % | |
| 155,563 | | |
| 4.3 | % | |
| 126,626 | | |
| 3.4 | % |
Asia | |
| 29,027 | | |
| 2.7 | % | |
| 18,241 | | |
| 1.2 | % | |
| 58,412 | | |
| 1.6 | % | |
| 60,664 | | |
| 1.7 | % |
| |
$ | 1,075,824 | | |
| 100 | % | |
$ | 1,527,571 | | |
| 100 | % | |
$ | 3,655,310 | | |
| 100 | % | |
$ | 3,686,516 | | |
| 100.0 | % |
Note 9. Related Party Transactions
and Operating Leases
Included in general and administrative expenses, as well as,
selling and distribution expenses for the three months ended September 30, 2014 and 2013 are fees of approximately $97,000 and
$53,000, respectively, paid to a company owned by the Company’s majority stockholder. Included in general and administrative
expenses, as well as, selling and distribution expenses for the nine months ended September 30, 2014 and 2013 are fees of approximately
$204,000 and $89,000, respectively, paid to a company owned by the Company’s majority stockholder.
The Company purchased sample products from a related party of
approximately $53,000 and $53,000 for the nine months ended September 30, 2014 and 2013, respectively.
The Company rents office space from an affiliate, EGA Research,
LLC, which is controlled by the Company’s majority stockholder under a triple net lease expiring on February 28, 2016. The
lease calls for monthly rental payments of $7,000. Total rent expense for each of the three and nine months ended September 30,
2014 and 2013 were $21,000 and $63,000, respectively.
The Company entered into an office lease with an unrelated party
for additional rental space in 2011 which expired on May 31, 2013 and was renewed through May 31, 2015. The lease calls for monthly
rental payments of $4,000. The Company has an option to purchase the building for its fair value at any time during the term of
the lease. Total rent expense under this lease for each of the three and nine months ended September 30, 2014 and 2013 were $12,000
and $36,000, respectively.
Minimum future rentals under the lease
agreements are as follows:
Year ending | |
| |
2014 | |
$ | 33,000 | |
2015 | |
| 104,000 | |
2016 | |
| 14,000 | |
| |
$ | 151,000 | |
Note 10. 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 of approximately $3,246,000, and $3,014,000 at September 30, 2014 and December 31, 2013, respectively. The federal
net operating loss carry forwards begin to expire in 2024. A 34% 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 $79,000 during the nine
months ended September 30, 2014.
The NOL carry forwards may be significantly limited under Section
382 of the Internal Revenue Code (“IRC”) as a result of the Company’s 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. The Company
has not performed any analysis of whether or not there has been a cumulative change in ownership of greater than 50%. If this analysis
were completed and it was determined that there has been a change in ownership, 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, revenue, and expenses for the periods presented.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The following is a discussion of the financial condition and
results of operations of Empowered Products, Inc., a Nevada corporation and its subsidiaries. Unless otherwise indicated in this
report, terms “we,” “our,” “us,” “Company” and “EPI” refer to Empowered
Products, Inc. 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 year
ended December 31, 2013 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, 2013 filed with the Securities
and Exchange Commission (the “SEC”) on March 31, 2014 (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 lubricant 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 stores and consumers; |
| · | our ability to control advertising and marketing costs; |
| · | the maintenance of favorable trade relations between China and the U.S.; |
| · | our ability to sell our products in South America and other new markets; |
| · | our ability to develop a new online marketing strategy for our products; |
| · | our ability to maintain certification 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; |
| · | our ability to protect our trademarks; |
| · | market acceptance of our new line of nutritional supplements; |
| · | our reliance on the expected growth in demand for our products; |
| · | exposure to product liability claims; |
| · | exposure to intellectual property claims from third parties; |
| · | our ability to manage inventory in an effective manner; |
| · | our reliance on the expected growth in the nutritional supplement industry; |
| · | our compliance with FDA regulations and other regulatory requirements; |
| · | implementation of new regulations governing our products and operations; |
| · | our ability to protect against security breaches and inappropriate behavior of Internet users; |
| · | our exposure to credit card fraud; |
| · | our reliance on our current president and chief executive officer; |
| · | our ability to maintain effective disclosure controls and internal control over financial reporting; |
| · | 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 |
| · | 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 assumed the business and operations of EP Nevada and its subsidiaries, which became our sole business, and changed our
name from “On Time Filings, Inc.” to “Empowered Products, Inc.”
Prior to the Merger, described above, 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 former 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, EP Australia.
Through EP Nevada and its subsidiaries, we offer a line of
topical gels, lotions and creams, designed to enhance a person’s sex life and make people feel good about their sexual
health in general. We currently have 13 exclusively formulated skin lubricants sold under our PINK® for Women and
GUN OIL® for Men trademarks and intend to continue to expand our product 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 21,000 retail outlets. We also sell two herbal supplements for
women under our PINK® for Women brand, PINK® Elevate Libido and PINK® Elevate Performance, and two herbal
supplements for men under our GUN OIL® for Men brand, GUN OIL® High Caliber Drive and GUN OIL® High Caliber
Performance.
Results of Operations
The following table sets forth information from our consolidated
condensed statements of operations for the three months ended September 30, 2014 and 2013 in dollars and as a percentage of revenue
(unaudited):
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
In Dollars | | |
Percentage of Revenue | | |
In Dollars | | |
Percentage of Revenue | | |
In Dollars | | |
Percentage of Revenue | | |
In Dollars | | |
Percentage of Revenue | |
Revenues | |
$ | 1,075,824 | | |
| 100 | % | |
$ | 1,527,571 | | |
| 100 | % | |
$ | 3,655,310 | | |
| 100 | % | |
$ | 3,686,516 | | |
| 100 | % |
Cost of revenue | |
| 509,637 | | |
| 47 | % | |
| 522,856 | | |
| 34 | % | |
| 1,596,751 | | |
| 44 | % | |
| 1,335,507 | | |
| 36 | % |
Gross profit | |
| 566,187 | | |
| 53 | % | |
| 1,004,715 | | |
| 66 | % | |
| 2,058,559 | | |
| 56 | % | |
| 2,351,009 | | |
| 64 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling and distribution | |
| 517,137 | | |
| 48 | % | |
| 368,647 | | |
| 24 | % | |
| 1,399,997 | | |
| 38 | % | |
| 826,222 | | |
| 22 | % |
General and administrative | |
| 332,986 | | |
| 31 | % | |
| 362,515 | | |
| 24 | % | |
| 1,191,891 | | |
| 33 | % | |
| 1,210,519 | | |
| 33 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (283,936 | ) | |
| (26 | )% | |
| 273,553 | | |
| 18 | % | |
| (533,329 | ) | |
| (15 | )% | |
| 314,268 | | |
| 9 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 39 | | |
| 0 | % | |
| 67 | | |
| 0 | % | |
| 47 | | |
| 0 | % | |
| 279 | | |
| 0 | % |
Interest expense | |
| (669 | ) | |
| (0 | %) | |
| (4,464 | ) | |
| (0 | %) | |
| (2,540 | ) | |
| (0 | %) | |
| (12,653 | ) | |
| (0 | %) |
Net Income (loss) | |
$ | (284,566 | ) | |
| (26 | )% | |
$ | 269,156 | | |
| 18 | % | |
$ | (535,822 | ) | |
| (15 | %) | |
$ | 301,894 | | |
| 8 | % |
Net Income (loss) per
basic share | |
$ | (0.00 | ) | |
| | | |
$ | 0.00 | | |
| | | |
$ | (0.01 | ) | |
| | | |
$ | 0.00 | | |
| | |
Three Months Ended September 30, 2014 and 2013
Revenue for the three months ended September 30, 2014 was approximately
$1.1 million as compared to approximately $1.5 million in the comparable period in 2013. The 30% decrease in revenue
from the comparable period in 2013 was primarily attributable to 2013 sales reflecting an initial sale into a national retail chain’s
sales pipeline. In addition, our freight revenue decreased and returns, promotional allowances, discounts and coupon rebates increased
due to increased focus on product promotions to the consumer. These costs were charged directly to revenue. Sales in 2013 benefited
from the initial fill orders into the distribution chains of major retailers on which we typically have better margins.
Cost of revenue primarily consists of costs related to the production
and purchase raw materials and packaging. Cost of revenue for the three months ended September 30, 2014 was approximately
$510,000 as compared to approximately $523,000 in the comparable period in 2013. The slight decrease in cost of revenue
for the three months ended September 30, 2014 relative to the same period in 2013 was primarily due to a decrease in products sold.
For the three months ended September 30, 2014, our gross profit
decreased by approximately $439,000 when compared to the three months ended September 30, 2013. The gross margin was 53% and 66%
for the three months ended September 30, 2014 and 2013, respectively. The gross profit margin decrease was attributable to
an increase in promotional discounts and coupon campaigns in the national retail chains as well as an increase in our returns allowance.
These were charged directly against revenues, thus increasing the cost of revenue as a percentage of sales. The percentage of sales
to national retail chains during the three months ended September 30, 2014 and 2013 were 34% and 50%, respectively. Higher sales
to national retail chains during 2013 were reflective of the initial fill orders into their distribution centers.
Selling and distribution expenses for the three months ended
September 30, 2014 were approximately $517,000, or 48% of revenue, compared to approximately $369,000, or 24% of revenue,
for the same period in the prior year, an increase of 40%. The increase in selling and distribution expenses was primarily
the result of an increase in advertising buys and trade show expenses; an increase in marketing and sales personnel expense and
increased product testing as we move towards 510K certification of certain products. We believe that 510K certification will
facilitate widespread distribution of our products in the nationwide retail market.
General and administrative expenses for the three months ended
September 30, 2014 were approximately $333,000, or 31% of revenue, compared to approximately $363,000, or 24% of revenue, for the
same period in the prior year, an 8% decrease. General and administrative expenses increased as a percentage of sales
due to lower revenues in the current quarter, however, the overall general and administrative expenses decreased as a result of
reduced legal and filing fees.
No expense or benefit from income taxes
was recorded in the three months ended September 30, 2014 or 2013 due to our net loss and the available net operating loss carry
forwards utilized, respectively.
We had net loss of approximately $286,000
for the three months ended September 30, 2014 compared with a net income of approximately $269,000 for the three months ended September
30, 2013.
Nine Months Ended September 30,
2014 and 2013
Revenues for the nine months
ended September 30, 2014 were approximately $3.7 million as compared to approximately $3.7 million in the comparable period
in 2013. We experienced a significant increase in sales of Pink, Pink Water, Gun Oil and Gun Oil H2O as we began to
distribute our products through retail chains located across the United States. However, during the current nine month period
we ran a coupon campaign across 7,400 Walgreen stores, the costs of which were charged directly to revenue. This rebate
campaign increased our overall sales volume, but reduced our overall net sales by approximately $395,000. In addition, we
increased our returns allowance for approximately $98,000 as one of our retail chains, Meijer, removed our lubricant products
from their 160 stores pending FDA clearance, which we anticipate will occur in late 2014 or early 2015.
Cost of revenue for the nine months ended September 30, 2014
was approximately $1.6 million compared to approximately $1.3 million in the comparable period in 2013. The increase in cost
of revenue was primarily due to the increase in cost of goods sold that resulted from the increase in overall sales prior to the
effect of the coupon rebates, as discussed above. Due to the coupon campaign and returns, our cost of revenue increased as a percentage
of net sales.
Gross profit for the nine months ended September 30, 2014 decreased
to approximately $2.1 million from approximately $2.4 million for the nine months ended September 30, 2013. Our gross profit margin
decreased to 56%, from 64% in the nine months ended September 30, 2014, as compared to the same period in 2013. The decrease
in gross profit margin was attributable to expanded promotions and discounts and one-time setup fees paid to new retailers.
The percentage of sales to national retail chains during the nine months ended September 30, 2014 and 2013 were approximately 56%
and 46% respectively.
Selling and distribution expenses for the nine months ended
September 30, 2014 were approximately $1.4 million, or 38% of revenues, compared to approximately $826,000, or 22% of
revenues, for the same period in the prior year.
The increase in selling and distribution expenses was primarily
the result of an increase in advertising and trade show expenses; an increase in marketing and sales personnel expense and increased
product testing, as we consider seeking to obtain 510K certification of certain of our products. A portion of this increase is
also attributable to a non-cash charge of $120,000 during the nine months ended September 30, 2014 related to the issuance of stock
warrants for marketing services rendered.
General and administrative expenses
for the nine months ended September 30, 2014 were approximately $1.2 million or 33% of revenues, compared to approximately $1.2
million, or 33% of revenues, for the same period in the prior year.
No expense or benefit from income taxes
was recorded in the nine months ended September 30, 2014 or 2013 due to our net loss and the available net operating loss carry
forwards utilized, respectively.
We had a net loss of approximately
$536,000 for the nine months ended September 30, 2014 compared with a net income of approximately $302,000 for the nine months
ended September 30, 2013.
Liquidity and Capital Resources
We had unrestricted cash and cash equivalents of approximately
$424,000 as of September 30, 2014, as compared to approximately $157,000 as of December 31, 2013.
We rely on the Company’s operations to generate sufficient
income and cash to fund our operations, along with borrowings under our line of credit. We have a line of credit with Bank of Nevada
providing for borrowings of up to $500,000. As of September 30, 2014, we had no borrowings outstanding under this line of
credit. The Company did have $502,000 of cash that is restricted and tied to its line of credit.
For the nine months ended September 30, 2014, net cash provided
by operating activities was approximately $393,000 as compared to net cash provided by operating activities of approximately $340,000
for the comparable period in 2013. The increase in net cash provided by operating activities is primarily attributable to changes
in: accounts receivable of approximately $815,000, prepayments and other assets of approximately $434,000, inventory of approximately
$371,000; which were partially offset by changes in: accounts payable of approximately $117,000, provision for doubtful accounts
of approximately $46,000; share based compensation expenses of approximately $282,000, deferred revenue of approximately $283,000,
and the net loss incurred for the nine months ended September 30, 2014 compared to the net income earned during the same period
in the prior year.
For the nine months ended September 30, 2014, net cash used
in investing activities was approximately $27,000, as compared to approximately $8,000 for the comparable period in 2013. The increase
in net cash used in investing activities is primarily attributable to costs surrounding machinery upgrades and leasehold improvements
at our bottling line warehouse.
Net cash used in financing activities was $100,000 for the nine
months ended September 30, 2014 as compared to approximately $346,000 for the comparable period in 2013. The decrease in cash used
in financing activities was primarily the result of a smaller pay down of our line of credit for the nine months ended September
30, 2014.
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 related party 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 inception through September 30, 2014, the Company made purchases of approximately $223,000 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 2 of this report and 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 estimate that these discounts and returns will
approximate 2% of gross revenues and the costs are accrued accordingly. For coupon promotions we estimate what the expected
redemptions are and reduce our revenues based on these estimates. 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. An allowance for doubtful accounts is 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 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 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 estimate an allowance to reduce inventory for
slow moving, obsolete or damaged inventory.
Trademarks and other intangibles
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. An impairment loss would
be recorded if the carrying amount of the indefinite lived intangible asset exceeds its estimated fair value. Other intangibles
consisted of customer lists acquired in 2011 and website development costs incurred in 2012. Other intangible assets are amortized
over their useful lives ranging from 2 to 5 years.
Share-Based Compensation
The Company’s incentive compensation plan allows the Company
to grant awards to employees, directors, and consultants in the form of stock options, stock awards, warrants, restricted stock
units, and stock appreciation rights. Compensation related to these awards is determined based on the fair value on the date of
grant and is amortized to expense over the vesting period. For warrants granted to non-employees, the Company recognizes compensation
expense as the performance or services are completed. For restricted stock units, the Company recognizes compensation expense based
on the earlier of the vesting date or the date when the employee becomes eligible to retire.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed
to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer
and our Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
Based on an evaluation carried out as of the end of the period
covered by this quarterly report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act), our Chief
Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective
due to the material weaknesses in our internal control over financial reporting.
In our Annual Report, our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on this assessment, management believes that as of December 31, 2013, our internal control over financial reporting was not
effective based on those criteria because of the existence of material weaknesses. The specific deficiencies contributing to these
material weaknesses related to (a) ineffective procedures and controls over reserves and allowances, (b) inadequate segregation
of duties, (c) an inadequate number of independent board members and lack of an independent audit committee, and (d) an insufficient
complement of personnel with appropriate levels of knowledge and experience. Due to the actual and potential errors on financial
statement balances and disclosures, management has concluded that these deficiencies in internal controls over the period-end financial
close and reporting processes constituted a material weakness in internal control over financial reporting.
We intend to appoint outside directors to our board of directors
who shall be appointed to an audit committee resulting in an audit committee who will undertake the oversight in the establishment
and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management
when funds are available to us. Management believes that the appointment of independent directors, who would be appointed to serve
an audit committee function, will remedy the lack of a functioning audit committee. We originally anticipated these initiatives
to be at least partially, if not fully, implemented by December 31, 2013; however, due to limited resources and varying Company
business priorities, we currently intend to take action in the future when Company resources permit. There is no guarantee that
we will be able to take sufficient actions to remedy the material weaknesses described above.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required for smaller reporting companies
Item 2. Unregistered Sale of Equity Securities and Use of
Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
Exhibit
Number |
|
Description of Document |
|
|
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
* |
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. |
EMPOWERED PRODUCTS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Empowered Products, Inc. |
|
|
|
|
|
|
Dated: November 14, 2014 |
/s/ |
Scott Fraser |
|
By: |
Scott Fraser |
|
Its: |
President and Chief Executive Officer
(Principal Executive Officer and Authorized Officer) |
|
|
|
|
/s/ |
Kurt Weber |
|
By: |
Kurt Weber |
|
Its: |
Chief Financial Officer
(Principal Financial and Accounting Officer) |
Exhibit 31.1
Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Scott Fraser, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Empowered Products, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud,
whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: November 14, 2014 |
|
/s/ |
Scott Fraser |
|
By: |
Scott Fraser |
|
President and Chief Executive Officer |
(Principal Executive Officer) |
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Kurt Weber, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Empowered Products, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the
registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: November 14, 2014 |
|
|
|
/s/ Kurt Weber |
|
|
|
|
Kurt Weber
Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
|
|
|
|
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
In connection with the quarterly report
of Empowered Products, Inc. (the “Company”) on Form 10-Q for the quarter ending September 30, 2014, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities
and on the date indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Scott Fraser |
|
|
Scott Fraser |
|
President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
November 14, 2014 |
|
|
|
/s/ Kurt Weber |
|
|
Kurt Weber
Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
|
November 14, 2014 |
|
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