XOTC:EMPO Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2012
 
OR
     
o   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   27-0579647

(State or other jurisdiction of

incorporation or organization)

 

(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

 

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

 

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

 

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 62,388,856 shares of common stock, par value $0.001 per share, outstanding as of May 14, 2012.

 
 

EXPLANATORY NOTE

 

Empowered Products, Inc. (the “Company”) filed a registration statement on Form 8-A to register shares of its common stock under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Company is now required to file reports pursuant to Section 13 of the Exchange Act. Although the Company has not been subject to such filing requirements for the past 90 days, the Company has filed all reports during the preceding 12 months that it would have been required to file if it were subject to the filing requirements of Section 13 or 15(d) of the Exchange Act during such period.

 

 

 
 

EMPOWERED PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended March 31, 2012

INDEX

 

        Page
Part I   Financial Information  
           
    Item 1    Financial Statements  
             
        (a) Consolidated Condensed Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 2
             
        (b) Consolidated Condensed Statements of Operations for the Three Ended March 31, 2012 and 2011 (Unaudited) 3
             
        (c) Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited) 4
             
        (d) Notes to Consolidated Condensed Financial Statements as of and for the Three Months ended March 31, 2012 (Unaudited) 5
             
    Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
           
    Item 3   Quantitative and Qualitative Disclosures About Market Risk 15
           
    Item 4   Controls and Procedures 15
           
Part II   Other Information  
          16
    Item 1   Legal Proceedings  
           
    Item 1A   Risk Factors 16
           
    Item 2   Unregistered Sale of Equity Securities and Use of Proceeds 16
           
    Item 3   Default Upon Senior Securities 16
           
    Item 4   Mine Safety Disclosures. 16
           
    Item 5   Other Information 16
           
    Item 6.    Exhibits 16
         
Signatures 17

 

 

1
 

 

Empowered Products, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
 
     March 31,     December 31, 
    2012    2011 
    (Unaudited)      
Assets          
Current Assets:          
Cash and cash equivalents  $393,493   $863,766 
Restricted cash   561,411    561,411 
Accounts receivable, less allowance for doubtful          
accounts of $49,000   324,469    346,332 
Inventory   1,085,320    767,755 
Prepaid and other current assets   138,381    161,344 
Total current assets   2,503,074    2,700,608 
           
Plant and equipment, net   271,393    287,793 
Trademarks and other intangibles, net   520,858    518,475 
Other assets   5,628    5,660 
Total assets  $3,300,953   $3,512,536 
           
Liabilities and Stockholders' Equity          
Current Liabilities:          
Line of credit  $410,308   $468,521 
Accounts payable and other accrued expenses   264,275    426,240 
Total current liabilities   674,583    894,761 
           
Commitments and contingencies          
           
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, 62,388,856 shares issued and outstanding   62,389    62,389 
Additional paid-in capital   6,089,899    6,089,899 
Accumulated deficit   (3,525,918)   (3,534,513)
Total stockholders' equity   2,626,370    2,617,775 
Total liabilities and stockholders' equity  $3,300,953   $3,512,536 
           
See Notes to Unaudited Consolidated Condensed Financial Statements.     

 

2
 

 

Empowered Products, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
         
   Three Months Ended 
   March 31, 
   2012   2011 
         
Revenue  $815,913   $750,096 
Cost of revenue   287,358    514,564 
Gross profit   528,555    235,532 
           
Selling and distribution   275,117    126,921 
General and administrative   239,125    216,644 
           
Income (loss) from operations   14,313    (108,033)
           
Interest income   -    500 
Interest expense   (5,718)   (3,847)
           
Net income (loss)  $8,595   $(111,380)
           
           
           
Earnings (loss) per share:          
Basic  $0.00   $(0.00)
Diluted  $0.00   $(0.00)
           
Weighted average common shares          
 outstanding for basic   62,388,856    60,388,856 
Weighted average common shares          
 outstanding for diluted   62,388,856    60,388,856 
           
           
           
           
           
           
See Notes to Unaudited Consolidated Condensed Financial Statements.     
           
           

 

3
 

 

Empowered Products, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
   Three Months Ended 
   March 31, 
   2012   2011 
Cash flows used in operating activities:          
Net income (loss)  $8,595   $(111,380)
Adjustments to reconcile net income (loss) to cash flows          
used in operating activities:          
Depreciation and amortization   17,075    13,000 
Provision for doubtful accounts   206    - 
Changes in assets and liabilities:          
(Increase) in restricted cash   -    (500)
Decrease (increase) in accounts receivable   21,657    (6,527)
(Increase) decrease in inventory   (317,565)   11,863 
Decrease (increase) in prepaid and other current assets   22,963    (3,858)
(Increase) in other assets   32    38 
(Decrease) increase in accounts payable and other accrued expenses   (161,965)   85,550 
Cash flows used in operating activities   (409,002)   (11,814)
           
Cash flows used in investing activities:          
Payment of fees for trademarks   (3,058)   (9,209)
Cash flows used in investing activities   (3,058)   (9,209)
           
Cash flows (used in) provided by financing activities:          
Capital contributions   -    31,736 
Line of credit (repayments) draws, net   (58,213)   (26,731)
Cash flows (used in) provided by financing activities   (58,213)   5,005 
           
Net decrease in cash and cash equivalents   (470,273)   (16,018)
           
Cash and cash equivalents at the beginning of the period   863,766    28,943 
           
Cash and cash equivalents at the end of the period  $393,493   $12,925 
           
Supplementary disclosure of cash flow information:          
Cash paid for interest  $5,718   $3,847 
           
Supplementary disclosure of noncash investing and financing activity:          
Acquisition of subsidiary through settlement of an accounts receivable balance  $-  $58,564
           

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.  Recapitalization and Merger

 

On June 30, 2011, the Company completed a reverse merger transaction, pursuant to an Agreement and Plan of Merger, dated June 30, 2011 (the “Merger Agreement”), by and among the Company, EPI Acquisition Corp. (“Acquisition Sub”), EPI Name Change Corp. (“Name Change Merger Sub”), and Empowered Products Nevada, Inc. (“EP Nevada”) pursuant to which EP Nevada merged with and into Acquisition Sub with EP Nevada continuing as the surviving entity (the “Merger”). In contemplation of the Merger, the Company effectuated a 44-to-1 forward stock split whereby each share of its issued and outstanding common stock was converted into forty-four shares of common stock. In connection with this stock split, the Company’s board of directors approved an increase in the total authorized shares of common stock of the Company from 50,000,000 to 2,200,000,000. The weighted average number of shares outstanding at March 31, 2011 have been retroactively adjusted to reflect the 44-to-1 forward stock split. Upon the closing of the Merger, the Company changed its name from “On Time Filings, Inc.” to “Empowered Products, Inc.” Upon consummation of the Merger, each outstanding share of EP Nevada common stock was exchanged for 4 shares of the Company’s common stock. As a result of the Merger, the sole stockholder of EP Nevada common stock received 40,000,000 shares of the Company’s common stock. Immediately after the closing of the Merger, the Private Placement (see Note 8) and the Share Cancellation the Company had 62,388,856 shares of common stock issued and outstanding, no issued shares of preferred stock, no options and warrants to purchase 2,000,000 shares of common stock issued and outstanding.

 

In addition, in accordance with the terms of the Merger, upon the effective time of the Merger, members of the board of directors and officers of EP Nevada became directors and officers of the Company. The business of EDGARizing corporate documents was abandoned and the business plan of the EP Nevada was adopted. The transaction was therefore recorded as a reverse acquisition with EP Nevada as the acquiring party and the Company as the acquired party for accounting purposes.

 

Pursuant to a Share Repurchase and Cancellation Agreement dated June 30, 2011 (the “Repurchase Agreement”) by and between the Company, OT Filings Inc., a wholly owned subsidiary of the Company (“OT Filings”) and Suzanne Fischer, the Company repurchased 223,370,000 shares of its common stock (the “Repurchased Shares”) from Suzanne Fischer for a repurchase price of $50,000 and all of the issued and outstanding shares of OT Filings. Upon the repurchase, all of the Repurchased Shares were cancelled and the repurchase price of $5,000 was recorded as expense in the period. The remaining $45,000 was paid out of OT Filings cash on-hand prior to the transfer of operating assets and liabilities of the pre-merged OT Filings to Suzanne Fischer.

 

Note 3. 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 Securities and Exchange Commission 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, 2011 filed with the United States Securities and Exchange Commission on April 16, 2012. The results of operations for the interim periods presented 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 March 31, 2012 and the results of operations and cash flows for the three months ended March 31, 2012.

 

4
 

Empowered Products, Inc. and Subsidiaries

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.

 

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 three months ended March 31, 2012 and 2011 approximated $11,000 and $27,000, 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.

 

At times the Company provides free products to its customers. These free products are accounted for in accordance with Accounting Standards Codification (“ASC”) 605-50 Revenue Recognition-Customer Payments and Incentives and the cost of the product is recognized in cost of revenue.

 

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 gross revenues 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 three months ended March 31, 2012 and 2011, the Company incurred approximately $76,000 and $16,000, respectively, in advertising and company marketing expenses.

 

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.

  

5
 

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 ASC 740, Accounting for Income Taxes (“ASC 740”). 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. ASC 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 Financial Accounting Standards Board (“FASB”) ASC 740 (formerly Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109). 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 March 31, 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 $126,000 and $87,000 at March 31, 2012 and December 31, 2011, respectively. Management periodically evaluates the composition of inventory and estimates an allowance to reduce inventory for slow moving, obsolete or damaged inventory. Management recorded an allowance of $5,000 and $0 at March 31, 2012 and December 31, 2011, respectively.

 

6
 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

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 March 31, 2012 and December 31, 2011 was approximately $510,000 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 March 31, 2012 and December 31, 2011, other intangibles, in the amount of approximately $10,700 and $11,000, respectively consist of a customer list which is being amortized on the straight-line basis over the next four years.

 

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 March 31, 2012 and 2011, no impairment losses were recorded.

 

Note 4. Earnings per Share (“EPS”)

 

Earnings (loss) per share are calculated in accordance with the authoritative guidance issued by the FASB on 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 March 31, 
   2012   2011 
         
Net income (loss) available to common shares  $8,595   $(111,380)
           
Basic:          
    Weighted average shares   62,388,856    60,388,856 
           
Diluted:          
    Weighted average shares, basic   62,388,856    60,388,856 
    Dilutive effect of warrants   -    - 
    Weighted average shares, diluted   62,388,856    60,388,856 
           
Basic earnings per share  $0.00   $(0.00)
Diluted earnings per share  $0.00   $(0.00)
           
Weighted average anti-dilutive shares excluded from diluted EPS   2,000,000    - 

 

7
 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Note 5. Inventory

 

Inventory consists of the following at:

 

   March 31,   December 31, 
   2012   2011 
           
Raw materials  $618,685   $418,576 
Finished goods   466,635    349,179 
   $1,085,320   $767,755 

 

Note 6. Plant and Equipment, net

 

Depreciation for the three months ended March 31, 2012 and 2011 was $16,400 and $13,000, respectively. Cost, accumulated depreciation and estimated useful lives are as follows:

 

  Estimated  March 31,   December 31, 
Category  Useful Lives  2012   2011 
Manufacturing and computer equipment   5 - 7 Years  $376,218   $376,218 
Office furniture and computer software   3 - 7 Years   75,692    75,692 
Vehicles   5 Years   19,442    19,442 
       471,352    471,352 
Less:  accumulated depreciation     (199,959)   (183,559)
      $271,393   $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 March 31, 2012) and an interest rate floor of 5%, secured by restricted cash and a personal guarantee of the stockholder with a maturity date of November 1, 2012. The balance was $410,308 and $468,521 at March 31, 2012 and December 31, 2011, respectively.

 

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 months ended March 31:

 

   2012   2011 
Revenue:                    
 United States  $758,227    92.8%  $689,137    91.9%
 Europe   37,562    4.7%   47,917    6.4%
 Asia   20,124    2.5%   13,042    1.7%
   $815,913    100.0%  $750,096    100.0%

 

8
 

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 three months ended March 31, 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, currently valued at approximately $608,000 at any time during the term of the lease.

 

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 three months ended March 31, 2012 and 2011 are marketing fees of approximately $66,000 and $0, 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 $1,217,000 at March 31, 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 decreased by approximately $3,000 during the three months ended March 31, 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 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.

 

9
 

 

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 subsidiary, Empowered Products Asia Limited, a Hong Kong company (“EP Asia”) and EP Asia’s wholly-owned subsidiary, Empowered Products Pty Ltd. (formerly Polarin 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;

  

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·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 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 indirectly owned subsidiary, EP Australia.

 

Through Empowered Products, Inc., 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.

 

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Results of Operations

 

The following table sets forth information from our statements of operations for the three months ended March 31, 2012 and 2011 in dollars and as a percentage of revenue (unaudited):

 

   Three Months Ended March 31, 
   2012   2011 
   In Dollars   Percentage of Revenue   In Dollars   Percentage of Revenue 
Revenues  $815,913    100.00%  $750,096    100.00%
Cost of revenue   287,358    35.22%   514,564    68.60%
Gross profit   528,555    64.78%   235,532    31.40%
                     
Selling and distribution   275,117    33.72%   126,921    16.92%
General and administrative   239,125    29.31%   216,644    28.88%
                     
Income (loss) from operations   14,313    1.75%   (108,033)   -14.40%
                     
Interest income   -    0.00%   500    0.06%
Interest expense   (5,718)   -0.70%   (3,847)   -0.51%
Net income (loss)  $8,595    1.05%  $(111,380)   -14.85%
Earnings (loss) per share  $0.00        $(0.00)     

 

Three Months Ended March 31, 2012 and 2011

 

Revenues for the three months ended March 31, 2012 were approximately $816,000 as compared to approximately $750,000 in the comparable period in 2011.  The 8.8% increase in revenue was primarily due to additional sales to a national chain and increases in product prices, and was partially offset by reductions in bulk product sales. Initial sales to select Walgreens retail stores in the three months ended March 31, 2012 was approximately $57,000 as compared to $0 for the same period ended March 31, 2011. Bulk lubricant sales for the three months ended March 31, 2012 declined approximately $49,000 from bulk lubricant sales in the comparable period in 2011. We also implemented a price increase for our lubricants and herbal supplements effective January 1, 2012. The average increase in prices for our lubricants was approximately 40% from prices in effect during the first quarter of 2011. Herbal supplement sales for the period ended March 31, 2012 were approximately $9,340 compared to $0 for the period ended March 31, 2011.

 

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 March 31, 2012 was approximately $287,000 as compared to approximately $515,000 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 reduced bulk product sales which have lower margins.

 

For the three months ended March 31, 2012, our gross profit increased to approximately $529,000, from approximately $236,000 for the three months ended March 31, 2011. During the same period, our gross profit margin increased to 64.8%, up from 31.4% in the three months ended March 31, 2012.  This increase in our gross profit margin was mainly due to efficiency improvements in the procurement of components for our product mix. Also, the increased revenues in response to our product-price increases to wholesalers implemented as of January 1, 2012 contributed to our higher gross profit margins.

 

Selling and distribution expenses for the three months ended March 31, 2012 were approximately $275,000, or approximately 33.7% of revenues, compared to approximately $127,000, or 16.9% of revenues, for the same period in the prior year, an increase of 116.8%.  The increase in selling and distribution expenses was primarily the result of direct mail marketing campaigns and the development of our online retail store.

 

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General and administrative expenses for the three months ended March 31, 2012 were approximately $239,000, or 29.3% of revenue, compared to approximately $217,000, or 28.9% of revenues, for the same period in the prior year, a 10.0% increase.  The increase in general and administrative expenses was primarily because of increased professional fees associated with becoming a public company as a result of the Merger. Our general and administrative expenses also increased because of an increase in salary expenses, as we began to pay our President and Chief Executive Officer, Scott Fraser, an annual salary of $185,000 on June 1, 2011. Mr. Fraser was paid $39,041 and $3,000 during the three months ended March 31, 2012 and 2011, respectively.

 

No expense or benefit from income taxes was recorded in the three months ended March 31, 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 net income of approximately $9,000 for the three months ended March 31, 2012 compared to net loss of approximately $111,000 for the three months ended March 31, 2011.

 

Liquidity and Capital Resources

 

We had unrestricted cash and cash equivalents of approximately $393,000 as of March 31, 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 March 31, 2012, we had borrowings of $410,308 outstanding under this line of credit. This line of credit is secured by our restricted cash balance which amounted to $561,411 at March 31, 2012.

 

For the three months ended March 31, 2012, net cash used in operating activities was approximately $409,000, as compared to net cash used in operating activities of approximately $12,000 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 three months ended March 31, 2012, net cash used in investing activities was approximately $3,000, as compared to net cash used in investing activities of approximately $9,000 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 from 2011 levels.

 

Net cash used in financing activities was approximately $58,000 for the three months ended March 31, 2012 as compared to net cash provided by financing activities of approximately $5,000 for the comparable period in 2011. The increase in cash used in financing activities was due to our paydowns of the line of credit and the lack of capital contributions by our primary shareholder.

 

For the three months ended March 31, 2012 and 2011, our inventory was valued at approximately $1.1 million and 0.5 million 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 the national drugstore chain sales channel and believe that our presence therein will expand over the next three quarters.

 

Anticipated cash flows from operations and funds available from our credit facilities, together with cash on hand, will provide sufficient liquidity to meet our working capital needs and planned capital expenditures. 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. Through March 31, 2012, the Company made purchases of approximately $47,200 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.

 

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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 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 estimates an allowance to reduce inventory for slow moving, obsolete or damaged inventory.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for a smaller reporting company.

 

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, or CEO, and our Controller, our principal accounting and 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 management, including our CEO and Controller, our CEO and Controller have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were ineffective as of March 31, 2012 due to the material weakness in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

In our Annual Report, we indicated that we had a material weakness in our internal control over financial reporting resulting from an inadequate number of independent board members and lack of an independent audit committee, which may result in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes that the appointment of one or more independent directors will remedy the lack of a functioning audit committee and a lack of a majority of independent directors on the Company’s board. Management believes the appointment of independent directors will greatly decrease any control and procedure issues that the Company may encounter in the future. As our operations and business grow, the Company intends to add independent directors. The Company has not yet added any independent directors to its board of directors.

 

 

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.

14
 

Part II. Other Information

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K  for the year ended December 31, 2011.

 

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

 

Effective March 1, 2012, we entered into a new two-year commercial lease agreement (the “Lease”) with EGA Research, LLC for the property located at 3355 and 3367 West Oquendo Road, Las Vegas, Nevada, 89118. Our prior lease for this property expired on March 1, 2012. Monthly rent under the Lease is $7,000 during the term of the Lease. EGA Research, LLC, is controlled by our majority stockholder and President and Chief Executive Officer, Scott Fraser.

 

The information included in this Item 5 is provided in accordance with Item 1.01 of Form 8-K.

 

Item 6. Exhibits

 

(a)           Exhibits

 

Exhibit

Number

  Description of Document
     
10.1   Commercial Lease Agreement dated as of March 1, 2012 by and between Empowered Products, Inc. and EGA Research, LLC.
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 Controller 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 Controller 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.

 

 

15
 

 

 

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: May 14, 2012 /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:

Controller

(Principal Financial and Accounting Officer)

 

 

16

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