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EMPO > SEC Filings for EMPO > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for EMPOWERED PRODUCTS, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion relates to a discussion of the financial condition and results of operations of Empowered Products, Inc., a Nevada corporation (the "Company") herein used in this report, unless otherwise indicated, under the terms "we," "our," "Company" and "EPI," and its wholly-owned subsidiary Empowered Products Nevada, Inc., a Nevada corporation ("EP Nevada"), EP Nevada's wholly-owned subsidiary, Empowered Products Limited, a British Virgin Islands company ("EP BVI"), EP BVI's wholly-owned subsidiaries, Empowered Products Asia Limited, a Hong Kong company ("EP Asia") and Empowered Products Pty Ltd., an Australian company ("EP Australia").

Forward-Looking Statements

This management's discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated condensed financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements for the years ended December 31, 2011 and 2010 and the related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on April 16, 2012 (the "Annual Report").

The information contained in this report includes some statements that are not purely historical and that are forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our management's expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "might," "plans," "possible," "potential," "predicts," "projects," "seeks," "should," "will," "would" and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. The forward-looking statements contained in this report are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties' control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:

· our reliance on third-party contractors to mix our products and manufacture our nutritional supplements;

· our ability to grow and increase awareness of our brand;

· the success of our new sales strategy to sell products directly to retail consumers;

· our ability to control and reduce advertising and marketing costs;

· our ability to obtain a minimum favorable Nielsen Rating;

· the maintenance of favorable trade relations between China and the U.S.;

· our ability to sell our products in South America and other new international markets;

· our ability to develop a new online marketing strategy for our products;

· our ability to obtain certification in individual countries in the European Union;

· the occurrence of foul weather that disrupts our operations;

· our ability to market our products to end-retailers successfully;

· our vulnerability to interruptions in shipping lanes;

· our ability to increase our production space, machinery and personnel in line with our expansion plans;

· our ability to increase our production capacity in a timely manner;

· the willingness of third-parties to conduct business with us given the adult nature of our business;

· our ability to protect our trademarks;

· market acceptance of our new line of nutritional supplements;

· the anticipated future growth in the market for nutritional supplements;

· our inexperience in the nutritional supplement market;

· our inexperience in dealing with the U.S. Food and Drug Administration and other regulatory agencies;

· our reliance on the expected growth in demand for our products;

· our ability to comply with regulations regarding the labeling of our products;

· exposure to product liability claims;

· exposure to intellectual property claims from third parties;

· development of a public trading market for our securities;

· our ability to raise additional capital;

· the cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and

· and various other matters, many of which are beyond our control.

Company Overview

We were incorporated in the State of Nevada on July 10, 2009. On June 30, 2011, pursuant to an Agreement and Plan of Merger, EP Nevada merged with and into EPI Acquisition Corp., a wholly-owned subsidiary of the Company, with EP Nevada as the surviving company (the "Merger"). Upon the closing of the Merger, we
(i) assumed the business and operations of EP Nevada and its subsidiaries, which is now our sole business operations, and (ii) changed our name from "On Time Filings, Inc." to "Empowered Products, Inc."

Prior to the Merger, described below, our business included the EDGARization of corporate documents that require filing on EDGAR, the Electronic Data Gathering, Analysis and Retrieval system maintained by the Securities and Exchange Commission ("SEC"), and providing financial reporting and bookkeeping services. Pursuant to an assignment agreement, the assets and liabilities of this business were transferred to OT Filings, Inc. immediately after the Merger and the shares of OT Filings were transferred to Suzanne Fischer, one of our directors.

EP Nevada was incorporated in the State of Nevada on April 22, 2004. In March 2011, EP Nevada formed EP Asia to acquire certain assets of Polarin Limited, a company organized under the laws of Hong Kong ("Polarin"). Upon acquiring the assets of Polarin on March 31, 2011, EP Nevada acquired a new indirect subsidiary, Empowered Products Pty Ltd., an Australian company ("EP Australia").

Through EP Nevada and its subsidiaries, we offer a line of topical gels, lotions and oils, designed to enhance a person's sex life and make people feel good about their sexual health in general. We currently have 12 exclusively formulated skin lubricants sold under our PINKŪ for Women and GUN OILŪ for Men trademarks and intend to continue to expand our products offerings. Our proprietary formulated products are designed to increase mental focus and to improve the bond of interpersonal relationships. Our trademarked products are currently sold in 30 countries through more than 2,700 retail outlets.

In the third quarter of 2011, Empowered Products entered into the health supplement market with the introduction of four nutritional supplements under the "Elevate for Women" and "High Caliber for Men" brands. We intend to expand our proprietary line of supplements by targeting the growing number of people who we believe are socially incapacitated and/or subdued by prescription anti-depressants.

Results of Operations



The following table sets forth information from our statements of operations for
the three and nine months ended September 30, 2012 and 2011 in dollars and as a
percentage of revenue (unaudited):



                                            Three Months Ended September 30,                                       Nine Months Ended September 30,
                                         2012                               2011                               2012                                2011
                                               Percentage                        Percentage                        Percentage of                        Percentage
                              In Dollars       of Revenue       In Dollars       of Revenue       In Dollars          Revenue          In Dollars       of Revenue
Revenues                     $    770,611              100 %    $   833,026              100 %    $ 2,271,932                 100 %    $ 2,245,064              100 %
Cost of revenue                   333,251            43.25 %        460,295            55.26 %      1,027,207               45.21 %      1,297,476            57.79 %
Gross profit                      437,360            56.75 %        372,731            44.74 %      1,224,725               53.91 %        947,588            42.21 %

Selling and distribution          224,511            29.13 %        271,295            32.57 %        754,428               33.21 %        509,293            22.69 %
General and administrative        230,508            29.91 %        397,511            47.72 %        749,655               33.00 %        951,786            42.39 %

Loss from operations              (17,659 )          (2.29 )%      (296,075 )         (35.54 )%      (259,358 )            (11.42 )%      (513,491 )         (22.87 )%

Interest income                       119             0.02 %              -                -              119                0.01 %            500             0.02 %
Interest expense                   (5,946 )          (0.77 )%        (5,507 )          (0.66 )%       (17,266 )             (0.76 )%       (19,608 )          (0.87 )%
Net loss                     $    (23,486 )          (3.05 )%   $  (301,582 )         (36.20 )%   $  (276,505 )            (12.17 )%   $  (532,599 )         (23.72 )%
Net loss per share           $      (0.00 )                     $     (0.00 )                     $     (0.00 )                        $     (0.00 )

Three Months Ended September 30, 2012 and 2011

Revenues for the three months ended September 30, 2012 were approximately $771,000 as compared to approximately $833,000 in the comparable period in 2011. The 7.5% decrease in revenue was primarily due to slower sales in Europe and fewer sales of Herbal Supplements.

Cost of revenue primarily consists of costs related to the production or purchase of products for sale. Cost of revenue for the three months ended September 30, 2012 was approximately $333,000 as compared to approximately $460,000 in the comparable period in 2011. The decrease in cost of revenues was primarily the result of a lower volume of products being sold with new higher margins and significant efforts in improving the Company's purchasing and procurement practices.

For the three months ended September 30, 2012, our gross profit increased to approximately $437,000, from approximately $373,000 for the three months ended September 30, 2011. During the same periods, our gross profit margin increased to 56.8%, up from 44.7%. This increase in our gross profit margin was mainly due to improved purchasing and procurement practices, as well as price increases on our finished products that were implemented on January 1, 2012.

Selling and distribution expenses for the three months ended September 30, 2012 were approximately $225,000, or approximately 29.1% of revenues, compared to approximately $271,000, or 32.6% of revenues, for the same period in the prior year, a decrease of 17.2%. The decrease in selling and distribution expenses was primarily the result of reduced marketing through the trade show channel.

General and administrative expenses for the three months ended September 30, 2012 were approximately $231,000, or 29.9% of revenues, compared to approximately $398,000, or 47.7% of revenues, for the same period in the prior year, a 42.0% decrease. The decrease in general and administrative expenses was primarily because of decreased professional fees that were previously associated with the early months of being a public company and the Merger during the quarter ended June 30, 2011.

No expense or benefit from income taxes was recorded in the three months ended September 30, 2012 or 2011 due to our net losses. We do not expect any U.S. federal income taxes to be incurred for the current fiscal year because of available net operating loss carry forwards.

We had a net loss of approximately $23,000 for the three months ended September 30, 2012 compared to a net loss of approximately $302,000 for the three months ended September 30, 2011.

Nine Months Ended September 30, 2012 and 2011

Revenues for the nine months ended September 30, 2012 were $2.3 million as compared to $2.2 million in the comparable period in 2011. The 1.2% increase in revenue was primarily caused by the implementation of price increases on January 1, 2012.

Cost of revenue primarily consists of costs related to the production or purchase of products for sale. Cost of revenue for the nine months ended September 30, 2012 was approximately $1.0 million compared to approximately $1.3 million in the comparable period in 2011. The decrease in cost of revenues was primarily the result of a lower volume of products being sold and significant efforts in improving the Company's purchasing and procurement practices.

For the nine months ended September 30, 2012, our gross profit increased to approximately $1.2 million, from approximately $948,000. During the same periods, our gross profit margin increased to 53.9%, up from 42.2%. This increase in our gross profit margin was mainly due to improved purchasing and procurement practices, as well as price increases on our finished products that were implemented on January 1, 2012.

Selling and distribution expenses for the nine months ended September 30, 2012 were approximately $754,000, or 33.2% of revenues, compared to approximately $509,000, or 22.7% of revenues, for the same period in the prior year, an increase of 48.1%. The increase in selling and distribution expenses was primarily the result of direct mail marketing campaigns and the continued development of our online retail store during the first part of 2012.

General and administrative expenses for the nine months ended September 30, 2012 were approximately $750,000 or 33.0% of revenues, compared to approximately $952,000, or 42.4% of revenues, for the same period in the prior year, a 21.2% decrease. The decrease in general and administrative expenses was primarily because of decreased professional fees that were associated with becoming a public company and the Merger during the nine months ended September 30, 2011.

No expense or benefit from income taxes was recorded in the nine months ended September 30, 2012 or 2011 due to our net losses. We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carryforwards.

We had a net loss of approximately $277,000 for the nine months ended September 30, 2012 compared with a net loss of approximately $533,000 for the nine months ended September 30, 2011.

Liquidity and Capital Resources

We had unrestricted cash and cash equivalents of approximately $116,000 as of September 30, 2012, as compared to $864,000 as of December 31, 2011.

We generally finance our activities through our business operations, with any shortfalls supplemented by our borrowings under a line of credit, contributions from our majority stockholder, or sales of equity securities. We have a line of credit with Wells Fargo Bank providing for borrowings of up to $500,000. As of September 30, 2012, we had borrowings of $399,991 outstanding under this line of credit. This line of credit is secured by our restricted cash balance which amounted to $561,530 at September 30, 2012.

For the nine months ended September 30, 2012, net cash used in operating activities was approximately $662,000, as compared to net cash used in operating activities of approximately $590,000 for the comparable period in 2011. The increase in net cash used in operating activities is primarily attributable an increase in our raw materials inventory in anticipation of sales to large drug store chains and paydowns of our accounts payable and accrued expense balances.

For the nine months ended September 30, 2012, net cash used in investing activities was approximately $18,000, as compared to net cash used in investing activities of approximately $59,000 for the comparable period in 2011. The decrease in net cash used in investing activities is primarily attributable to the decrease in payments of fees for trademarks and equipment from 2011 levels.

Net cash used in financing activities was approximately $69,000 for the nine months ended September 30, 2012 as compared to net cash provided by financing activities of approximately $2,041,000 for the comparable period in 2011. The cash used in financing activities was primarily due to debt payments on the line of credit, net of draws, during the nine months ended September 30, 2012. This compares to cash received from financing activities during the nine months ended September 30, 2011 primarily due to a private placement of the Company's common stock.

For the nine months ended September 30, 2012 and 2011, our inventory was valued at approximately $944,000 and $768,000, respectively. This buildup of inventory was primarily due to an increase of raw material purchases in anticipation of increased sales to national drugstore chains. On February 1, 2012, we commenced product shipments to select Walgreens retail stores through an initial order placed by its national purchasing office in Deerfield, Illinois. We are currently expanding our pursuit of a national and regional drugstore chain presence.

Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions.

Off-Balance-Sheet Arrangements

In August 2011, the Company entered into an agreement to purchase product sample packets of Gun Oil and PINK products. In connection with the agreement, the vendor provides the manufacturing equipment, machine operator, and management of production. The Company is required to make minimum monthly purchases of $5,880 pursuant to the agreement. Since the execution of the agreement, the Company made purchases of approximately $82,320 pursuant to the purchase obligation.

Critical Accounting Policies

Management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

While our significant accounting policies are more fully described in Note 3 to our audited financial statements included in the Annual Report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Revenue recognition

We recognize revenue when all significant contractual obligations, which involve the shipment of the products sold and reasonable assurance as to the collectability of the resulting account receivable, have been satisfied. Returns are permitted for damaged or unsalable items only. Revenue is shown after deductions for prompt payment, volume discounts and returns. We participate in various promotional activities in conjunction with our retailers and wholesalers, primarily through the use of discounts. The allowances for sales returns are established based on our estimate of the amounts necessary to settle future and existing obligations for such items on products sold as of the balance sheet date.

Accounts receivable

Accounts receivable are carried at the outstanding amount due less an allowance for doubtful accounts, if an allowance is deemed necessary. Allowance for doubtful accounts are established when there is a basis to doubt the full collectability of the accounts receivable. We periodically evaluate our accounts receivable and determine the requirement for an allowance, based on our history of past write-offs, collections and current conditions. When an account receivable is ultimately determined to be uncollectible and due diligence for collection has taken place, the account receivable is written-off.

Inventory

Inventory consists primarily of raw materials and finished goods that we hold for sale in the ordinary course of business. Inventory is stated at the lower of cost (determined on the first-in, first-out basis) or market. Other manufacturing overhead costs are also allocated to finished goods inventory. We periodically evaluate the composition of inventory and estimates an allowance to reduce inventory for slow moving, obsolete or damaged inventory.

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