Our Business
We are a vertically integrated manufacturer that designs, develops and markets products and accessories that enhance intimacy. Liberator is also a nationally recognized brand trademark, brand category and a patented line of products commonly referred to as sexual positioning shapes and sex furniture. We are an integrated multi-channel, multi-brand direct-to-consumer retailer, distributor and wholesaler that also operates the Liberator brand website. We conduct our manufacturing, distribution and all administrative functions from a 140,000 square foot facility in Atlanta, Georgia.
We believe our Liberator customer base consists primarily of affluent, college educated couples that buy Liberator to enhance bedroom play and/or to improve sexual performance.
In the sexual wellness market, the Company conducts direct to consumer business through its owned and managed website www.liberator.com and the Liberator exhibition and concept store within our factory.
Through our wholly-owned subsidiary, OneUp Innovations Inc. (“OneUp”), we conduct wholesale business for Liberator products through five primary channels: (1) adult and female friendly retailers, flash sites and specialty boutiques, (2) e-tailers who sell our products through adult, mass market, drug and other sites offering sexual wellness products, (3) adult “toy” home party businesses, (4) mail order catalogers, and (5) distributors of adult / sexual wellness products. These wholesale accounts have approximately 950 retail locations and/or websites in the United States and Canada. We have a growing number of retailers who are also adding a dedicated Liberator exhibition concept to their merchandising space. We also sell internationally under exclusive license and manufacturing agreements.
Under OneUp, we also function as an exclusive resale distributor of the Tenga brand sold through the same wholesale and direct-to-consumer channels as branded Liberator products. For the year ended June 30, 2012, Tenga products represented approximately twenty-one percent of our consolidated net sales.
In addition, the Company sells a line of contemporary beanbag seating under the Jaxx brand. Jaxx is an offshoot from Liberator manufacturing as it provides additional revenue from repurposing our polyurethane foam trim into shredded beanbag fill. The Jaxx product line and accessory products are sold through the following four wholesale channels: (1) beanbag e-tailers, (2) mass markets, (3) mail order catalogers, and (4) retail furniture stores. The Company also owns and manages a website under the URL www.JaxxBeanBags.com for direct to consumer sales. For the year ended June 30, 2012, this product line represented approximately eleven percent of our consolidated net sales.
Unless the context requires otherwise, all references in this report to the “Company,” “Liberator,” “we,” “our,” and “us” refers to Liberator, Inc. and its subsidiaries.
Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400.
Corporate History
Liberator, Inc. (the “Company”), located in Atlanta, Georgia, was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. to provide consulting and commercial property management services. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc. (f/k/a Remark Enterprises Inc.), a Nevada corporation (“Old Liberator”). Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”). References to the “Company” in this Annual Report include the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc.
As a result of the Merger, each issued and outstanding share of the common stock of Old Liberator (the “Old Liberator Common Shares”) were converted into one share of the Company’s common stock, $0.01 par value, which, after giving effect to the Merger, equaled, in the aggregate, 98.4% of the total issued and outstanding common stock of the Company (the “Liberator Common Stock”). Pursuant to the Merger Agreement, each issued and outstanding share of preferred stock of Old Liberator (the “Liberator Preferred Shares”) was to be converted into one share of the Company’s preferred stock with the provisions, rights, and designations set forth in the Merger Agreement (the “Liberator Preferred Stock”). On the execution date of the Merger Agreement, the Company was not authorized to issue any preferred stock. On February 11, 2011 the Company filed an amendment to its Articles of Incorporation authorizing the issuance of the Liberator Preferred Stock, and at that time the Liberator Preferred Stock was exchanged pursuant to the terms of the Merger Agreement. As of the execution date of the Merger Agreement, Old Liberator owned 80.7% of the issued and outstanding shares of the Company’s common stock. Upon the consummation of the Merger, the shares of Liberator Common Stock owned by Old Liberator prior to the Merger were cancelled.
On January 27, 2011, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Web Merchants, Inc., a Delaware corporation (“WMI”) and Fyodor Petrenko and Dmitrii Spetetchii, the holders of 100% of WMI’s capital stock (the “WMI Shareholders”), to acquire 100% of WMI’s issued and outstanding equity ownership in exchange for 28,394,400 shares of our common stock to the WMI Shareholders. Dmitrii Spetetchii also received $100,000 in cash, which represented $79,000 for the repayment of a loan he made to WMI and $21,000 in consideration for him signing a non-compete agreement with the Company. Pursuant to the Purchase Agreement, WMI operated as a wholly owned subsidiary of the Company until October 1, 2011 when it was sold to Web Merchants Atlanta, LLC (“WMA”), an entity controlled by the President and former majority shareholder of WMI, Fyodor Petrenko. Under the WMI Sale Agreement, the Company received the 25.4 million shares of Liberator common stock owned by Mr. Petrenko and a cash payment of $700,000 in exchange for the issued and outstanding stock of WMI owned by the Company.
On February 28, 2011, the Company name was changed from WES Consulting, Inc. to Liberator, Inc.
Founded in Atlanta, Georgia in 2000, OneUp Innovations, Inc., the operating company of Liberator, Inc., provides goods to customers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life.
Industry Background
The Company participates in the rapidly growing worldwide market of sexual wellness. What was once called Family Planning has evolved over the last decade into a new category called Sexual Wellness, a growing worldwide movement toward sexual health. Many of the major health and wellness retailers, pharmacies and on-line retailers have started embracing this movement, especially over the last two to three years. A Google search of the term “Sexual Wellness” returns over 3 million entries, with the first three entries in organic search being Amazon.com, Walgreens.com, and Overstock.com.
Major consumer brands are rapidly entering the Sexual Wellness market, with either new products or repackaged existing products. Such brands include:
We believe that the category of Sexual Wellness is in the early stages of consumer awareness and that it will continue to grow and gain consumer acceptance to become a major trend in retailing.
Core Business Strengths
We believe we have the following core business strengths that we can leverage to implement our strategy:
Design Vision
Our in-house design group continues to reinforce our constantly evolving brand image. Our products are designed to reflect utility and sensuality as well as be room décor that incorporates high quality fabrics and construction with comfort and performance in the bedroom. Evolving from our iconic Liberator shapes, we combined form with function to launch contemporary furniture and accessories for sex play, as well as products for mainstream and mass market retailers which embrace the sexual wellness category of products.
Advertising and Branding
The Liberator.com website is the primary branding and advertising vehicle for the Liberator brand. We believe our website reinforces the Liberator mission and brand image while driving sales to all of our wholesale channels. We also believe we have distinguished ourselves from other web e-tailers in the adult and sexual wellness space by using edgy photography, instructional videos and exceptional art direction combined with an entertainment bent. Liberator attracts customers to its website and other retailers and e-tailers through internally developed print ads, and radio and television advertising during holiday periods. These provocative advertising campaigns communicate a distinctive image that differentiates us and creates a connection and following with our customers. Since inception, over $9.3 million has been spent building brand awareness. We have also aligned the brand with the entertainment industry appearing in Meet the Fockers, Burn after Reading and numerous TV and media events.
Diverse Mainstream Appeal
The Liberator brand is marketed and distributed through diverse wholesale mass market channels, specialty retailers and web stores. We estimate that approximately 50% of our purchases are made jointly by couples, varying in ages from 30 to 55 years old, who view sexual expression and experimentation as essential to a well-lived life. Liberator, as a company, also understands and supports sexuality as a potentially positive force in everyone’s life, and celebrates sexual diversity, differing desires, relationships structures, and individual choices based on consent. We offer our customers a broad range of Liberator styles and designs. By offering such a broad range of products, including higher priced luxury items, we believe it elevates the perception of the brand while providing more accessible price points for every customer and budget.
Flexible and Vertically Integrated Model
Our vertically integrated business model, with manufacturing, distribution, product development and marketing performed in-house, allows us to create new products with reduced lead times at a lower cost while enabling us to quickly respond to market and customer demands for new product releases. For our wholesale accounts, being able to fulfill large orders with shorter turnaround times allows us to capture business during December and February when wholesale customers make just-in-time holiday purchases.
American Manufacturing and Sourcing
We implemented a state-of-the-art conveyor-based sewing system to manufacture sewn products at the lowest possible cost in the United States. Because all cutting, sewing, foam contouring, assembly and packaging are performed in-house, we believe we can exercise greater control over product quality and respond faster to changing customer demands, which gives us a competitive advantage over companies that utilize out-sourced sewing services. Liberator can source raw materials from multiple domestic suppliers and we have supply contracts in place to produce our specialty fabrics under specific quality control and performance standards with just-in-time deliveries.
Management Information Systems
Our enterprise resource planning software is designed specifically for the sewn products industry to provide comprehensive inventory, order processing, production planning, accounting and management information for the marketing, manufacturing, finance and distribution functions of our business. Item level replenishment and real time inventory is directly linked to our website feeds and online wholesale order portals. We continue to expand and upgrade our information systems, networks and infrastructure to support recent and future growth. To support our internal information technology infrastructure, we have agreements with third party providers for hosting services and administration support.
During fiscal 2012, we began work on a comprehensive new enterprise level e-commerce platform which we expect to launch prior to the 2012 Christmas season. We expect this new e-commerce platform to provide our customers with a better user experience and, as a result, increase our Direct to consumer sales. We have agreements with our e-commerce and network providers to manage our data center with 24/7 response time and uptime guarantees.
Business Strategy
As one of the few recognized brands and brand categories in the sexual wellness market, our goals are to achieve long-term growth and profitability and diversify our sales base. We plan to achieve these goals using the following strategies:
Products and Services
Liberator Products
We developed a product category which we call “Liberator Bedroom Adventure Gear”. They are positioning props that elevate, rock and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting.
Liberator Shapes are manufactured in a variety of heights and widths to accommodate variations in the human body. They consist of differently shaped cushions and props that are available in an assortment of fabric colors and prints to add to the visual excitement. Each of the product profiles of the Liberator Shapes is unique, designed to introduce positions to the sexual experience that were previously difficult to achieve or impossible to achieve with standard pillows or cushions. Liberator Gear is manufactured from structured polyurethane foam, cut at various angles, platforms and profiles. The foam base is encased in a tight, fluid resistant polyester shell, helping the cushions to maintain their shape. The original offering of the Liberator Wedge and Ramp, sold as a set, are our best-selling items. All of the Liberator Shapes are also available in our Black Label Series which includes blindfolds and snap-on Velcro cuffs.
We have also developed larger profile designs that are commonly referred to as “sex furniture”. Three of the sex furniture pieces are made from contoured urethane foam and covered in a variety of fabrics and colors. These items are marketed as the Esse ®, Esse Stage, and the Equus ®. Other larger designs include products based on shredded polyurethane foam encased in a wide range of fabric types and colors and sold under our Zeppelin ® product offering. The Liberator larger profile designs can also be used as seating when not being used for relaxed interaction and creative sex.
All products sold under the Liberator brand provided 40% and 46% of our revenues for our fiscal years ended June 30, 2012 and 2011, respectively.
Jaxx Products
In addition to the Liberator product line, we also produce a line of casual foam-based furniture sold under the “Jaxx” brand. These products are primarily offered directly to consumers through our JaxxBeanBag.com web site and to e-Merchants under drop-ship arrangements where we ship directly to customers and to other resellers. Our Jaxx products provided 11% of our revenues in each of our fiscal years ended June 30, 2012 and 2011.
Resale Products
Beginning in 2006, we began importing high-quality pleasure objects from around the world. These resale products provided 37% and 30% of our revenues for our fiscal years ended June 30, 2012 and 2011, respectively. The primary reason for the significant increase from 2011 to 2012 is the growth in sales of pleasure objects other than Tenga and, to a lesser extent, an increase in sales of the Tenga products.
Miscellaneous Products and Contract Manufacturing
We also manufacture couture lingerie, latex garments, fetish wear, and a line of boudoir bedding items that are sold under the Fascinator ™ line. The Fascinator line provided an immaterial portion of our revenues during the last 2 fiscal years. Beginning in early fiscal 2007, we began providing contract manufacturing services to companies seeking private label specialty products made from fabric and foam. These products are typically designed by the client companies and manufactured to their specifications and, to date, have not been a material part of our business.