Liberator, Inc. (Form: 10-K, Received: 09/30/2013 13:53:34)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2013

Commission file number : 000-53314

Liberator, Inc.

(Exact name of Company as specified in its charter)

Florida		59-3581576
(State of incorporation)		(IRS Employer Identification No.)

2745 Bankers Industrial Drive, Atlanta, Georgia 30360

(Address of principal executive offices) (Zip Code)

Company's telephone number: (770) 246-6400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ YES x NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ YES x NO

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. x YES ¨ NO

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ YES x NO

The aggregate market value of the common stock held by non−affiliates of the registrant computed by reference to the closing price of the common stock on December 30, 2012, the last trading day of the registrant’s most recently completed second fiscal quarter, was $2,215,813.

The number of shares of Common Stock, $.01 par value, outstanding as of the close of business on

September 25, 2013 was 70,702,596.

Liberator, Inc.

Index to Annual Report on Form 10-K

		PAGE

PART I

ITEM 1.	Business	3

ITEM 1A.	Risk Factors	11

ITEM 2.	Properties	11

ITEM 3.	Legal Proceedings	11

ITEM 4.	Mine Safety Disclosures	11

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	20

ITEM 8.	Financial Statements and Supplementary Data	21

ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22

ITEM 9A.	Controls and Procedures	22

ITEM 9B.	Other Information	23

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	23

ITEM 11.	Executive Compensation	25

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	26

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	28

ITEM 14.	Principal Accounting Fees and Services	29

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules	30

SIGNATURES		32

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Annual Report”) for Liberator, Inc. (“Liberator” the “Company””we” “our” or “us”) may contain forward-looking statements, which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as "expects," "anticipates," "intends," "plan," "believes," "predicts", "estimates" or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning the Company, the performance of the industry in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. You should not place undue reliance on forward-looking statements.

Forward-looking statements speak only as of the date of this report, presentation or filing in which they are made. Except to the extent required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this report include, but are not limited to:

Statements relating to our business strategy;

Statements relating to our business objectives; and

Expectations concerning future operations, profitability, liquidity and financial resources.

These forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

competition from other sexual wellness retailers and adult-oriented websites;

our ability to extend, renew or refinance our existing debt;

our ability to generate significant sales revenue from magazine, internet and radio advertising;

the loss of one or more significant customers, or the loss of the rights to distribute Tenga products in North America;

our plan to make continued investments in advertising and marketing;

our ability to maintain our brands;

unfavorable economic and market conditions and the impact on our leveraged financial position;

our reliance on credit cards as a form of payment;

our ability to keep up with new technologies and remain competitive;

our ability to continue as a going concern;

our history of operating losses and the risk of incurring additional losses in the future;

security breaches may cause harm to our systems;

supply interruptions from raw material vendors;

our ability to improve manufacturing efficiency at our production facility;

trends in raw material costs and other costs both in the industry and specific to the Company;

our ability to enforce and protect our intellectual property rights;

we may be subject to claims that we have violated the intellectual property rights of others;

the loss of our main data center or other parts of our infrastructure;

systems failures and interruptions in our ability to provide access to our websites and content;

companies providing products and services on which we rely may refuse to do business with us;

changes in government laws affecting our business;

we may not be successful in integrating any acquisitions we make;

our dependence on the experience and competence of our executive officers and other key employees;

restrictions to access on the internet affecting traffic to our websites;

risks associated with currency fluctuations;

an anticipated worsening US deficit and a rise in inflation in coming years that would put further stress on consumer spending;

management’s goals and plans for future operations;

risks associated with litigation and legal proceedings; and

other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by the Company with the Securities and Exchange Commission.

PART I.

ITEM 1. Business

Our Business

Liberator, Inc. is the manufacturer and marketer of Liberator Bedroom Adventure Gear ^® , one of the world’s most widely-recognized brand categories in the sexual well-being space, now emerging into mainstream retail.

Liberator’s mission is to enhance couples’ intimacy by inspiring creativity and romantic imagination. Liberator Bedroom Adventure Gear ^® creates surfaces and elevations that facilitate and expand sexual performance and repertoire. We believe our products make the act of love more exciting and rewarding for people of all shapes and sizes, regardless of age or physical limitations.

For more than 11 years, Liberator’s reputation and distinctive image has been consistently developed across an expanding number of sales channels including: Liberator.com, a direct-to consumer website; adult and couple-friendly adult retailers; Internet retailers in drug, mass, catalog and specialty areas selling products under the sexual wellness or well-being category; and Liberator’s retail flagship store.

The entire Liberator line, including more than a dozen trademarked products, is produced by a team of over 110 dedicated employees in a 140,000 square-foot factory in Atlanta, Georgia.

Liberator Bedroom Adventure Gear combines functional design with sensuous textures that transform ordinary bedrooms into supportive landscapes for intimacy. Liberator presents angles, elevations, curves and motion that help people of all sizes including those with back injuries and other medical conditions find comfortable ways to connect while increasing their stamina and performance.

According to many of our customers, we have created “ one of the greatest products for enhancing intimacy ” that helps couples experience the best life has to offer. We are humbled by the reaction Liberator has gotten from our customers and proud of our achievements. But the truth is, we are inspired to do even more. We are just getting started, pushing into new markets and spreading intimacy and sexual fulfillment to customers around the world.

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 websites. We conduct our manufacturing, distribution and all administrative functions from a single facility in Atlanta, Georgia. All business activity of the Company is done through our wholly-owned subsidiary, OneUp Innovations, Inc. (“OneUp”). OneUp was organized in 2000.

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 websites, www.liberator.com and www.theliberator.co.uk, and the Liberator exhibition and concept store within our factory.

We conduct our 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 through a UK-based sales staff and third-party fulfillment service, and through a distributor in Australia.

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, 2013, Tenga products represented approximately twenty-one percent of our consolidated net sales.

In addition, the Company sells a line of contemporary casual 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.JaxxLiving.com for direct to consumer sales. For the year ended June 30, 2013, this product line represented approximately thirteen 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

The Company 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”).

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 (which were returned to our treasury and retired) 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.

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 two entries in organic search being Amazon.com and Walgreens.com.

Major consumer brands are rapidly entering the Sexual Wellness market, with either new products or repackaged existing products. Such brands include:

K-Y ^® : the personal lubricant first introduced in 1917, now offers 10 products including products marketed as climax enhancers, for massage and foreplay, lubricants with sensation and vaginal moisturizers. The K-Y brand is owned by Johnson & Johnson, a Fortune 500 company.

Trojan Condoms ® , the leading condom in North America, now offers a line of nine vibrators and vibrating products. A recent quote from the Trojan Condom website - “vibrators are increasingly becoming as common in Americans’ bedrooms as coffee makers are in their kitchens.” The Trojan Condoms brand is owned by Church & Dwight Co. Inc, a Fortune 1000 company.

Durex Condoms ® (a division of $15 billion UK-based Reckitt Benckiser) now offers a selection of vibrating products in addition to condoms.

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.

Business Strategy

As we believe Liberator is 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:

Manufacturing . To improve our business results, we constantly look for ways to manage the impact of rising raw material costs by improving the productivity of our manufacturing processes. We recently implemented modest price increases for certain products, but are unable to predict if we will be able to successfully pass on recent raw material cost increases to our wholesale and retail customers.

Wholesale Operations. Our goal is to increase consumer demand through advertising and public relations while our wholesale operations expand our offering to distributors, retailers and e-tailers across every channel of adult, mass market, drug and specialty accounts. For wholesalers thinking about adding sexual wellness products to their retail or online store, Liberator is typically one of the first “safer” products presented, as it can be promoted as an assistive aid to sexual positioning. As the mainstream demand for sexual wellness products grows, our sales staff is training and educating new resellers on how to get started in this category. For retail display, we offer mainstream packaging in a variety of sizes and price points to meet their customers particular demographic. For e-tailers, we maintain brand continuity by providing rich product content, photography and instructional videos for use on their websites. We also provide fulfillment services and can drop-ship orders directly to their customer, typically the same day the order is received.

Product Development. In fiscal 2011, we strategically expanded our Liberator offering by introducing several product line extensions, including Liberator Décor Series (shapes that coordinate with bedding), and Liberator Sex Toy Mounts. We also introduced the Liberator “Jaz series,” an offering of smaller-sized shapes designed for easier retail display at lower price points. We are designing products for both form and function, crafting them with quality materials that define a new class of products that we call “Erotic Luxury.” In fiscal 2013, we developed the Eco-Packaging (described below) which makes our products more convenient for the consumer and reduces our outbound shipping costs. Future products are expected to be an extension of the Liberator brand name and would include vibrators, pleasure objects and consumables, like massage oils and lubricants. Our ability to grow the Liberator brand and develop new growth opportunities depends in part on our ability to appropriately identify and execute our strategies and initiatives. Implementation of these plans may be delayed or may not be successful for a variety of reasons.

Liberator Concept Store . Our 2,500 square foot Liberator exhibition store is the retail extension of our Liberator.com website. Located at our Atlanta factory, it is a gallery-like setting for sensual and erotic discovery, offering a presentation of products that celebrate intimacy and romantic imagination. In our opinion, Liberator and luxury pleasure objects are meant to go together. Our concept store is a destination where customers can learn about, touch and purchase the Liberator products they have only been able to see online. In addition to Liberator branded shapes, furniture and accessories, the store features a range of better brands from around the globe including: designer sex toys, lounge-wear and lingerie collections, masks, cuffs and intimate accessories, erotic décor homewares, and bath and body essentials. Also included are limited addition hand-made items in glass, leather, latex and a collection of romantic gifts. We are dedicated to bringing our customers a compelling in-store experience through knowledgeable associates, interactive media displays and a high level of service, quality and innovation. The store also serves as a laboratory to listen and observe consumer reaction to new products and evaluate price points and merchandising techniques. Our concept store has demonstrated the strength of the Liberator brand as customers, both singles and couples, want to feel and experience our products and, although we are located in an industrial park, they are willing to travel to the store, return repeatedly and refer friends. We believe that a Liberator branded retail concept is ready to be expanded beyond our single location to large metropolitan areas, providing an upscale experience in-sync with the overall mainstreaming of sexual wellness.

Jaxx Products . The Jaxx product line was originally started in 2007 with the idea that we could create higher value from using our polyurethane foam trim as beanbag fill versus recycling this material as carpet pad regrind. Since then, the Jaxx product line has developed into a wide variety of styles, sizes and fabric choices including those designed for children. Our wholesale and mass market distribution channels are established mostly as drop-ship accounts and are seasonally busy during November and December. Further growth is expected to come from Jaxx as we expand sales into retail stores. We also expect to develop higher priced modern design seating and private labeled products, and offer contract production services around our core competency in manufacturing. The contemporary seating business is highly competitive. We believe we can compete effectively on the basis of product quality, design, customer service and price. We believe that our primary competitive advantages are consumer recognition of the Jaxx brand, as well as distribution through the multiple sale channels where consumers prefer to purchase. However, our plans to expand this product offering and sales channels may not be successful and implementation may hamper our operational and managerial resources.

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 sophisticated 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, The Real Housewives of Atlanta and numerous other 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, relationship 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

Liberator has been crafting Bedroom Adventure Gear in Atlanta headquarters for more than 11 years. It is our pride and heritage to manufacture in America, and to use other domestic sources of raw materials in our manufacturing process. We devote as much effort into providing jobs for our community as we do focusing on bettering the love lives of thousands. Our goal is to see that the jobs we create are more than just a paycheck, but rather are examples of good and lasting employment that support families and communities.

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.

Liberator Eco-Packaging

When we set about redesigning our packaging at the beginning of fiscal 2013, we were concerned about two things: how to make it more convenient at the point of purchase and how it would affect the world around us.

Before we could envision how our products could be more easily carried out of a store, we had to consider what path they must travel to get there. Our Liberator Shapes are large, high density foam pieces leaving us with a difficult product to reduce in size. In order to cut down the dimensions, we developed a proprietary vacuum compression process that removes approximately 90% of the air from the Liberator Shapes without compromising the integrity of the product. This allows our Liberator Shapes to leave our Atlanta manufacturing facility in a box that is approximately 60% smaller than our previous packaging.

As our boxes shrink, so does our carbon footprint. With less space necessary for shipping, we use less fuel for deliveries and fewer paper products for packaging, reducing our impact on the environment. For our customers, this means they get an easy-to-carry retail package, or a small, discreet plain brown box when ordering online.

Just like we have redefined the bedroom, we are redefining the way we impact the world around us.

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 2013, we implemented a comprehensive new enterprise level e-commerce platform in the United States and the United Kingdom. This new e-commerce platform provides our domestic and European customers with a better user experience and, as a result, has increased our Direct to consumer sales.

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 Shapes are 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, continue to be 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 49% and 40% of our revenues for our fiscal years ended June 30, 2013 and 2012, 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 JaxxLiving.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 13% of our revenues in our fiscal year ended June 30, 2013 and 11% in our fiscal year ended June 30, 2012.

Resale Products

Beginning in 2006, we began importing high-quality pleasure objects from around the world. These resale products (including Tenga products) provided 32% and 37% of our revenues for our fiscal years ended June 30, 2013 and 2012, respectively.

Sales of Tenga products accounted for approximately 21% of net sales in each of the years ended June 30, 2013 and 2012 and approximately 19% and 16% of the total gross profit in those same years, respectively. The average profit margin on Tenga products for the two years ended June 30, 2013 was 24%. As a result of a price increase from Tenga in May, 2013, the average profit margin on sales of Tenga will decline during the remainder of fiscal 2014.

Intellectual Property

The Liberator trademark is registered with the United States Patent and Trademark office and with the registries of many foreign countries. In addition we were issued approximately 20 other product name trademarks and trade names including: “Bedroom Adventure Gear”, “Explore More”, Ramp, Wedge, Stage, Esse, Zeppelin, Hipster, Wing, Equus, Jaxx and Bonbon. In August 2005, we were issued utility patent number US 6,925,669 “Support Cushion and System of Cushions.” We believe our trademarks and patent have significant value and we intend to continue to vigorously protect them against infringement.

Sales and Distribution

Our sales personnel are organized by geographic market and by customer type. In addition, in North America, we have sales personnel who routinely visit sexual wellness retailers to assist in product training, merchandising and stocking of selling areas. Through our in-house wholesale sales organization, we engage retailers directly and then either ship to them on a wholesale basis or provide fulfillment services by drop-shipping directly to their customers.

As is customary in the sexual wellness and casual furniture industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers or wholesale distributors. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of sexual wellness and casual furniture products, combined with our expertise in marketing and new product introduction.

Our ten largest customers (excluding our own e-commerce sites and retail store) accounted for approximately 24% of net sales for the year ended June 30, 2013 and 19% of net sales for the year ended June 30, 2012. No single customer accounted for more than 10% of our net sales during that period. However, the loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Marketing

Our marketing strategy is designed to increase brand awareness and drive highly targeted new and repeat customers to our websites, our e-merchants’ websites and our retail customers’ stores. We use a multi-channel approach which includes search engine marketing, print advertising, email campaigns, and affiliate programs to acquire and retain our customer base.

Online Marketing — We promote our websites via keywords and shopping feeds on internet search engines including but not limited to Google, Bing and Yahoo. Banner advertisements on display networks are also used to drive traffic to our websites. In addition, we operate affiliate programs aimed at creating brand awareness through websites that promote our products.

Email Campaigns — Our weekly email marketing campaigns distribute information on new products, promotional discounts and product information to registered e-commerce customers.

Print Advertising — For Liberator and Jaxx products, we place advertisements in a broad range of national magazines and consumers are directed to one of our primary e-commerce websites to learn more about our products and place their orders. We intend to expand our advertising efforts beyond magazines to reach broader segments of the population and increase our consumer base. These initiatives may include television and radio advertising.

Manufacturing Facilities

Our 140,000 square foot facility on eight acres is located in a suburb of metro Atlanta, Georgia and includes manufacturing and distribution, sales and marketing, product development, customer service and administrative staff.

Our manufacturing operation has CAD controlled fabric cutting and foam contouring equipment and two state-of-the-art conveyor unit production sewing systems. Our in-house manufacturing capabilities have enabled us to achieve greater efficiencies and cost savings, as well as strict control over the entire manufacturing cycle including raw material procurement, finished goods production and logistics optimization. In addition to providing us with greater production flexibility, our in-house manufacturing provides us with the opportunity to improve fulfillment response time, reduces the risk of out-of-stock situations, limits finished goods obsolescence and improves overall operating margins.

Technology and Operations

Our websites are supported by a technology infrastructure that is designed to provide a superior customer experience, including speed, ease of use and security. Our technology infrastructure uses highly scalable, fully fault tolerant enterprise-class technology and provides a high-availability system that we believe rivals those of larger companies. We maintain strategic partnerships with vendors to ensure that we can rapidly deploy new products and information technology solutions that we believe are key to our success.

We follow rigorous industry standards to protect our internal operations and the personal information we collect from our customers. We do not sell or disclose the personal information of our customers. We continue to maintain and upgrade our technology framework that can support high levels of security while meeting the compliance requirements of Payment Card Industry security standards. We are considered a “sender” under the CAN-SPAM Act and comply with the applicable aspects thereof.

International Sales

In fiscal 2013, the Company adopted a new international sales strategy. In the European Union, the Company has shifted from a licensee model to a direct sales model with the assistance of an outsourced sales organization based in the United Kingdom. This sales organization will be responsible for wholesale sales and marketing operations and customer service in the European Union. This change is expected to give the Company better control over the brand image in the United Kingdom and the European Union with a resulting increase in product sales.

In fiscal 2013, the Company also launched a new e-commerce site that services consumers in the European Union. Orders placed on the website, www.theliberator.co.uk , are shipped from a third-party fulfillment center located in England directly to consumers. Our new compression packaging significantly reduces the freight cost to send the products to England and to send the products from the fulfillment center to the end consumer, creating a better value for our customers.

In Australia and New Zealand, the Company has formed a relationship with the largest distributor of adult products in that region. Headquartered in Melbourne, Australia, this distributor is an adult products wholesale supplier servicing Australian, New Zealand and South East Asian retailers.

During fiscal 2013, we terminated all of our existing international distribution agreements, including the agreements with partners in China (which includes Hong Kong and Macau), Brazil, Singapore, France, Italy and the Netherlands. Our new Eco-Packaging eliminated the need for in-country manufacturing and the existing distributors were not achieving the contractual minimum purchase levels.

Sales Channels

We conduct our business through two primary sales channels: Direct (consisting of our Internet websites) and Wholesale (consisting of our stocking reseller, drop-ship, contract manufacturing and distributor accounts). The following is a summary of our revenues:

(Dollars in thousands)	Fiscal 2013		Fiscal 2012
Direct	$	5,214	$	5,020
Wholesale		7,758		8,394
Other		874		1,061
Total Net Sales	$	13,846	$	14,475

Net sales in the Other channel consists of shipping and handling fees derived from our Direct business.

Direct

The following is a summary of our Direct business net sales and the percentage relationship to total revenues:

(Dollars in thousands)	Fiscal 2013			Fiscal 2012
Direct sales channel net sales	$	5,214		$	5,020
Direct net sales as a percentage of total revenues		37.7	%		34.7	%

Wholesale

The following is a summary of our net sales to Wholesale customers and the percentage relationship to total revenues:

(Dollars in thousands)	Fiscal 2013			Fiscal 2012
Wholesale sales channel net sales	$	7,758		$	8,394
Wholesale net sales as a percentage of total revenues		56.0	%		58.0	%

As of June 30, 2013, the Company has approximately 800 active wholesale accounts, most of which are located in the United States.

Internet Websites

Since 2002, our Liberator website located at www.Liberator.com has allowed our customers to purchase our Liberator merchandise over the Internet. We design and operate our websites using an in-house technical and creative staff.

Our www.Liberator.com website is intended to be an entertainment and educational venue where consumers can watch product demonstration videos, videos on sexual wellness topics and humorous videos on the many facets of human sexuality.

Our www.JaxxLiving.com website offers contemporary seating to the young adult and student market.

Unless specifically set forth to the contrary, the information that appears on our websites is not part of this annual report.

Government Regulation

We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations that regulate the promotion and sale of merchandise and the operation of warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

Seasonality

Our business is seasonal and, as a result, revenues will vary from quarter to quarter. During the past three years, we have realized an average of approximately 29% of our annual revenues in our second quarter, which includes Christmas, and an average of approximately 27% of our revenues in the third quarter, which includes Valentine’s Day.

Competition

Competition among retailers of adult products and web based marketers is high. Although we compete with retail, catalog, and internet businesses and now mass and drug retailers that sell sexual wellness products including vibrators, pleasure objects, accessories and similar merchandise, we believe that this opens new channels of distribution for our products and that we are able to compete favorably as our Liberator products are unique, are couple-centric, and are assistive devices for couples with sexual limitations and issues.

We believe that our primary competitive advantage is consumer recognition of our brand. Since we sell through multiple sales channels, we provide consumers with the ability to shop for intimacy products in an environment or website that they are most comfortable in. In fact, many e-tailer websites refer to Liberator as a product category and not as a discrete product. We also believe that we differentiate ourselves from conventional sex toys based on our utility of design and overall customer satisfaction as it relates to enhanced intimacy.

Our range of retail product price points places us in the upper 50th percentile of the average adult retail pleasure object purchased. We believe our success depends, in large part, on our ability to create and market products that enhance intimacy and provide consumers with on-going value which will lead them to purchase other Liberator styles and designs.

For the Liberator e-commerce website, other competitive factors include the effectiveness of our electronic customer mailing lists, maintaining natural search listing, advertising response rates, website design and functionality. The broad range of designs, color choice, fabrics and accessories that we offer helps to differentiate us and allows us to compete favorably against many other adult or sexual wellness websites. Liberator.com also competes against numerous mainstream websites, many of which have a greater volume of web traffic, greater financial strength and marketing resources.

Geographic Information

During our last two years, substantially all of our revenue was generated within North America, and all of our long-lived assets are located within the United States.

Employees and Labor Relations

As of September 19, 2013, we had 114 employees (81 in production and warehouse operations, and 33 in sales, marketing and administrative operations). Additional staffing is typically required for peak holiday periods through Valentine’s Day. None of our employees are represented by a union. We have had no labor-related work stoppages, and we believe our relationships with our employees are good.

ITEM 1A. Risk Factors

Not applicable to a smaller reporting company.

ITEM 2. Properties

We are headquartered in Atlanta, Georgia. Our mailing address is 2745 Bankers Industrial Drive, Atlanta, GA 30360. We lease a 140,000 square feet building on eight acres which we believe allows for expansion when needed. Our facility houses manufacturing, distribution and fulfillment, call center, in-house advertising and creative departments, product design group, administrative offices and a 2,500 square foot factory concept store. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The lease for this facility expires on December 31, 2015.

We believe our facilities are currently adequate for their intended purposes and are adequately maintained.

ITEM 3. Legal Proceedings

As of the date of this Annual Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

ITEM 4. Mine Safety Disclosures

None.

PART II.

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is quoted on the OTC Markets Group on the OTCQB tier (“OTCQB”) under the symbol “LUVU.” The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock as reported on the OTCQB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions. The last sale price of our common stock as reporting on the OTCQB on September 23, 2013 was $0.05 per share.

Fiscal Year
2013	High Bid		Low Bid
Fourth Quarter: 4/1/13 to 6/30/13	$	0.11	$	0.05
Third Quarter: 1/1/13 to 3/31/13		0.12		0.06
Second Quarter: 10/1/12 to 12/31/12		0.15		0.02
First Quarter: 7/1/12 to 9/30/12	$	0.13	$	0.06

Fiscal Year
2012	High Bid		Low Bid
Fourth Quarter: 4/1/12 to 6/30/12	$	0.44	$	0.11
Third Quarter: 1/1/12 to 3/31/12		0.23		0.14
Second Quarter: 10/1/11 to 12/31/11		0.17		0.10
First Quarter: 7/1/11 to 9/30/11	$	0.20	$	0.12

Holders

As of September 20, 2013, we had approximately 85 stockholders of record of our common stock and approximately 550 beneficial holders.

Transfer Agent

The transfer agent and registrar for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, OR 97214. Their telephone number is 503-227-2950.

Dividend Policy

We have not paid dividends. We plan to retain all earnings generated by our operations, if any, for use in our business. We do not anticipate paying any cash dividends to our shareholders in the foreseeable future. The payment of future dividends on the common stock and the rate of such dividends, if any, and when not restricted, will be determined by our board of directors in light of our earnings, financial condition, capital requirements, and other factors. Additionally, under the terms of our credit facility, we are precluded from paying a dividend and we may in the future issue preferred stock and/or other securities that provides for preferences over holders of common stock in the payment of dividends.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information regarding securities authorized for issuance under our equity compensation plans as of June 30, 2013.

	Number of securities to be issued upon exercise of outstanding options		Weighted average exercise price of outstanding options		Number of securities remaining, available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		3,383,500	$	.107		1,616,500	(2)
Equity compensation plans not approved by security holders (3)		200,000		.06		-0-

Total		3,583,500	$	.104		1,616,500

(1) Includes option awards outstanding under our 2009 Stock Option Plan.

(2) Includes shares remaining available for future issuance under our 2009 Stock Option Plan.

(3) Non-qualified stock options issued to two unsecured lenders.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6. Selected Financial Data.

Not applicable to smaller reporting company.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Company during the fiscal years ended June 30, 2013 and 2012 and should be read in conjunction with our financial statements and accompanying notes thereto included elsewhere herein. Certain information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results may differ materially from the results discussed in this section because of various factors, including those set forth elsewhere herein. See “Forward-Looking Statements” included in this report.

Results of Operations

Overview

The following table sets forth, for the periods indicated, information derived from our Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows the table should be read in conjunction with our Consolidated Financial Statements.

	Year Ended June 30, 2013			Year Ended June 30, 2012
Net sales		100	%		100	%
Cost of goods sold		71	%		71.2	%
Gross profit		29	%		28.8	%
Selling, General and Administrative Expenses		26.3	%		28.9	%
Income (loss) from continuing operations		1.4	%		(2.4	)%

The following table represents the percentage of net sales by product type:

	Year Ended June 30, 2013			Year Ended June 30, 2012
Net sales:
Liberator		49	%		40	%
Jaxx		13	%		11	%
Resale		32	%		37	%
Other		6	%		12	%
Total Net Sales		100	%		100	%

Liberator - Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market. Liberator products are sold to distributors and retailers as well as directly through our e-commerce site and single retail store. Net sales of Liberator products increased 13% during the year ended June 30, 2013, from the comparable year earlier period. This increase is primarily related to the launching of our new compression packaging, increased international sales and improved sales conversion from our new Liberator.com e-commerce platform, which was launched on February 1, 2013.

Jaxx - Jaxx products are casual and contemporary furniture products manufactured by us and sold under the Jaxx brand. Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site. Net sales of Jaxx products decreased 10% during the year ended June 30, 2013, compared to the prior year. This decrease is primarily due to a shift in the focus of our sales staff to selling Liberator branded products and resale products.

Resale - Resale products are non-Liberator branded products (including Tenga) that we purchase from others at wholesale or distributor prices and resell through our sales channels to retailers, distributors, or through one of our e-commerce sites and single retail store. Sales of Tenga products accounted for approximately 21% of net sales in each of the years ended June 30, 2013 and 2012 and approximately 19% and 16% of the total gross profit in those same years, respectively. As a result of a price increase from Tenga in May, 2013, the average profit margin on sales of Tenga will decline during the remainder of fiscal 2014.

Other - Other products include sales from contract manufacturing and fulfillment services. Net sales during the year ended June 30, 2013 decreased compared to the prior year. This decline is due to a decrease in the number of contract manufacturing projects and fulfillment contracts during fiscal year 2013 from the prior fiscal year.

Fiscal Year ended June 30, 2013 Compared to the Fiscal Year Ended June 30, 2012

Net sales. Net sales for the twelve months ended June 30, 2013 decreased from $14,474,761 for the comparable prior year period by approximately $629,000, or 4%, to $13,845,509. The decrease in total net sales was substantially due to lower sales of resale products through the Wholesale channel and lower shipping and handling fees derived from our Direct business, and was partially offset by higher sales of manufactured Liberator products through the Direct channel. The Direct sales channel, which consists of consumer sales through our two websites and, to a lesser extent, our single retail store, increased from approximately $5.0 million in the twelve months ended June 30, 2012 to approximately $5.2 million in the twelve months ended June 30, 2013, an increase of approximately 4%. During fiscal 2012, we began work on a comprehensive new enterprise level e-commerce platform which we launched in February, 2013. We expect this new e-commerce platform to provide our on-line customers with a better user experience and, as a result, increase our Direct to consumer sales. Despite our ongoing focus on our Wholesale business, sales to wholesale customers decreased approximately 8% from the prior year to approximately $7.8 million. The Wholesale sales channel includes Liberator products sold to distributors and retailers, products sold under exclusive (like the Tenga product line) and non-exclusive distribution agreements, and retailers, and private label items sold to other resellers. The Wholesale sales channel also includes contract manufacturing services which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. The Other sales channel consists principally of shipping and handling fees derived from our Direct sales channel. The Other sales channel decreased 18% to $.9 million in the twelve months ended June 30, 2013, primarily as a result of lower shipping and handling charges on sales through the Direct channel. We expect Other revenue to continue to decline in future periods as “free” or reduced-cost shipping and handling becomes a growing trend in the e-commerce industry.

Gross profit. Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead and depreciation. Total gross profit as a percentage of sales for the year ended June 30, 2013 was 29%, the same as in the prior year. Although gross profit as a percentage of sales through all sales channels remained unchanged during the year ended June 30, 2013 from the prior fiscal year, the total amount of gross profit decreased 4% due to the 4% decrease in net sales.

Operating expenses. Excluding depreciation expense, total operating expenses for the year ended June 30, 2013 were 26% of net sales, or $3,646,597, compared to 29% of net sales, or $4,183,349, for the year ended June 30, 2012. Other selling and marketing expense (which excludes advertising and promotion expense) increased by 6% to $1,437,471, due to higher personnel related costs including salaries, commission expense and travel expense and e-commerce related costs. General and administrative expense decreased by 27%, or $628,503, due primarily to lower investor relations expense of $420,241 and lower legal expense of $76,175. We believe our personnel related costs will decrease during fiscal 2014, as Michael Kane, the former Executive Vice President for the Company, James Blanchard, the former Senior Vice President for the Company, and Sean Hougham, the former Vice President of Manufacturing for the Company, all terminated their employment with the Company during fiscal 2013 and their positions currently remain unfilled in order to reduce operating expenses.

Other income (expense). Other income (expense) increased from ($403,188) in fiscal 2012 to ($476,530) in fiscal 2013, primarily as a result of higher interest expense and a loss on disposal of assets of $87,853. The loss on disposal of assets was primarily due to the write-down of the former e-commerce platform.

Income taxes. No expense or benefit from income taxes was recorded in the twelve months ended June 30, 2013 and 2012. 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 carry-forwards.

We had a net loss from continuing operations of ($288,485), or ($0.00) per diluted share, for the twelve months ended June 30, 2013 compared with a net loss from continuing operations of ($756,376), or ($0.01) per diluted share, for the twelve months ended June 30, 2012.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. As described in previous paragraphs, operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, costs associated with new product introductions, and increases in raw material costs. In addition, future operating results may fluctuate as a result of factors beyond our control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which we operate and sell. A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales. Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to meaningfully adjust spending in certain areas, or the inability to adjust spending quickly enough, as in personnel and administrative costs, to compensate for a sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

Liquidity and Capital Resources

	Year ended
The following table summarizes our cash flows:	June 30,
	2013			2012
Cash flow data from continuing operations:
Cash used in operating activities	$	(103,765	)	$	(412,442	)
Cash provided by (used in) investing activities		(262,261	)		429,812
Cash provided by (used in) financing activities	$	269,466		$	(51,314	)

As of June 30, 2013, our cash and cash equivalents totaled $397,860, compared to $494,420 in cash and cash equivalents as of June 30, 2012.

Operating Activities

Net cash used in operating activities primarily consists of the net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, loss on disposal of fixed assets, and the effect of changes in operating assets and liabilities. Net cash used in operating activities from continuing operations was $103,765 and $412,442 in the years ended June 30, 2013 and 2012, respectively. The primary reasons for the decrease in cash used in operating activities is the reduced net loss and a reduction in accounts receivable $214,632, which was offset in part by an increase in inventory $267,934.

Investing Activities

Cash used in investing activities from continuing operations in the year ended June 30, 2013 of $262,261 was primarily attributable to the costs associated with the new e-commerce platform. The new e-commerce platform became operational on February 1, 2013.

Cash provided by investing activities from continuing operations in the year ended June 30, 2012 of $429,812 was primarily attributable to the sale of WMI, and expenditures of $99,616 for the purchase of production equipment, leasehold improvements and computer equipment.

Financing Activities

Cash provided by financing activities in the year ended June 30, 2013 of $269,466 was primarily attributable to the proceeds from the credit card advance, borrowings from unsecured notes payable, partially offset by the repayment of the line of credit and other obligations, including the unsecured notes payable and principal payments on capital leases.

Cash used in financing activities in the year ended June 30, 2012 of $51,314 was primarily attributable to borrowings from unsecured notes payable, the net proceeds from the sale of common stock and net borrowings under our line of credit, offset by the repayment of notes and leases payable and the credit card advance that was borrowed in the prior year.

Sufficiency of Liquidity

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We incurred a net loss from continuing operations of $288,485 for the year ended June 30, 2013 and a net loss from continuing operations of $756,376 for the year ended June 30, 2012. As of June 30, 2013, we have an accumulated deficit of $8,047,685 and a working capital deficit of $1,233,352. This raises substantial doubt about our own ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to meet our financing requirements, and the success of our future operations. Management believes that actions presently being taken to revise our operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase sales and gross profits through a greater focus on higher margin Direct to consumer sales and branded Liberator products, and through improved production controls and reporting. To that end, on February 1, 2013 we launched a new enterprise level e-commerce platform. We believe this new e-commerce platform provides our customers with a better user experience and, as a result, should increase our Direct to consumer sales. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation during the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic Direct sales. We estimate that the operational and strategic growth plans we have identified will require approximately $600,000 of funding, of which we estimate that $300,000 will be provided by debt financing and the balance will be provided by a combination of cash flow from operations as well as cash on hand and cash raised through additional equity and debt financings.

Capital Resources

We expect total capital expenditures for fiscal 2014 to be under $150,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit. This includes capital expenditures in support of our normal operations.

If our business plans and cost estimates are inaccurate and our operations require additional cash or if we deviate from our current plans, we could be required to seek additional debt financing for particular projects or for ongoing operational needs. This indebtedness could harm our business if we are unable to obtain additional financing on reasonable terms. In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business. If we do not comply with such covenants, our lenders could accelerate repayment of our debt or restrict our access to further borrowings, which in turn could restrict our operating flexibility and endanger our ability to continue operations.

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital. The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of June 30, 2012 and June 30, 2013 the lenders Index Rate was 4.75 %.) In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month. The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation. In addition, the loan has a corporate guarantee from the parent, Liberator, Inc. At June 30, 2013, we had utilized $366,196 from our line of credit, compared to a utilization of $506,753 at June 30, 2012. On June 30, 2013, we were current and in compliance with all terms and conditions of this line of credit.

On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,000,000 and include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% and the Monthly Service Fee was changed to .5% per month.

On October 4, 2012, the Company entered into an agreement with Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after the funding date. On May 14, 2013, the loan was renewed for $400,000 and the remaining balance of $126,518 on the prior loan was repaid from the net proceeds of the renewal. At the time of the renewal, the Company had a balance of $14,400 in unamortized discount which was charged to interest expense during the fourth quarter. Terms of the renewal loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after May 14, 2013. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman. As of June 30, 2013, the principle amount is $349,952, net of a discount of $38,400.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 30, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain equipment and our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Future minimum lease payments under our operating leases as of June 30, 2013 are detailed in section entitled “Contractual Obligations.”

Inflation

During fiscal 2013, we experienced increases in various raw material costs and increases in costs impacted by increases in fuel prices, such as freight and transportation costs. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2014, although there is no assurance this will occur. Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease.

Effect of Recently Issued Accounting Standards and Estimates

We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our consolidated financial position, results of operations, or cash flows.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below.

Revenue Recognition

To recognize revenue, four basic criteria must be met: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

Net sales are comprised of the total product sales billed during the period plus amounts paid for shipping and handling, less the actual returns, customer allowances, and customer discounts.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and an additional allowance may be required.

Inventories

We value inventory at the lower of cost or market on an item-by-item basis and establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on-hand, the estimated time required to sell such inventory, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations. Finished goods and goods in process include a provision for manufacturing overhead, including depreciation.

Accounting for Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2013, we carried a valuation allowance of $2.4 million against our net deferred tax assets.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

In fiscal year 2013, we did not generate positive cash flows from operations. If our long-term future plans do not yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.

Non-GAAP Financial Measures

Reconciliation of net loss from continuing operations to Adjusted EBITDA income from continuing operations for the years ended June 30, 2013 and 2012:

	Year ended June 30,
	2013			2012
Net loss from continuing operations	$	(288,485	)	$	(756,376	)

Less interest income		(648	)		(652	)

Plus interest expense		389,325			351,599

Plus income tax expense		—			—

Plus depreciation and amortization expense		176,946			342,855

Plus common stock issued for services		—			65,000

Plus stock-based compensation		34,380			71,946

Plus loss on disposal of assets		87,853			—

Plus amortization of debt issuance costs		—			52,241

Adjusted EBITDA income from continuing operations	$	399,371		$	126,613

As used herein, Adjusted EBITDA represents income from continuing operations before interest income, interest expense, income taxes, depreciation, amortization, amortization of debt issuance costs, loss on disposal of assets, stock-based compensation expense and common stock issued for services. We have excluded the non-operating item, amortization of debt issuance costs, because it represents a non-cash charge that is not related to the Company’s operations. We have excluded the non-cash expenses, stock-based compensation and common stock issued for services, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net loss from continuing operations of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss from continuing operations as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for amortization of debt issuance costs, stock-based compensation expense and common stock issued for services.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable for a smaller reporting company.

ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of June 30, 2013 and 2012	F-2

Consolidated Statements of Operations for the years ended June 30, 2013 and 2012	F-3

Consolidated Statements of Changes in Stockholders’ Deficit from July 1, 2011 to June 30, 2013	F-4

Consolidated Statements of Cash Flows for the years ended June 30, 2013 and 2012	F-5

Notes to Consolidated Financial Statements	F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:

Liberator, Inc.

We have audited the accompanying consolidated balance sheets of Liberator, Inc. and Subsidiaries (the “Company”) as of June 30, 2013 and 2012 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Liberator, Inc. and Subsidiaries as of June 30, 2013 and 2012 and the results of its operations and its cash flows for the years ended June 30, 2013 and 2012 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has a net loss of $288,485, a working capital deficiency of $1,233,352, an accumulated deficit of $8,047,685 and a negative cash flow from continuing operations of $103,765. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Liggett, Vogt & Webb, P.A.

LIGGETT, VOGT & WEBB, P.A.

Certified Public Accountants

Boynton Beach, Florida

September 30, 2013

F-1

Liberator, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30, 2013			June 30, 2012
Assets:
Current assets:
Cash and cash equivalents	$	397,860		$	494,420
Accounts receivable, net of allowance for doubtful accounts of $4,986 in 2013 and $9,503 in 2012		522,900			755,303
Inventories		1,409,703			1,141,769
Prepaid expenses		76,932			67,042
Total current assets		2,407,395			2,458,534

Equipment and leasehold improvements, net		756,990			735,677
Other assets		4,479			9,082
Total assets	$	3,168,864		$	3,203,293
Liabilities and stockholders’ deficit:
Current liabilities:
Accounts payable	$	1,607,765		$	1,643,405
Accrued compensation		214,110			255,105
Unsecured lines of credit		—			38,980
Accrued expenses and interest		232,714			173,063
Line of credit		366,196			506,753
Short-term unsecured notes payable		664,625			843,040
Current portion of lease payable		21,422			31,538
Current portion of deferred rent payable		67,963			25,669
Merchant cash advance (net $38,400 in discount)		349,952			—
Notes payable-related party		116,000			116,000
Total current liabilities		3,640,747			3,633,553
Long-term liabilities:
Leases payable		40,927			42,028
Unsecured note payable		300,000			—
Unsecured lines of credit		12,535			—
Convertible notes payable – shareholder		625,000			625,000
Deferred rent payable		125,553			224,505
Total long-term liabilities		1,104,015			891,533
Total Liabilities		4,744,762			4,525,086
Commitments and contingencies (See Note N)		—			—
Stockholders’ deficit:
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding		—			—
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000,000 as of June 30, 2013 and 2012		430			430
Common stock, $0.01 par value, 175,000,000 shares authorized, and 70,702,596 shares issued and outstanding in 2013 and 2012, respectively		707,026			707,026
Additional paid-in capital		5,764,331			5,729,951
Accumulated deficit		(8,047,685	)		(7,759,200	)
Total stockholders’ deficit		(1,575,898	)		(1,321,793	)
Total liabilities and stockholders’ deficit	$	3,168,864		$	3,203,293

The accompanying notes are an integral part of these consolidated financial statements.

F-2

Liberator, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended June 30, 2013 and 2012

	2013			2012

Net Sales	$	13,845,509		$	14,474,761
Cost of goods sold		9,833,921			10,301,745
Gross profit		4,011,588			4,173,016
Operating expenses:
Advertising and promotion		468,639			452,133
Other selling and marketing		1,437,471			1,362,226
General and administrative		1,740,487			2,368,990
Depreciation		176,946			342,855
Total operating expenses		3,823,543			4,526,204
Operating income (loss) from continuing operations		188,045			(353,188	)

Other income (expense):
Debt issuance costs		—			(52,241	)
Loss on disposal of assets		(87,853	)		—
Interest income		648			652
Interest expense and financing costs		(389,325	)		(351,599	)
Total other income (expense)		(476,530	)		(403,188	)
Loss from continuing operations before income taxes		(288,485	)		(756,376	)
Provision for income taxes		—			—
Loss from continuing operations		(288,485	)		(756,376	)
Loss from discontinued operations		—			(26,041	)
Net loss	$	(288,485	)	$	(782,417	)

Net loss per share:
Basic and diluted loss per common share from continuing operations	$	(0.00	)	$	(0.01	)
Basic and diluted loss per common share from discontinued operations	$	(0.00	)	$	(0.00	)
Basic and diluted loss per common share	$	(0.00	)	$	(0.01	)
Weighted-average common shares outstanding:
Basic and diluted weighted average common and common equivalents shares outstanding		70,702,596			82,784,225

The accompanying notes are an integral part of these consolidated financial statements.

F-3

Liberator, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Deficit )

From July 1, 2011 to June 30, 2013


	Series A Preferred										Additional						Total
	Stock				Common Stock						Paid-in			Accumulated			Stockholders’
	Shares		Amount		Shares			Amount			Capital			Deficit			Equity (Deficit)

Balance, July 1, 2011		4,300,000	$	430		91,947,047		$	919,470		$	7,423,401		$	(6,976,783	)	$	1,366,518

Common stock cancellation in connection with sale of Web Merchants, Inc.		—		—		(25,394,400	)		(253,944	)		(2,037,646	)		—			(2,291,590	)
Stock cancellation		—		—		(51	)		—			—			—			—
Shares issued for services		—		—		650,000			6,500			58,500			—			65,000
Stock-based compensation expense		—		—		—			—			71,946			—			71,946
Issuance of common stock through private placement		—		—		3,500,000			35,000			213,750			—			248,750
Net loss		—		—		—			—			—			(782,417	)		(782,417	)
Ending balance, June 30, 2012		4,300,000		430		70,702,596			707,026			5,729,951			(7,759,200	)		(1,321,793	)

Stock-based compensation expense		—		—		—			—			34,380			—			34,380
Net loss		—		—		—			—			—			(288,485	)		(288,485	)
Ending balance, June 30, 2013		4,300,000	$	430		70,702,596		$	707,026		$	5,764,331		$	(8,047,685	)	$	(1,575,898	)

The accompanying notes are an integral part of these consolidated financial statements.

F-4

Liberator, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2013 and 2012

	2013			2012
OPERATING ACTIVITIES:
Net loss	$	(288,485	)	$	(782,417	)
Less: loss from discontinued operations		—			(26,041	)
Loss from continuing operations		(288,485	)		(756,376	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		176,946			342,855
Stock-based compensation expense		34,380			71,946
Loss on disposal of fixed assets		87,853			—
Common stock issued for services		—			65,000
Provision for bad debt		17,771			14,489
Amortization of debt issuance costs		—			52,241
Deferred rent payable		(56,658	)		(46,018	)
Change in operating assets and liabilities:
Accounts receivable		214,632			(59,012	)
Inventory		(267,934	)		(16,346	)
Prepaid expenses		(5,287	)		(15,087	)
Accounts payable		(35,639	)		(100,967	)
Accrued expenses and interest		59,651			7,909
Accrued payroll and related		(40,995	)		26,924
Cash used in operating activities- continuing operations		(103,765	)		(412,442	)
Cash used in operating activities- discontinued operations		—			(56,099	)
Net cash used in operating activities		(103,765	)		(468,541	)
INVESTING ACTIVITIES:
Cash proceeds from sale of Web Merchants, Inc.		—			529,428
Investment in equipment and leasehold improvements		(262,261	)		(99,616	)
Cash (used in) provided by investing activities- continuing operations		(262,261	)		429,812
Cash provided by investing activities- discontinued operations		—			238,345
Net cash (used in) provided by investing activities		(262,261	)		668,157
FINANCING ACTIVITIES:
Net proceeds from sale of common stock		—			248,750
Net cash (used in) provided by line of credit		(140,557	)		45,995
Repayment of related party loans		—			(29,948	)
Repayment of unsecured line of credit		(26,446	)		(32,413	)
Proceeds from credit card advance		400,000			—
Repayment of credit card advance		(50,048	)		(389,926	)
Proceeds from short-term debt		630,000			480,000
Repayment of short-term debt		(508,415	)		(336,921	)
Principle payments on capital leases		(35,068	)		(36,851	)
Cash provided by (used in) financing activities- continuing operations		269,466			(51,314	)
Cash used in financing activities- discontinued operations		—			—
Net cash provided by (used in) financing activities		269,466			(51,314	)
Net (decrease) increase in cash and cash equivalents		(96,560	)		148,302
Cash and cash equivalents at beginning of period		494,420			346,118
Cash and cash equivalents at end of period	$	397,860		$	494,420
Supplemental Disclosure of Cash Flow Information:
Non cash items:
Stock cancellation in the disposal of Web Merchants, Inc.	$	—			(2,539,440	)
Additions to capital leases	$	23,851		$	46,678
Cash paid during the year for:
Interest	$	366,805		$	333,109
Income taxes	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-5

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE A – ORGANIZATION AND NATURE OF BUSINESS

Liberator, Inc. (the “Company” or Liberator) was incorporated in the State of Florida on February 25, 1999. References to the “Company” in these notes include the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. (“OneUp”), and Foam Labs, Inc. (“Foam Labs”.) The results of operations of Web Merchants, Inc. (“WMI”) are classified as discontinued operations in the Company’s accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows.

The Company is a designer and manufacturer of various specialty furnishings for the sexual wellness market. The Company has also become an online retailer of products for the sexual wellness market. The Company’s sales and manufacturing operation are located in the same facility in Atlanta, Georgia. Sales are generated through internet and print advertisements. We have a diversified customer base with no one customer accounting for 10% or more of consolidated net sales in the current and prior fiscal year and no particular concentration of credit risk in one economic sector. Foreign operations and foreign net sales are not material. Our business is seasonal and as a result we experience higher sales in the second and third quarters.

NOTE B – GOING CONCERN

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company incurred a net loss from continuing operations of $288,485 and $756,376 for the years ended June 30, 2013 and 2012, respectively and as of June 30, 2013 the Company has an accumulated deficit of $8,047,685 and a working capital deficit of $1,233,352. This raised substantial doubt about to its ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. However, management cannot provide any assurances that the Company will be successful in accomplishing these plans. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp and Foam Labs. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

F-6

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: asset impairment; income taxes; tax valuation reserves; allowances for doubtful accounts; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.

Revenue Recognition

We recognize revenues as goods are shipped to customers and title is transferred. The criteria for recognition of revenue are when persuasive evidence that an arrangement exists and both title and risk of loss have passed to the customer, the price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are estimated and recorded as a reduction to sales in the period in which sales are recorded.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company includes shipping and handling costs in cost of product sales.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management's best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. The Company reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

The following is a summary of Accounts Receivable as of June 30, 2013 and June 30, 2012.

	June 30, 2013			June 30, 2012
Accounts receivable	$	555,628		$	803,342
Allowance for doubtful accounts		(4,986	)		(9,503	)
Allowance for discounts and returns		(27,742	)		(38,536	)
Total accounts receivable, net	$	522,900		$	755,303

Inventories and Inventory Reserves

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor, depreciation and overhead. The company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or market may be adjusted in response to changing conditions.

F-7

Concentration of Credit Risk

The Company maintains its cash accounts with banks located in Georgia. The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank. The Company had cash balances on deposit at June 30, 2013 that exceeded the balance insured by the FDIC by $147,860. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During 2013, we purchased 30% and 18% of total inventory purchases from two vendors.

During 2012, we purchased 17% of our total inventory purchases from one vendor.

As of June 30, 2013 one of the Company’s customers represents 25% of the total accounts receivables.

Fair Value of Financial Instruments

At June 30, 2013, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other long-term debt.

The fair values of these financial instruments approximated their carrying values based on either their short maturity or current terms for similar instruments.

The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

· Level 1 : Observable inputs such as quoted prices for identical assets or liabilities in active markets;

· Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

· Level 3 : Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

The valuation techniques that may be used to measure fair value are as follows:

A. Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

Advertising Costs

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $16,709 at June 30, 2013 and $17,340 at June 30, 2012. Advertising expense for the years ended June 30, 2013 and 2012 was $468,639 and $452,133, respectively.

F-8

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development (included in general and administrative expense) totaled $104,806 for the year ended June 30, 2013 and $104,895 for the year ended June 30, 2012.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated service lives for financial reporting purposes of 2-10 years.

Expenditures for major renewals and betterments which extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently.

Operating Leases

The Company leases its facility under a ten year operating lease which was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at June 30, 2013 is $193,516. The rent expense under this lease for each of the years ended June 30, 2013 and 2012 was $323,722.

Segment Information

We have identified three reportable sales channels: Direct, Wholesale and Other . Direct includes product sales through our two e-commerce sites and our single retail store. Wholesale includes Liberator branded products sold to distributors and retailers, non- Liberator products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Other consists principally of shipping and handling fees and costs derived from our Direct business and fulfillment service fees.

The following is a summary of sales results for the Direct, Wholesale , and Other channels.

	Year Ended June 30, 2013		Year Ended June 30, 2012		% Change
Net Sales by Channel:
Direct	$	5,213,506	$	5,020,393		3.8	%
Wholesale	$	7,758,126	$	8,394,022		(7.6)	%
Other	$	873,877	$	1,060,346		(17.6)	%
Total Net Sales	$	13,845,509	$	14,474,761		(4.3)	%

	Year Ended		Margin			Year Ended		Margin			%
	June 30, 2013		%			June 30, 2012		%			Change
Gross Profit by Channel:
Direct	$	2,595,875		50	%	$	2,462,282		49	%		5.4	%
Wholesale	$	1,548,197		20	%	$	1,676,748		20	%		(7.7)	%
Other	$	(132,484)		(15)	%	$	33,986		3	%		—	%
Total Gross Profit	$	4,011,588		29	%	$	4,173,016		29	%		(3.9)	%

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC, did not, or are not believed by management, to have a material impact on the Company’s present or future financial statements.

F-9

Net Loss Per Share

In accordance with FASB Accounting Standards Codification No. 260 (“FASB ASC 260”), “Earnings Per Share”, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares outstanding as of June 30, 2013 and 2012, which consist of options, warrants, and convertible notes, have been excluded from the diluted net loss per common share calculations because they are anti-dilutive.

The total potential anti-dilutive securities as of June 30, 2013 and 2012 are as follows:

	2013		2012
Warrants		2,462,393		2,712,393
Stock options		3,583,500		3,506,956
Convertible debt		4,375,000		2,500,000
Total		10,420,893		8,719,349

Income Taxes

Stock Based Compensation

We account for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and restricted stock award at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period.

Stock Issued for Services to other than Employees

Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by FASB ASC 505, which is measured as of the date required by FASB ASC 505, “Equity – Based Payments to Non-Employees”. In accordance with FASB ASC 505, the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying common stock on the “valuation date”, which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.

F-10

NOTE D - DISCONTINUED OPERATIONS

Major Categories of Assets and Liabilities Sold

Effective October 1, 2011, the Company consummated the sale of its interest in its subsidiary WMI to Web Merchants Atlanta, LLC, an entity controlled by the President and former majority shareholder of WMI, Fyodor Petrenko. The sale took place pursuant to the terms of a definitive Stock Purchase Agreement (the “WMI Sale Agreement”).

Effective October 1, 2011, approximately 25.4 million shares of Liberator common stock owned by Mr. Petrenko were surrendered by Mr. Petrenko and placed into escrow until certain outstanding loans of the Company were either satisfied or WMI and Mr. Petrenko were provided with a written release of any liability as a guarantor. On February 7, 2012, the Company obtained the written releases described in the escrow agreement and the 25,394,400 shares were disbursed from escrow to the Company and the shares were retired.

Also effective at the closing of the transaction, (a) Fyodor Petrenko resigned as a director and Executive Vice President of the Company, and Rufina Bulatova resigned as Vice President - Online Marketing of the Company (b) the Voting Agreement between the Company, Louis S. Friedman and Fyodor Petrenko, dated January 27, 2011, was cancelled, and (c) the Employment Agreement between the Company and Fyodor Petrenko, dated January 27, 2011, was terminated and cancelled.

At October 1, 2011, the major categories of assets and liabilities of WMI were comprised of the following:


	October 1, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	170,572
Accounts receivable, net		77,828
Inventories, net		868,275
Prepaid expenses		54,663
Total current assets		1,171,338
Equipment, net		49,446
Intangible assets, net		836,260
Goodwill		1,633,592

Total assets	$	3,690,636

LIABILITIES
Current liabilities:
Accounts payable	$	695,224
Accrued compensation		24,381
Accrued expenses and interest		38,797
Total liabilities	$	758,402

The following table sets forth the components of discontinued operations:

F-11

	For the Period July 1, 2011 to October 1, 2011
Net sales	$	2,626,608
Cost of sales		1,739,277
Gross profit		887,331
Advertising expenses		315,551
Other sales and marketing expenses		376,693
General and administrative expenses		216,117
Depreciation and amortization expenses		5,011
Total operating expenses		913,372
Loss from Operations of Discontinued Operations	$	(26,041	)

NOTE E – IMPAIRMENT OF LONG-LIVED ASSETS

We follow Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, Property, Plant, and Equipment, regarding impairment of our other long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of long-lived asset.

Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated. There was no impairment as of June 30, 2013 or 2012.

NOTE F – INVENTORIES

All inventories are stated at the lower of cost or market using the first-in, first-out method of valuation.

The Company’s inventories consist of the following components at June 30, 2013 and 2012:

	2013		2012
Raw materials	$	528,771	$	442,254
Work in Process		138,240		110,270
Finished Goods		742,692		589,245
	$	1,409,703	$	1,141,769

NOTE G – PROPERTY AND EQUIPMENT, NET

Property and equipment at June 30, 2013 and 2012 consisted of the following:

	2013			2012			Estimated Useful Life
Factory equipment	$	1,693,993		$	1,620,463			2-10 years
Computer equipment and software		867,677			894,824			5-7 years
Office equipment and furniture		166,996			166,996			5-7 years
Construction in progress		—			39,241
Leasehold improvements		343,120			336,461			10 years
Subtotal		3,071,786			3,057,985
Accumulated depreciation		(2,314,796	)		(2,322,308	)
	$	756,990		$	735,677

Depreciation expense was $176,946 and $342,855 for the years ended June 30, 2013 and 2012, respectively.

F-12

NOTE H– SHORT TERM UNSECURED NOTES PAYABLE

Unsecured notes payable at June 30, 2013 and 2012 consisted of the following:

	2013				2012
Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing January 11, 2013. Secured by personal guarantee of principal stockholder.	$	-		$		140,784

Unsecured note payable for $130,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing April 2, 2013. Secured by personal guarantee of principal stockholder.		-				102,256

Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing December 6, 2013. Secured by personal guarantee of principal stockholder.		121,584				-

Unsecured note payable for $250,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing January 10, 2014. Secured by personal guarantee of principal stockholder.		140,784				-

Unsecured note payable for $130,000 to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing April 4, 2014. Secured by personal guarantee of principal stockholder.		102,256				-

Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2013. Subsequent to June 30, 2013, the due date on this note was extended by the holder to July 31, 2015. Secured by personal guarantee of principal stockholder.		100,000				100,000

Unsecured note payable for $300,000 to an individual, with interest at 20%, principal and interest originally due in full on January 3, 2013; extended to January 3, 2014 with interest payable monthly and principal due on maturity . Secured by personal guarantee of principal stockholder.		300,000				300,000

Unsecured note payable for $200,000 to an individual, with interest payable monthly at 20%, the principal was due in full on May 1, 2013; extended to May 1, 2015 by the note holder. Secured by personal guarantee of principal stockholder.		200,000				200,000

Total unsecured notes payable	$	964,624			$	843,040
Less: current portion		(664,624	)			(843,040	)
Long-term unsecured notes payable	$	300,000			$	-

NOTE I- SHORT TERM NOTES PAYABLE- RELATED PARTY

	2013		2012
Unsecured note payable to an officer, with interest at 3.25%, due on demand	$	40,000	$	40,000

Unsecured note payable to an officer, with interest at 3.25%, due on demand	$	76,000	$	76,000
Total unsecured notes payable	$	116,000	$	116,000
Less: current portion		116,000		116,000
Long-term unsecured notes payable	$	-	$	-

F-13

NOTE J – CONVERTIBLE NOTES PAYABLE – SHAREHOLDER

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp. The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. Effective August 15, 2013, the note was amended again to reduce the per share conversion price to $0.125 and extend the maturity date to August 15, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.125 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. As of June 30, 2013, the principle balance was $375,000 and accrued interest was $45,062.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital, Inc. with a face amount of $250,000. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. Effective September 2, 2013, the note was amended again to reduce the per share conversion price to $0.055 and extend the maturity date to September 2, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.055 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. As of June 30, 2013, the principle balance was $250,000 and the accrued interest was $28,706.

The principal payments required at maturity under the Company’s outstanding short term notes, short term related party notes and convertible notes payable at June 30, 2013 are as follows:

2014	$	625,000
2015		0
2016		0
2017		0
Total	$	625,000

NOTE K – CREDIT CARD ADVANCE

NOTE L– LINE OF CREDIT

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital. The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of June 30, 2013 the lenders Index Rate was 4.75%.) In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month.

F-14

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the facility. In addition, Liberator has provided its corporate guarantee of the credit facility. On June 30, 2013, the balance owed under this line of credit was $366,196 (see Note O).

NOTE M – UNSECURED LINES OF CREDIT

The Company has drawn cash advances on two unsecured lines of credit that are in the name of the Company and Louis S. Friedman. The terms of these unsecured lines of credit call for monthly payments of principal and interest, with interest rates ranging from 7% to 18%. The aggregate amount owed on the two unsecured lines of credit was $12,535 at June 30, 2013 and $38,980 at June 30, 2012.

NOTE N – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facility under a ten year operating lease which was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at June 30, 2013 and 2012 is $193,516 and $250,174. The rent expense under this lease for the years ended June 30, 2013 and 2012 was $323,722.

The Company also leases certain postage equipment under an operating lease. The monthly lease is $104 per month and expires January 2017.

The Company entered into an operating lease for certain material handling equipment in September 2010. The monthly lease amount is $1,587 per month and expires in September 2015.

Future minimum lease payments under non-cancelable operating leases at June 30, 2013 are as follows:

Year ending June 30,
2014	$	411,974
2015		425,274
2016		210,569
Thereafter through 2017		1,038
Total minimum lease payments	$	1,048,855

Capital Leases

The Company has acquired equipment under the provisions of long-term leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The leased properties under these capital leases have a total cost of $162,000. These assets are included in the fixed assets listed in Note G and include computers, software, furniture, and equipment. The capital leases have stated or imputed interest rates ranging from 7% to 21%.

The following is an analysis of the minimum future lease payments subsequent to the year ended June 30, 2013:

Year ending June 30,
2014	$	29,112
2015		19,975
2016		18,879
2017		10,881
2018		440
Future Minimum Lease Payments	$	79,287
Less Amount Representing Interest		(16,938	)
Present Value of Minimum Lease Payments		62,349
Less Current Portion		(21,422	)
Long-Term Obligations under Leases Payable	$	40,927

F-15

Employment Agreements

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. The agreement provides for an annual base salary of $150,000 and eligibility to receive a bonus. By virtue of Mr. Friedman’s ownership of 100% of the Series A Convertible Preferred Stock, Mr. Friedman has 70.2 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the election of any directors and the outcome of any corporate transaction or other matter submitted to the shareholders for approval. In certain termination situations, the Company is liable to pay severance compensation to Mr. Friedman for up to nine months at his current salary.

Legal Proceedings

NOTE O – RELATED PARTY TRANSACTIONS

The Company has a subordinated note payable to the majority shareholder’s wife in the amount of $76,000. Interest on the note during the year ended June 30, 2013 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $2,470. The accrued interest on the note as of June 30, 2013 was $10,051. This note is subordinate to all other credit facilities currently in place.

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations. The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. On August 15, 2013, the note was further amended to reduce the per share conversion price to $.125 and extend the maturity date to August 15, 2014. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.125 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $375,000 and accrued interest was $45,062.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. Effective September 2, 2013, the note was amended again to reduce the per share conversion price to $0.055 and extend the maturity date to September 2, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $250,000 and the accrued interest was $28,705.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the loan during the year ended June 30, 2013 was accrued by the Company at the prevailing prime rate (which was 3.25% on June 30, 2013) and totaled $1,360. The accrued interest on the note as of June 30, 2013 was $3,248. This note is subordinate to all other credit facilities currently in place.

On January 3, 2011, an individual loaned the Company $300,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on January 3, 2012; extended to January 3, 2013; then extended to January 3, 2014 with interest payable monthly and principle due on maturity. Mr. Friedman personally guaranteed the repayment of the loan obligation.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note L – Line of Credit). In addition, Liberator has provided its corporate guarantees of the credit facility. On June 30, 2013, the balance owed under this line of credit was $366,196.

On July 20, 2011, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum), with the principal amount due in full on July 31, 2012. On July 31, 2012, the note was extended to July 31, 2013 under the same terms. Prior to June 30, 2013, the note was extended to July 31, 2015 under the same terms. Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

F-16

On April 2, 2012, the Company issued an unsecured promissory note to Hope Capital for $130,000. Terms of the note call for bi-weekly principal and interest payments of $5,536. Mr. Friedman personally guaranteed the repayment of the loan obligation. This loan was repaid in full on March 29, 2013.

On December 10, 2012, the Company issued an unsecured promissory note to Hope Capital and Jabro Funding Corp. for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on December 6, 2013. Mr. Friedman has personally guaranteed the repayment of the loan obligation.

On January 14, 2013, the Company issued an unsecured promissory note to Hope Capital and Jabro Funding Corp. for $250,000. Terms of the note call for bi-weekly principal and interest payments of $10,646 with the note due in full on January 10, 2014. Mr. Friedman has personally guaranteed the repayment of the loan obligation.

The loan from Credit Cash (see Note K – Credit Card Advance) is guaranteed by the Company (including OneUp and Foam Labs) and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

NOTE P – STOCKHOLDERS’ EQUITY

Options

As of June 30, 2013, the Company had one shareholder approved plan, the 2009 Stock Option Plan (the “Plan”), under which shares were available for equity based awards. Under the Plan, 5,000,000 shares of common stock are reserved for issuance until the Plan terminates on October 19, 2019.

Under the Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of June 30, 2013, there were 1,416,500 options available for grant under the Plan.

All stock option grants made under the Plan were at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the Plan were determined by the board of directors in accordance with the provisions of the plan. The terms of each option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The Company has no awards with market or performance conditions.

The following table summarizes stock-based compensation expense by line item in the consolidated statements of operations, all relating to employee stock plans:

	Twelve Months Ended June 30,
	2013		2012

Cost of Goods Sold	$	10,275	$	15,978
Other Selling and Marketing		8,186		33,819
General and Administrative		15,919		22,149
Total	$	34,380	$	71,946

Stock-based compensation expense recognized in the consolidated statements of operations for each of the twelve month period ended June 30, 2013 and 2012 is based on awards ultimately expected to vest.

A summary of option activity under the Company’s stock plan for the year ended June 30, 2013 and 2012 is presented below:

F-17

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value as of June 30, 2013
Outstanding at June 30, 2011		2,125,956		$	.20		3.4 years	$	—
Granted		1,738,000		$	.17			$	—
Exercised		—		$	—			$	—
Forfeited or Expired		(357,000	)	$	.20			$	—
Outstanding at June 30, 2012		3,506,956		$	.18		3.4 years	$	—
Granted		2,894,000		$	.06			$	—
Exercised		—		$	—			$	—
Forfeited or Expired		(2,817,456	)	$	.16			$	—
Outstanding at June 30, 2013		3,583,500		$	.10		3.8 years	$	115,605
Exercisable at June 30, 2013		522,750		$	.19		2.4 years	$	—

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $.13 for such day. The total intrinsic value of stock options exercised during fiscal years 2013 and 2012 was $0.

A summary of the Company’s non-vested options for the year ended June 30, 2013 is presented below:

Non-vested Options	Shares			Weighted Average Grant-Date Fair Value
Non-vested at June 30, 2012		2,569,625		$	.04
Granted		2,894,000			.06
Vested		(317,625	)		.09
Forfeited		(2,285,250	)		.05
Non-vested at June 30, 2013		2,860,750		$	.04

The weighted average grant-date fair value of stock options granted during fiscal years 2013 and 2012 were $217,600 and $73,758, respectively. The total grant-date fair values of stock options that vested during fiscal years 2013 and 2012 were $20,147 and $44,524, respectively.

The following table summarizes the weighted average characteristics of outstanding stock options as of June 30, 2013:

			Outstanding Options				Exercisable Options
Exercise Prices			Number of Shares	Remaining Life (Years)		Weighted Average Price	Number of Shares		Weighted Average Price
	$	.06 to $.10	2,313,000	4.3	$	.07	—	$	—
	$	.15 to $.16	1,016,500	3.1	$	.16	332,250	$	.16
	$	.25	254,000	1.3	$	.25	190,500	$	.25
Total stock options			3,583,500	3.8	$	.10	522,750	$	.19

The range of fair value assumptions related to options granted during the years ended June 30, 2013 and 2012 were as follows:

F-18

	2013		2012
Exercise Price:	$	0.06 - 0.10	$	0.16 - 0.20
Volatility:		29% to 147%		56% to 109%
Risk Free Rate:		0.43% to 0.65%		0.56% to 0.66%
Vesting Period:	4 years		4 years
Forfeiture Rate:		0%		0%
Expected Life	4.4 years		4.5 years
Dividend Rate		0%		0%

As of June 30, 2013, total unrecognized stock-based compensation expense related to all unvested stock options was $114,844, which is expected to be expensed over a weighted average period of 2.8 years.

Share Purchase Warrants

As of June 30, 2013, the following share purchase warrants were outstanding:

Number of Warrants		Exercise Price		Expiration Date
	292,479	$	.50	June 26, 2014
	1,292,479	$	.75	June 26, 2014
	877,435	$	1.00	June 26, 2014

	2,462,393

The following table summarizes the continuity of the Company’s share purchase warrants:

	Shares			Weighted Average Exercise Price
Balance June 30, 2012		2,712,393		$	.76
Issued		—			—
Expired		(250,000	)		.25
Balance June 30, 2013		2,462,393		$	.81

Issuance of Restricted Common Stock for Services

One November 17, 2011, we issued 250,000 shares of common stock with a fair value of $25,000, and subsequently on January 3, 2012, February 1, 2012, March 1, 2012, and April 1, 2012 we issued an additional 100,000 shares of common stock (for a total of 400,000 shares) with a fair value of $40,000 to Trilogy Capital Partners for investor relations services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances.

Effective October 1, 2011, the Company completed the sale of its wholly owned subsidiary WMI to an original owner of WMI for 25,394,000 shares of common stock and the payment of $700,000. The fair value of the treasury stock was determined based on the fair value of the assets exchanged, which was determined to be the more readily determinable value under ASC 845-10.

During April 2012, the Company entered into a private placement whereby they sold 2,850,000 shares of common stock at $0.10 per share for gross proceeds of $285,000 and paid offering costs of $36,250. In addition, the Company issued the placement agent 650,000 shares of common stock upon completion of the private placement.

F-19

NOTE Q – INCOME TAXES

Deferred tax assets and liabilities are computed by applying the effective U.S. federal income tax rate to the gross amounts of temporary differences and other tax attributes. Deferred tax assets and liabilities relating to state income taxes are not material. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of June 30, 2013 and 2012, the Company believed it was more likely than not that future tax benefits from net operating loss carryforwards and other deferred tax assets would not be realizable through generation of future taxable income; therefore, they were fully reserved.

The components of deferred tax assets and liabilities at June 30, 2013 and 2012 are approximately as follows:

Deferred tax assets:	2013			2012
Net operating loss carry-forwards	$	2,360,009		$	2,250,500
Valuation allowance		(2,360,009	)		(2,250,500	)
Net deferred tax assets	$	—		$	—

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 38% to pretax loss from continuing operations for the years ended June 30, 2013 and 2012 due to the following:

	2013			2012
Book loss from operations	$	109,509		$	271,920
Valuation (allowance)		(109,509	)		(271,920	)
Net tax benefit	$	—		$	—

At June 30, 2013, the Company had net operating loss (NOL) carryforwards of approximately $2.4 million that may be offset against future taxable income. During 2013 and 2012, the total increase in the valuation allowance was $109,509 and $271,920, respectively. The Company’s ability to use its NOL carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50.0% of the outstanding stock of a company by certain stockholders or public groups.

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the definition of Section 382. If the Company has experienced an ownership change, utilization of the NOL carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed and any limitation known, no positions related to limitations are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company. The NOL carryforwards expire in the years 2024 through 2033.

The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended June 30, 2009 through 2013.

NOTE R – SUBSEQUENT EVENTS

On July 19, 2013 the unsecured promissory note to an individual for $100,000 was extended to July 31, 2015 under the same terms. Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On September 2, 2009, the Company issued a $250,000, 3% convertible note payable to Hope Capital. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. Effective September 2, 2013, the note was amended again to reduce the per share conversion price to $0.055 and extend the maturity date to September 2, 2014.

F-20

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are no events required to be disclosed under this Item.

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of June 30, 2013, our CEO and CFO believe that:

(i)

our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and

(ii)

our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

(a) Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework . Based on our assessment, management believes that, as of June 30, 2013, our internal control over financial reporting is effective based on those criteria.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a permanent exemption of the SEC that permits the Company to provide only management’s report in the Annual Report on Form 10-K. Accordingly, our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2013, has not been audited by our auditors or any other independent registered accounting firm.

(b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule15d-15(d) promulgated under the Exchange Act that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information

None.

PART III.

ITEM 10. Directors, Executive Officers and Corporate Governance.

The following table sets forth the officers and directors of Liberator, Inc. as of June 30, 2013.

Name	Age	Position
Louis S. Friedman	61	Chief Executive Officer, President, Director
Ronald P. Scott	58	Chief Financial Officer, Secretary, Director
Leslie Vogelman	61	Treasurer

All directors serve for one-year terms until their successors are elected or they are re-elected at the annual shareholders’ meeting. Officers hold their positions at the pleasure of the board of directors.

There is no arrangement, agreement or understanding between any of the directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer. Also, there is no arrangement, agreement or understanding between management and non-management shareholders under which non-management shareholders may directly or indirectly participate in or influence the management of our affairs.

Directors are not presently compensated for their service on the board, other than the repayment of actual expenses incurred. There are no present plans to compensate directors for their service on the board.

Background of Executive Officers and Directors

Louis S. Friedman, President, Chief Executive Officer and Director. Mr. Friedman has served as President, Chief Executive Officer, and director since our merger with Old Liberator, Inc. in October 2009. Prior to that, he served as Old Liberator’s Chief Executive Officer and a director since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Mr. Friedman founded OneUp in 2000. Before starting OneUp, Mr. Friedman was in business consulting, venture capital and private investing from 1990 to 2000. Earlier in his career, Mr. Friedman was Executive Vice President of Chemtronics, Inc., until its sale to Morgan Crucible in 1990. As Chief Executive Officer, Mr. Friedman has relevant insight into our operations, our industry, and related risks as well as experience bringing consumer products to market.

Ronald Scott, Chief Financial Officer, Secretary and Director. Mr. Scott joined the Company in October 2009 in connection with our merger with Old Liberator, Inc. Prior to that, he served as Old Liberator’s Chief Financial Officer, Secretary, and a director since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Mr. Scott joined OneUp Innovations as a part-time consultant in July, 2006 and as a full-time consultant in October, 2007, serving as its Chief Financial Officer. From 2004 to 2009, Mr. Scott was president of Impact Business Solutions, LLC, a consulting business that provides financial management services. Prior to Impact Business Solutions, and from 1990 to 2004, Mr. Scott was Executive Vice President - Finance and Administration and a member of the Board of Directors for Cyanotech Corporation, a NASDAQ-listed natural products company. Mr. Scott holds a B.S. degree in Finance and Management from San Jose State University and an M.B.A. degree with a concentration in Accounting from Santa Clara University. Mr. Scott has relevant operating experience with small, high growth companies and an in-depth understanding of generally accepted accounting principles, financial statements and SEC reporting requirements.

Leslie Vogelman, Treasurer. Ms. Vogelman joined the Company in October 2009 in connection with our merger with Old Liberator, Inc. Prior to that, she served as Old Liberator’s Treasurer since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Ms. Vogelman joined OneUp at its inception in 2000 as Secretary and Treasurer. Ms. Vogelman holds a B.A. from the State University of New York in Binghamton and an M.B.A. from Adelphi University.

The experience and background of each of the directors, as summarized above, were significant factors in their previously being nominated as directors of the Company.

Family Relationships

Louis Friedman, our President, Chief Executive Officer and Chairman, and Leslie Vogelman, our Treasurer, are husband and wife.

There are no other relationships between the officers or directors of the Company.

Committees

As of June 30, 2013, we have not established an audit committee or any other committee of the board of directors and, therefore, the responsibilities of such committees have been conducted by our board of directors as a whole.

An audit committee’s primary functions are to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our Annual financial performance as well as our compliance with laws and regulations; (iv) oversee management’s establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our board of directors.

We may, in the future, establish an audit committee and/or other committees of the board of directors.

Audit Committee Financial Expert

In general, an “audit committee financial expert” is an individual who:

understands generally accepted accounting principles and financial statements,
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity of our financial statements,
understands internal controls over financial reporting, and
understands audit committee functions.

While we do not currently have an audit committee, our board of directors has determined that Ronald Scott, our Chief Financial Officer, is an “audit committee financial expert” within the meaning of the foregoing definition.

Diversity

While the Company does not have a policy regarding diversity of its board members, diversity is one of a number of factors that is typically taken into account in identifying board nominees. We only have two members on our board of directors, but we hope to add more members for a diverse board in terms of previous business experience and educational and personal background of the members of our board.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership, and annual reports concerning their ownership of our common shares and other equity securities on Forms 3, 4, and 5 respectively. Executive officers, directors, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based on a review of the copies of such forms received by us, and to the best of our knowledge, except as otherwise disclosed below, there were no reports untimely filed during the fiscal year ended June 30, 2013.

Ronald Scott, our chief financial officer, failed to timely file one Form 4 covering the acquisition of stock options under our 2009 stock option plan on October 12, 2012;
Michael Kane, an officer during fiscal year 2013, failed to timely file one Form 4 covering the acquisition of stock options under our 2009 stock option plan on October 12, 2012; and
Leslie Vogelman, our treasurer, failed to timely file one Form 4 covering the acquisition of stock options under our 2009 stock option plan on October 12, 2012.

All delinquent reports have subsequently been filed.

Code of Ethics

We have not yet adopted a Code of Business Conduct and Ethics. We are currently working towards developing a formal Code of Business Conduct and Ethics, which will apply to all of our employees, including our board of directors. When available, a copy of our Code of Business Conduct and Ethics may, upon request made to us in writing at the following address, be made available without charge: 2745 Bankers Industrial Drive, Atlanta, Georgia, 30360.

ITEM 11. Executive Compensation.

Summary Compensation Table

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal years ended June 30, 2013 and 2012 by our named executive officers as defined in Item 402(a) of Regulation S-K (each an “NEO”).

		Fiscal	Salary		Bonus		Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation		All Other Comp- ensation		Total
Name and Principal Position		Year	($)		($)		($)		($)(1)		($)		($)		($)
Louis S. Friedman		2013		149,999		—		—		—		—		—		149,999
President, Chief Executive		2012		149,999		—		—		—		—		—		149,999
Officer and Chairman of the Board
Ronald P. Scott		2013		144,999		—		—		8,034		—		—		153,033
Chief Financial Officer, Secretary		2012		131,928		—		—		8,193		—		—		140,121
and Director

(1)	The amounts reported in this column represent the full grant date fair value of stock awards in accordance with ASC 718, net of estimated forfeitures. Refer to Note P of the financial statements included in Item 8 of this Annual Report for the assumptions made in the valuation of stock awards. See Grants of Plan-Based Awards table below.

Grants of Plan-Based Awards

The following table summarizes information concerning each grant of an award made in our fiscal year ending June 30, 2013 to each of our NEOs:

Name

Grant Date

All Other Option Awards: Number of Securities Underlying Options

(#)

Exercise or base price of option awards per share

($)

Grant Date Fair Value of Stock and Option Awards

($)

Louis S. Friedman

—

Ronald P. Scott

10/12/2012

400,000

$0.06

$8,034

These awards were each granted from our 2009 Incentive Stock Option Plan, vest in four equal annual increments beginning October 12, 2013, and expire October 12, 2017.

Outstanding Equity Awards at Fiscal Year End

The following table shows, for the fiscal year ended June 30, 2013, certain information regarding outstanding equity awards at fiscal year-end for our Named Executive Officers.

	Outstanding Equity Awards at June 30, 2013 Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date			Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)
Louis S. Friedman		—		—		—		—			—		—
Ronald P. Scott		50,000		150,000	$	.16	12/3/2016		(1)		—		—
		—		400,000	$	.06	10/12/2017		(2)		—		—

(1)	The common stock option vests pro rata over a four-year period on each of December 3, 2012, December 3, 2013, December 3, 2014 and December 3, 2015.
(2)	The common stock option vests pro rata over a four-year period on each of October 12, 2013, October 12, 2014, October 12, 2015 and October 12, 2016.

Employment Agreement

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. The agreement provides for an annual base salary of $150,000 and eligibility to receive a bonus, should the Company implement a bonus plan for executives. Under the agreement, this executive employee may be terminated at any time with or without cause, or by reason of death or disability. In certain termination situations, the Company is liable to pay severance compensation to this executive for up to 9 months.

Directors’ Compensation

For the fiscal years ended June 30, 2013 and 2012, our directors did not receive any compensation in their capacity as a director.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock by:

all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities;
each of our directors;
each of our Named Executive Officers; and
all current directors and executive officers as a group.

Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them.

Applicable percentage ownership in the following table is based on 70,702,596 shares of common stock outstanding as of September 26, 2013.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of September 26, 2013, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Liberator, Inc., 2745 Bankers Industrial Drive, Atlanta, GA 30360.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Executive Officers and Directors
Common	Louis S. Friedman		32,694,376	(1)		43.6	%
Common	Ronald P. Scott		50,000	(2)		0.1	%
Common	Leslie Vogelman		145,000	(3)		0.2	%
Common	All directors and executive officers as a group (3 persons)		32,889,376			43.7	%
5% Shareholders
Common	Hope Capital, Inc. (4)		7,228,001	(5)		9.9	%

Executive Officers and Directors
Series A Convertible Preferred Stock	Louis S. Friedman		4,300,000	(6)		100.0	%
Series A Convertible Preferred Stock	Ronald P. Scott		0			0.0	%
Series A Convertible Preferred Stock	Leslie Vogelman		0			0.0	%
Series A Convertible Preferred Stock	All directors and executive officers as a group (3 persons)		4,300,000			100.0	%

(1)

Includes 4,300,000 shares of common stock issuable upon conversion of 4,300,000 shares of Series A Convertible Preferred stock at the discretion of the holder. Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 70.2 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.

(2)

Includes options to purchase 50,000 shares of Common Stock.

(3)

Includes options to purchase 145,000 shares of Common Stock.

(4)	This person’s address is 1 Linden Place, Suite 207, Great Neck, NY 11021. Curt Kramer is the sole shareholder of Hope Capital, Inc. and the natural control person over these securities.

(5)

Includes 1,500,000 shares of the 3,000,000 shares that are issuable upon conversion of the $375,000 convertible note payable held by Hope Capital, Inc. Such note is convertible only to the extent that Hope Capital’s total ownership does not exceed 9.9% of the total shares issued and outstanding. The reported amount does not include shares issuable upon exercise of a warrant to purchase 1,000,000 shares of common stock to Hope Capital. Such warrant is exercisable at the holder’s option until June 26, 2014 and allows the holder to purchase shares of the Company at $.75 per share. The warrant is only exercisable to the extent that Hope Capital’s total share ownership does not exceed 9.9% of the total shares issued and outstanding. The reported amount also includes 350,000 shares of the 4,545,455 shares that are issuable upon conversion of the $250,000 convertible note payable held by Hope Capital, Inc. Such note is convertible only to the extent that Hope Capital’s total ownership does not exceed 9.9% of the total shares issued and outstanding.

(6)

Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 70.2 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence.

Related Party Transactions

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note L – Line of Credit). In addition, Liberator, Inc. has provided its corporate guarantees of the credit facility. On June 30, 2013, the balance owed under this line of credit was $366,196.

The loan from Credit Cash (see Note K – Credit Card Advance) was guaranteed by the Company (including OneUp and Foam Labs) and was personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

The Company has a subordinated notes payable to Leslie Vogelman, our treasurer and the wife of our CEO and majority shareholder in the amount of $76,000. Interest on the note during the year ended June 30, 2013 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $2,470. The accrued interest on the note as of June 30, 2013 was $10,051. This note is subordinate to all other credit facilities currently in place.

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations. The note was convertible, at the holder’s option or the Company’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of August 15, 2012. Effective August 15, 2012, the note was amended to reduce the per share conversion price to $0.20 and extend the maturity date to August 15, 2013. Effective August 15, 2013, the note was further amended to reduce the per share conversion to $.125 and the maturity date to August 15, 2014. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.125 per share, unless such conversion would force the holders’ total ownership of common stock of the Company to exceed 9.9% of the total shares outstanding. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $375,000 and accrued interest was $45,062.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital. The note was convertible, at the holder’s option, into common stock at $.25 per share and could be converted at any time prior to the maturity date of September 2, 2012. Effective September 2, 2012, the note was amended to reduce the per share conversion price to $0.10 and extend the maturity date to September 2, 2013. Effective September 2, 2013, the note was further amended to reduce the per share conversion price to $.055 and extend the maturity date to September 2, 2014. There was no beneficial conversion on the date of amendment as the face value was equal to the conversion price. As of June 30, 2013, the principle balance was $250,000 and the accrued interest was $28,705.

On July 20, 2011, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum), with the principal amount due in full on July 31, 2012. On July 31, 2012, the note was extended to July 31, 2013 under the same terms. As of June 30, 2013 the note was extended to July 31, 2015 under the same terms. Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

Director Independence

Our board of directors has determined that none of its current members qualifies as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SEC or under Nasdaq’s Marketplace Rule 5605(a)(2).

ITEM 14. Principal Accounting Fees and Services.

The aggregate fees billed by our principal accountant for each of the last two fiscal years for Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees are as follows:

	Fiscal Year Ended June 30,
	2013		2012
Audit Fees (1)	$	41,500	$	42,500
Audit-Related Fees (2)	$	-	$	-
Tax Fees (3)	$	-	$	-
All Other Fees (4)	$	-	$	-

(1)

Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements. Except for $30,000 in fiscal 2012, all audit fees were paid to the predecessor auditor.

(2)

Audit-Related Fees – This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC.

(3)	Tax Fees – This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

(4)	All Other Fees – This category consists of fees for other miscellaneous items.

Our board of directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of Liggett, Vogt & Webb P.A. as our independent accountants, the Board considered whether the provision of such services is compatible with maintaining independence. All of the services provided and fees charged by Liggett, Vogt & Webb P.A. were approved by the Board.

PART IV.

ITEM 15. Exhibits, Financial Statement Schedules.

Financial Statements; Schedules

Our consolidated financial statements for the fiscal years ended June 30, 2013 and 2012 begin on page F-1 of this annual report. We are not required to file any financial statement schedules.

Exhibit Table

Exhibit No.			Description
2.1			Merger and Recapitalization Agreement between WES Consulting, Inc., the majority shareholder of WES Consulting, Inc., Liberator, Inc., and the majority shareholder of Liberator, Inc., dated as of October 19, 2009 (2)
2.2			Stock Purchase and Recapitalization Agreement between OneUp Acquisition, Inc., Remark Enterprises, Inc., OneUp Innovations, Inc., and Louis S. Friedman, dated March 31, 2009 and fully executed on April 3, 2009 (3)
2.3			Amendment No. 1 to Stock Purchase and Recapitalization Agreement, dated June 22, 2009 (3)
3.1			Articles of Incorporation (1)
3.2			Bylaws (1)
3.3			Articles of Amendment to the Articles of Incorporation (4)
3.4			Articles of Amendment to the Articles of Incorporation, effective February 28, 2011 (5)
4.1			3% Convertible Note Due August 15, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on June 24, 2009 (3)
4.2			3% Convertible Note Due September 2, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on September 2, 2009 (3)
4.3			Designation of Rights and Preferences of Series A Convertible Preferred Stock of WES Consulting, Inc. (4)
4.4			Second Amendment to 3% Convertible Note originally due August 15, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on June 24, 2009 (10)
4.5			Second Amendment to 3% Convertible Note originally due September 2, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on September 2, 2009*
10.1			Lease Agreement between Bedford Realty Company, LLC and OneUp Innovations, Inc., dated September 26, 2005 (3)
10.2			Written Description of Oral Agreement between OneUp Innovations, Inc. and Leslie Vogelman, dated June 23, 2006 (3)
10.3			Exclusive Distribution Agreement between OneUp Innovations, Inc. and TENGA Co., Ltd., dated December 12, 2012 (9)
10.4			Receivables Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated May 24, 2011 (7)
10.5			Guarantee between Liberator, Inc. and Advance Financial Corporation, dated May 24, 2011 (7)
10.6			Guarantee between Foam Labs, Inc. and Advance Financial Corporation, dated May 24, 2011(7)
10.7			Guarantee between Louis S. Friedman and Advance Financial Corporation, dated May 24, 2011(7)
10.8			Amended and Restated Receivable Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated September 4, 2013 *
10.9			Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated November 4, 2010 (6)
10.10			Advance Schedule No. 3 to Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated October 4, 2012 (8)
10.11			Advance Schedule No. 4 to Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated May 14, 2013 *
21.1			Subsidiaries *
23.1			Consent of Liggett, Vogt & Webb P.A., independent registered public accounting firm *
31.1			Section 302 Certificate of Chief Executive Officer *
31.2			Section 302 Certificate of Chief Financial Officer *
32.1			Section 906 Certificate of Chief Executive Officer *
32.2			Section 906 Certificate of Chief Financial Officer *
101.1			The following financial information from the Company's annual report on Form 10-K for the period ended June 30, 2012, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets as of June 30, 2013, and 2012; (ii) Consolidated Statements of Operations for the Twelve Months Ended June 30, 2013 and 2012; (iii) Consolidated Statements of Stockholders Equity for the Twelve Months Ended June 30, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the Twelve Months Ended June 30 2013 and 2012; and (v) Notes to Consolidated Financial Statements. **

___________________

* Filed herewith.

** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)	Filed on March 2, 2007 as an exhibit to our Registration Statement on Form SB-2, and incorporated herein by reference.
(2)	Filed on October 22, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(3)	Filed on March 24, 2010 as an exhibit to Amendment No. 1 to our Current Report on Form 8-K, and incorporated herein by reference.
(4)	Filed on February 23, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(5)	Filed on March 3, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(6)	Filed on November 9, 2010 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(7)	Filed on October 12, 2011 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.
(8)	Filed on October 11, 2012 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.
(9)	Filed on February 8, 2013 as an exhibit to our Current Report on Form 8-K/A, and incorporated herein by reference.
(10)	Filed on August 15, 2013 as an exhibit to our Current Report on Form 8-K/A, and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LIBERATOR, INC.

Date: September 30, 2013	/s/ Louis S. Friedman
	Louis S. Friedman, Chief Executive Officer and President

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME	TITLE	DATE

/s/ Louis S. Friedman	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)	September 30, 2013
Louis S. Friedman

/s/ Ronald P. Scott	Chief Financial Officer (Principal Financial and Accounting Officer), Secretary, and Director	September 30, 2013
Ronald P. Scott

Exhibit 4.5

AMENDMENT NO 2 TO 3% CONVERTIBLE PROMISSORY NOTE

This Amendment No. 2 to 3% Convertible Note (the “Amendment”) effective September 2, 2013, by and among Liberator, Inc. (formerly known as Remark Enterprises, Inc., a Nevada corporation), a Florida corporation (the “Borrower”) and Hope Capital Inc., a New York corporation (the “Lender”) amends that certain 3% Promissory Note due September 2, 2012, as amended on September 2, 2012, in the principal amount of $250,000 by and between the Borrower and Lender (the “Note”).

WHEREAS, on September 2, 2009, the Borrower issued to the Lender the Note (Note No.: 1.02); and on September 2, 2012 the Company and Borrower amended the Note (the “Amendment No. 1”) (the Note and Amendment No. 1 collectively referred to herein as, the “Note”);

WHEREAS, the Note is convertible into securities of the Borrower; and

WHEREAS, the “Maturity Date” as defined under the Note is September 2, 2013; and

WHEREAS, the Borrower desires to retain its current working capital and to extend the Maturity Date; and

WHEREAS, the parties desire to amend the “Conversion Price” as defined under the Note;

NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency which is hereby acknowledged, the parties agree as follows:

Amendment to Maturity Date . The Maturity Date, as defined under the Note, shall be September 2, 2014.

Amendment to Conversion Price . The Conversion Price, as defined under the Note, shall be $0.055.

Capitalized Terms . All capitalized terms which have not been defined shall have the meaning contained in the Note.

Ratification of the Note . In all other respects, the Note is ratified and confirmed.

IN WITNESS WHEREOF, the undersigned have executed and delivered this Amendment to the Note, effective as of the date first written above.

BORROWER	LENDER
LIBERATOR, INC.	HOPE CAPITAL INC.

/s/ Louis S. Friedman	/s/ Curt Kramer
Louis S. Friedman, Chief Executive Officer	Curt Kramer, President

Exhibit 10.8

AMENDED & RESTATED

RECEIVABLES FINANCING AGREEMENT

ENTERED INTO BETWEEN

ADVANCE FINANCIAL CORPORATION

and

ONE UP INNOVATIONS, INC.

Date: September 4, 2013

Advance Financial Corporation

3700 Mansell Road, Suite 550

Alpharetta, Georgia 30022

Gentlemen:

This Amended and Restated Receivables Financing Agreement amends and restates the Receivable Financing Agreement dated May 24 ^th , 2011 entered between the parties hereto. We are pleased to reconfirm the following agreement by which you are to finance receivables arising from sales made by us.

1. To induce you to accept this agreement and to make loans and advances to us from time to time pursuant to these terms, we hereby assign and transfer to you all of our interest in, full title to, and the proceeds of: all accounts, instruments, contract rights, chattel paper, documents, and general intangibles (hereafter called "receivables") now existing and those hereafter created. Such assignment and transfer is made for the purpose of securing, and as collateral for, any and all loans and advances made to us under this agreement, together with all other Obligations of ours to you. As additional security for all our Obligations to you, we hereby grant to you a security interest in and lien upon all of our inventory and other Collateral (as said term is defined on Exhibit B attached hereto and made a part hereof) all of our books and records relating to receivables, all our title and/or interest in the goods represented by receivables and in all such goods that may be returned by or replevied or reclaimed from customers. You hereby have the right to stop goods in transit or to replevy or to reclaim such goods. All returned, replevied and reclaimed goods (unless released by you) coming into our possession shall be held by us in trust for you. We shall notify you promptly of all such returned, replevied or reclaimed goods. The receivables, the books and records relating thereto, the goods represented by receivables and all such goods that may be returned by or replevied or reclaimed from customers along with the Collateral as said term is defined in Exhibit B attached hereto and made a part hereof are hereinafter collectively referred to as the "collateral".

2. We will provide you with listings of receivables created in form satisfactory to you, together with copies of customer invoices and conclusive evidence of shipment and such other documents and proof of delivery/rendition as you may at any time require. You may lend against these receivables, provided, however, that there shall be no obligation on your part to make loans and advances against any of our receivables. Whether or not you choose to make any loans and advances to us based upon our receivables, we represent and warrant that each receivable meets and will continue to meet the following requirements:

(i) it is genuine and in all respects what it purports to be;

(ii) it is owned by us and we have the right to subject it to a security interest in favor of you or assign it to you;

(iii) it arises from (A) the performance of services by us and such services have been fully performed and acknowledged and accepted by the account debtor thereunder; or (B) the sale or lease of goods by us, and such goods have been completed in accordance with the account debtor's specifications (if any) and delivered to and accepted by the account debtor, such account debtor has not refused to accept and has not returned or offered to return any of the goods, or has not refused to accept any of the services, which are the subject of such account, and we have possession of, or have delivered to you at your request, shipping and delivery receipts evidencing delivery of such goods;

(iv) it is evidenced by an invoice rendered to the account debtor thereunder, is due and payable within thirty (30) days after the date of the invoice and does not remain unpaid past the due date thereof; provided, however, that notwithstanding your having made prior loans and advances against the receivables of an account debtor, if more than fifty (50%) percent of the aggregate dollar amount of invoices owing by a particular account debtor remain unpaid more than 90 days past the invoice date after the respective due dates thereof, then all accounts owing by that account debtor shall not be deemed acceptable for loans or advances;

(v) it is not subject to any prior assignment, claim, lien, security interest or encumbrance whatsoever, other than the security interest granted to you hereunder;

(vi) it is a valid, legally enforceable and unconditional obligation of the account debtor thereunder, and is not subject to setoff, counterclaim, credit, allowance, deduction or adjustment by such account debtor, or to any claim by such account debtor denying liability thereunder in whole or in part;

(vii) it does not arise out of a contract or order which fails in any material respect to comply with the requirements of applicable law;

(viii) the account debtor thereunder is not a director, officer, employee or agent of ours or a Subsidiary, Parent or Affiliate;

(ix) it is not an account with respect to which the account debtor is the United States of America or any department, agency or instrumentality thereof, unless we assign our right to payment of such account to you pursuant to, and in full compliance with, the Assignment of Claims Act of 1940, as amended;

(x) it is not an account with respect to which the account debtor is located in a state which requires us as a precondition to commencing or maintaining an action in the courts of that state, either to (A) receive a certificate of authority to do business and be in good standing in such state, or (B) file a notice of business activities report or similar report with such state's taxing authority, unless (x) we have taken one of the actions described in clauses (A) or (B), (y) the failure to take one of the actions described in either clause (A) or (B) may be cured retroactively by Borrower at its election, or (z) we have proven, to your satisfaction, that it is exempt from any such requirements under any such state's laws;

(xi) it is an account which arises out of a sale made in the ordinary course of our business;

(xii) the account debtor is a resident or citizen of, and is located within, the United States of America;

(xiii) it is not an account with respect to which the account debtor's obligation to pay is conditional upon the account debtor's approval of the goods or services or is otherwise subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale on approval, sale or return or consignment basis;

(xiv) it is not an (A) account with respect to which any representation or warranty contained in this agreement is untrue or (B) which violates any of our covenants contained in this agreement;

(xv) it is not an account which, when added to a particular account debtor's other indebtedness to us, exceeds a credit limit determined by you in your sole discretion for that account debtor; and

(xvi) it is not an account with respect to which the prospect of payment or performance by the account debtor is or will be impaired, as determined by you in your sole discretion.

The term "Affiliate" as used herein shall mean any Person directly or indirectly controlling, controlled by or under common control with Borrower.

The term “Business Day” as used herein shall mean any day which is not a Saturday, Sunday, or other day on which banks in the State of Georgia are authorized or required to close.

The term "Parent" as used herein shall mean any Person now or at any time or times hereafter owning or controlling (alone or with any other Person) at least a majority of our issued and outstanding stock or any Subsidiary of ours.

The term "Person" as used herein shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or foreign or United States government (whether federal, state, county, city, municipal or otherwise), including, without limitation, any instrumentality, division, agency, body or department thereof.

The term "Subsidiary" as used herein shall mean any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by Borrower or by any partnership or joint venture of which more than fifty percent (50%) of the outstanding equity interests are at the time, directly or indirectly, owned by Borrower.

3. Notwithstanding any of the foregoing, and without limiting your discretion, there shall be no obligation on your part to make loans and advances to us and from time to time at our request you may at your discretion lend to us up to 85% of the face value of each invoice (said percentage is hereinafter referred to as the "advance rate") acceptable to you, but the total of such loans and advances shall not exceed $1,000,000 (“Maximum Credit Line”) and you may at your discretion lend to us up to 50% of Eligible Inventory valued at cost (“Inventory Advances”), not to exceed the lesser of $300,000 or 75% of the Eligible Accounts Receivable Loan at any one time outstanding. The amounts of such loans shall be determined by you with consideration for the value of the collateral, taking into account all fluctuations of the value thereof in light of your experience and sound business principles. Such determinations by you shall be subject to the requirements of good faith on your part, our undertakings hereunder, and especially our assignment and transfer of all our receivables as security for the loans and our other Obligations to you, which will, of necessity, fluctuate in amount, and to the condition that you be at all times fully secured. At your option you may prepare and mail all customers' invoices. Billing on invoices by whomever done shall be conclusive evidence of assignment and transfer hereunder to you of the receivables represented thereby, whether or not we execute any other instrument with regard to any specific receivable.

All loans and advances shall, in your sole discretion, be evidenced by one or more promissory notes in form and substance satisfactory to you. However, if such loans and advances are not so evidenced, such loans and advances may be evidenced solely by entries upon the books and records maintained by you.

Any and all accrued interest, charges or fees which are not paid when due, shall become Obligations, shall be treated as such and shall be taken into consideration in your determination of the amount of the loans and advances which you may make to us; provided, however, that all such accrued and unpaid interest, charges and fees shall not be treated as an Obligation until the first day of the month immediately proceeding the month in which they accrued. You shall calculate the principal balance each day prior to our receiving credit for any collections received by you on that day. If at any time and for any reason, the aggregate amount of the outstanding advances made pursuant to Paragraph 2 exceeds the dollar or percentage limitations contained in Paragraph 2 (an “Overadvance”), then we shall, upon demand by you, immediately pay to you in cash, the amount of such excess. Any and all advances hereunder shall be added to and deemed part of the Obligations when made.

4. We shall pay you interest monthly, on the first (1st) day of each month, at the rate of three percent ( 3.00%) per annum in excess of the prime rate (as defined herein) on the average daily principal balance of all loans made hereunder. As used herein, the term "prime rate" shall mean the interest rate announced by SunTrust Bank from time to time as its prime rate. We understand that the prime rate is not necessarily the lowest interest rate available on loans made by SunTrust Bank , which loans may be priced at, above or below its prime rate. The prime rate as of the date hereof is three and twenty five one hundredths ( 3.25 %) percent per annum; accordingly, the interest rate hereunder expressed in simple interest terms as of the date hereof is six and twenty five one hundredths ( 6.25 %) percent per annum. If at any time or from time to time the prime rate increases or decreases, then the interest rate set forth in (b) above shall be correspondingly increased or decreased effective on the first day of the month immediately following the day on which any such increase or decrease in the prime rate is publicly announced. In the event that SunTrust Bank abolishes or abandons the practice of announcing its prime rate, you will designate a comparable reference rate which shall be deemed to be the prime rate hereunder. Interest hereunder shall be computed on a 360-day year simple interest basis. In addition, we shall pay you monthly, on the first (1st) day of each month, (a) as compensation for underwriting, administrative services, costs, and other services performed or incurred by you in connection with this agreement, a service fee equal to fifty hundredths of one percent ( .50%) per month of the average daily principal balance of all loans outstanding hereunder during the previous month with respect to advances for receivables (the “ Monthly Receivables Loan Service Fees ”) (Monthly Service Fees shall be calculated on the basis of a 360-day year) and a service fee equal to fifty hundredths of one percent ( .50%) per month of the average daily principal balance of all loans outstanding hereunder during the previous month with respect to advances for inventory (the “ Monthly Inventory Loan Service Fees ”) ( Monthly Inventory Loan Service Fees shall be calculated on the basis of a 360-day year) (b) as compensation for delays in collection and clearance of checks and other remittances, an amount equal to two (2) Business Days on interest and service fees computed at the rate set forth above in effect on the last day of the previous month on the total amount of all remittances delivered to you in payment of our Obligations during the previous month. In the event of an Overadvance that remains unpaid to you (irrespective of any demand for the repayment thereof which may be made by you), we shall pay to you, in addition to the Monthly Service Fee, a surcharge of 25% of the Monthly Service Fee for each day that an Overadvance exists. You will render a statement of account monthly, and such statement shall be deemed binding upon us unless you are notified in writing to the contrary within thirty (30) days after the date of each statement rendered . We shall pay to you a fee of seventy five hundredths of one percent ($7,500.00) (the "Modification Fee") of the Maximum Credit Line at closing and at each Renewal Term (defined below), which shall be for administrative services, costs, and other services performed or incurred by you in connection with the closing of this agreement, and shall be due and fully earned at such time as this Agreement is signed by us.

5. We shall direct all of our account debtors, as well as any other obligor, to make all payments on the accounts as directed by, exclusively and directly to a post office box or any other address designated by you (the "Lock Box"), and under your exclusive control. Any and all payments received by us shall be held in trust for the benefit of you and shall be immediately remitted, by us in the identical form in which such payments were made, whether by cash or check to such account as you may direct, however, nothing herein shall be interpreted or construed as consent or authorization by you to our receipt of payments made by account debtors or obligors on the accounts. If we, any Affiliate or Subsidiary, or any shareholder, officer, director, employee or agent of ours or any Affiliate or Subsidiary, or any other Person acting for or in concert with us shall receive any monies, checks, notes, drafts or other payments relating to or as proceeds of accounts, we and each such Person shall receive all such items in trust for, and as your sole and exclusive property and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to you. These remittances shall be listed and certified on a form satisfactory to you. In the event any payments or remittances, received by us are not delivered to you in kind, per the terms and conditions set forth in this Agreement, we shall pay to you a fee of fifteen percent of the face amount of any such payment or remittance. You will apply (conditioned upon final collection) each payment deposited, which payment has been made by any account debtor on a receivable represented by any invoice on which you have based any loan made to us hereunder, to such loan and any other Obligations which are due and payable, on the first day after receipt by you. You may, at any time and from time to time, whether before or after the maturity of any of the Obligations, (i) enforce collection of any of our accounts or contract rights by suit or otherwise; (ii) exercise all of our rights and remedies with respect to proceedings brought to collect any accounts; (iii) surrender, release or exchange all or any part of any accounts, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any account of ours upon such terms, for such amount and at such time or times as you deem advisable; (v) prepare, file and sign our name on any proof of claim in bankruptcy or other similar document against any account debtor; and (vi) do all other acts and things which are necessary, in your sole discretion, to fulfill our Obligations under this agreement and to allow you to collect the accounts. In addition to any other provision hereof, you may at any time, whether before or after the occurrence of a default, at our expense, notify any parties obligated on any of the accounts to make payment directly to you of any amounts due or to become due thereunder.

6. We hereby appoint and constitute you as our attorney-in- fact: to receive, open, and dispose of all mail addressed to us and to notify the postal authorities to change the address and delivery of mail addressed to us to such address as you may designate (provided that you shall return to us all mail not pertaining to receivables); to endorse our name upon any notes, acceptances, checks, drafts, money orders and other evidences of payment of receivables that may come into your possession and to deposit or otherwise collect the same; to sign our name on any bill of lading relating to any receivable, on drafts against customers; to verify accounts with communications to customers; to execute in our name any affidavits and notices with regard to any and all lien rights; and to do all other acts and things necessary to carry out this agreement. All acts of said attorney-in-fact are hereby ratified and approved, and said attorney-in-fact shall not be liable for any errors of commission or omission, nor for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable while we are indebted to you.

7. We make the following warranties, representations and covenants with and to you, understanding that you have relied upon each of them and will continue to rely upon each of them in making loans and advances to us:

(a) the financial statements delivered or to be delivered by us to you at or prior to the date of this agreement and at all times subsequent thereto accurately reflect our financial condition, and there has been no adverse change in the financial condition, the operations or any other of our status since the date of the financial statements delivered to you most recently prior to the date of this agreement;

(b) the office where we keep our books, records and accounts (or copies thereof) concerning the collateral, our principal place of business and all of our other places of business, locations of collateral and post office boxes are as set forth in Exhibit A of this agreement; we shall promptly (but in no event less than ten (10) days prior thereto) advise you in writing of the proposed opening of any new place of business, the closing of any existing place of business, any change in the location of our books, records and accounts (or copies thereof) or the opening or closing of any post office box by us;

(c) the collateral is and shall be kept, or based, only at the addresses set forth on Exhibit A of this agreement, and at other locations within the continental United States of which you have been advised by us in writing;

(d) if any of the collateral consists of goods of a type normally used in more than one state, whether or not actually so used, we shall immediately give written notice to you of any use of any such goods in any state other than a state in which we have previously advised you such goods shall be used, and such goods shall not, unless you shall otherwise consent in writing, be used outside of the continental United States;

(e) no security agreement, financing statement or analogous instrument exists or shall exist with respect to any of the collateral other than any security agreement, financing statement or analogous instrument evidencing security interests in your favor;

(f) we are and shall at all times during the Original Term or any Renewal Term be the lawful owner of all collateral now purportedly owned or hereafter purportedly acquired by us, free from all liens, claims, security interests and encumbrances whatsoever, whether voluntarily or involuntarily created and whether or not perfected;

(g) we have the right and power and are duly authorized and empowered to enter into, execute and deliver this agreement and perform our obligations hereunder and thereunder; our execution, delivery and performance of this agreement does not and shall not conflict with the provisions of any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on us, and our execution, delivery and performance of this agreement shall not result in the imposition of any lien or other encumbrance upon any of our property under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which we or any of our property may be bound or affected;

(h) there are no actions or proceedings which are pending or threatened against us which might result in any material adverse change in our financial condition or materially adversely affect the collateral and we shall, promptly upon becoming aware of any such pending or threatened action or proceeding, give written notice thereof to you;

(i) we have obtained all licenses, authorizations, approvals and permits, the lack of which would have a material adverse effect on the operation of our business, and we are and shall remain in compliance in all material respects with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety or environmental matters), the failure to comply with which would have a material adverse effect on our business, property, assets, operations or condition, financial or otherwise;

(j) all written information now, heretofore or hereafter furnished by us to you is and shall be true and correct as of the date with respect to which such information was or is furnished;

(k) we are not conducting, permitting or suffering to be conducted, nor shall we conduct, permit or suffer to be conducted, any activities pursuant to or in connection with which any of the collateral is now, or will (while any Obligations remain outstanding) be owned by any Affiliate; provided, however, that we may enter into transactions with Affiliates in the ordinary course of business pursuant to terms that are no less favorable to us than the terms upon which such transfers or transactions would have been made had they been made to or with a Person that is not an Affiliate and, in connection therewith, may transfer cash or property to Affiliates for fair value;

(l) our name has always been as set forth on Exhibit A of this agreement and we use no tradenames or division names in the operation of our business, except as otherwise disclosed in writing to you; we shall notify you in writing within ten (10) days of the change of our name or the use of any tradenames or division names not previously disclosed to you in writing;

(m) this agreement to which we are a party are our the legal, valid and binding obligations and are enforceable against us in accordance with their respective terms;

(n) we are solvent, are able to pay our debts as they become due and have capital sufficient to carry on our business, now own property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay our debts, and will not be rendered insolvent by the execution and delivery of this agreement or by completion of the transactions contemplated hereunder;

(o) other than the loans disclosed to you on the Loan Schedule, we are not now obligated, nor shall we create, incur, assume or become obligated (directly or indirectly), for any loans or other indebtedness for borrowed money other than the loans made hereunder and pursuant hereto, except that we may (i) borrow money from a Person other than you on an unsecured and subordinated basis if a subordination agreement in favor of you and in form and substance satisfactory to you is executed and delivered to you relative thereto; (ii) maintain any present indebtedness to any Person which has been disclosed to you in writing and consented to in writing by you; and (iii) incur unsecured indebtedness to trade creditors in the ordinary course of our business;

(p) except as otherwise disclosed in writing to you, we have no Parents, Subsidiaries or divisions, nor are we engaged in any joint venture or partnership with any other Person;

(q) we are duly organized and in good standing in our state of our organization and we are duly qualified and in good standing in all states where the nature and extent of the business transacted by us or the ownership of our assets makes such qualification necessary;

(r) we are not in default under any material contract, lease or commitment to which it is a party or by which it is bound, nor do we know of any dispute regarding any contract, lease or commitment which is material to our continued financial success and well-being;

(s) there are no controversies pending or threatened between us and any of our employees, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material to our continued financial success and well-being and we are in compliance in all material respects with all federal and state laws respecting employment and employment terms, conditions and practices; and

(t) we possess, and shall continue to possess, adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and tradenames to continue to conduct our business as heretofore conducted by us.

(u) we will notify you promptly of and shall settle all customer disputes, but, if you so elect, you are to have the right at all times to settle, compromise, adjust or litigate all customer disputes directly with the customer or other complainant upon such terms and conditions as you deem advisable, without incurring liability to us for your performance of any such acts.

(v) our Federal Employment Identification Number is 20-2635129 .

8. We represent, warrant and covenant to you that all of our representations, warranties and covenants contained in this Agreement (whenever appearing herein) shall be true at the time of our execution of this agreement, shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto, shall remain true until the repayment in full of all of the Obligations and termination of this agreement, and shall be remade by us at the time each loan or advance is made pursuant to this agreement.

9. Until payment or satisfaction in full of all Obligations and termination of this agreement, unless we obtain your prior written consent waiving or modifying any of our covenants hereunder in any specific instance, we agree as follows:

(a) we shall at all times keep accurate and complete books, records and accounts with respect to all of our business activities, in accordance with sound accounting practices and generally accepted accounting principles consistently applied from period to period, and shall keep such books, records and accounts, and any copies thereof, only at the addresses indicated for such purpose on Exhibit A of this agreement;

(b) we shall promptly advise you in writing of any material adverse change in our business, assets or condition, financial or otherwise, the occurrence of any default hereunder or the occurrence of any event which, if uncured, will become an default hereunder after notice or lapse of time (or both);

(i) keep the collateral properly housed and shall keep the collateral insured for the full insurable value thereof against loss or damage by fire, theft, explosion, sprinklers, and such other risks as are customarily insured against by Persons engaged in businesses similar to ours with such companies, in such amounts and under policies in such form as shall be satisfactory to you. Original (or certified) copies of such policies of insurance have been or shall be delivered to you within fifteen (15) days after the date hereof, together with evidence of payment of all premiums therefor, and shall contain an endorsement, in form and substance acceptable to you, showing loss under such insurance policies payable to you. Such endorsement, or an independent instrument furnished to you, shall provide that the insurance company shall give you at least thirty (30) days written notice before any such policy of insurance is altered or canceled and that no act of ours, whether willful or negligent, or default or any other Person shall affect you right to recover under such policy of insurance in case of loss or damage. We hereby direct all insurers under such policies of insurance to pay all proceeds payable thereunder directly to you. We irrevocably, make, constitute and appoint you (and all officers, employees or agents designated by you) as our true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing our name on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with respect to such policies of insurance; and

(ii) maintain, at our expense, such public liability and third party property damage insurance as is customary for Persons engaged in businesses similar to ours with such companies and in such amounts, with such deductibles and under policies in such form as shall be satisfactory to you and original (or certified) copies of such policies have been or shall be delivered to you within fifteen (15) days after the date hereof, together with evidence of payment of all premiums therefor; each such policy shall contain an endorsement showing you as additional insured thereunder and providing that the insurance company shall give you at least thirty (30) days written notice before any such policy shall be altered or canceled. If we at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then you, without waiving or releasing any obligation or default by us hereunder, may (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premiums and take such other actions with respect thereto as you deem advisable. All sums disbursed by you in connection with any such actions, including, without limitation, court costs, expenses, other charges relating thereto and reasonable attorneys' fees, shall constitute loans hereunder and shall be payable on demand by us to you and, until paid, shall bear interest at the highest rate then applicable to loans hereunder;

(d) all monies and other property obtained by us from you pursuant to this agreement will be used solely for business purposes;

(e) we shall, at your request, indicate on our records concerning the Collateral a notation, in form satisfactory to you, of your security interest hereunder, and we shall not maintain duplicates or copies of such records at any address other than our principal place of business set forth on Exhibit “A” of this agreement;

(f) we shall file all required tax returns and pay all of our taxes when due, including, without limitation, taxes imposed by federal, state or municipal agencies, and shall cause any liens for taxes to be promptly released; provided, that we shall have the right to contest the payment of such taxes in good faith by appropriate proceedings so long as (i) the amount so contested is shown on our financial statements, (ii) the contesting of any such payment does not give rise to a lien for taxes, (iii) we keep on deposit with you (such deposit to be held without interest) an amount of money which, in your sole judgment, is sufficient to pay such taxes and any interest or penalties that may accrue thereon, and (iv) if we fail to prosecute such contest with reasonable diligence, you may apply the money so deposited in payment of such taxes. If we fail to pay any such taxes and in the absence of any such contest by us, you may (but shall be under no obligation to) advance and pay any sums required to pay any such taxes and/or to secure the release of any lien therefore, and any sums so advanced by you shall constitute loans hereunder, shall be payable by us to you on demand, and, until paid, shall bear interest at the highest rate then applicable to loans hereunder;

(g) we shall not assume, guarantee or endorse, or otherwise become liable in connection with, the obligations of any Person, except by endorsement of instruments for deposit or collection or similar transactions in the ordinary course of business;

(h) we shall not enter into any merger or consolidation, or sell, lease or otherwise dispose of all or substantially all of our assets, or enter into any transaction outside the ordinary course of our business, including, without limitation, any purchase, redemption or retirement of any shares of any class of our stock, and any issuance of any shares of, or warrants or other rights to receive or purchase any shares of, any class of our stock;

(i) we shall not amend our organizational documents or change our fiscal year;

(j) we shall reimburse you for all costs and expenses, including, without limitation, legal expenses and reasonable attorneys' fees, incurred by you in connection with documentation and consummation of this transaction and any other transactions between us and you, including, without limitation, Uniform Commercial Code and other public record searches, lien filings, Federal Express or similar express or messenger delivery, appraisal costs, surveys, title insurance and environmental audit or review costs, and in seeking to collect, protect or enforce any rights in or to the collateral or incurred by you in seeking to collect any obligations and to administer and enforce any of your rights under this agreement. All such costs, expenses and charges shall constitute loans hereunder, shall be payable by us to you on demand, and, until paid, shall bear interest at the highest rate then applicable to loans hereunder.

10. You or your representatives at all reasonable times shall have the right to examine all of our books and records pertaining to receivables and goods affected by this agreement or any other future agreement between us. We have agreed to pay any field audit fees deemed necessary by AFC; but said fees shall not exceed $4,000 per year, plus expenses. We will submit to you an aging of receivables and accounts payable as of the end of each month, in form and manner satisfactory to you, by the 10th of the following month, and we agree to have prepared and to furnish to you quarterly within 30 days after the close of each quarter's financial statements, which shall include a balance sheet, a statement of profit and loss and a statement of cash flow and shall be prepared in a uniform manner consistent with prior years, in such form, substance and detail as you may reasonably require. We also agree to have prepared and to furnish to you within sixty days after the close of our fiscal year, similar annual financial statements in such form, substance and detail as you may reasonably require. You may, at any time during which this agreement or any provision contained herein is in force, contact any account debtor of ours in order to ascertain any details regarding that account debtor or any account which may be owed to us by that account debtor. You are authorized to contact and discuss our affairs, finances and business with any officer, employee or director of ours or with any Affiliate or the officers, employees or directors of any Affiliate, and to discuss our financial condition with our independent public accountants.

11. You shall be entitled to hold or set off all sums and all other property of ours, at any time to our credit or in your possession by pledge or otherwise or upon or in which you may have a lien or security interest, as security for any and all obligations of ours owing to you. “Obligations” as said term is used in this Agreement shall mean all obligations hereunder, and under all notes, contracts of suretyship, guaranty or accommodation made by us in your favor, and all our other obligations to you, however created, arising or evidenced, whether direct or indirect, whether through assignment from third persons, whether absolute or contingent, or otherwise, now or hereafter existing, or due or to become due. You shall have the right and are hereby irrevocably authorized and directed to apply all payments received from the collateral account to the amounts of any and all Obligations. Recourse to security shall not at any time be required. We shall at all times remain liable for the repayment to you on demand of all Obligations. In any case we shall remain liable to you for any deficiencies arising upon the liquidation of any security held by you. If any receivable is not paid when due or if any customer raises any claim of non-conformity of goods, total or partial failure of delivery, set-off, counterclaim, or breach of warranty, or any other claim inconsistent with our warranties of receivables, or there is otherwise non-compliance with our warranties and representations regarding our receivables as made above, we will, upon demand, pay you for application to the Obligations the gross amount of the receivable so affected or unpaid, together with any damages or loss sustained by you, but such payment shall not be deemed a reassignment thereof, and title thereto and to the goods represented thereby shall remain in you until and unless you execute a reassignment. Before or after default hereunder you shall be entitled to notify any or all account debtors or other obligors on the receivables to pay you directly, and we agree that while assigned to you, you may take such action with regard to the custody and collection of receivables as you may deem necessary. We agree that failure to take any action with regard to any given receivable shall not be unreasonable until and unless you receive a request for specific action from us with regard thereto. You may also apply all payments received from the collateral account to, or at your option we will pay you on demand, all costs and expenses, including fifteen percent (15%) of the total amount involved as attorneys' fees, incurred upon the liquidation of any collateral, to obtain or enforce payment of any Obligations, in the settlement, adjustment, compromise or litigation of customer disputes or in the prosecution or defense of any action or proceeding either against you or against us concerning any matter growing out of or connected with this Agreement and/or any receivables and/or any Obligations. In the event of any breach by us of any provision herein, we will repay upon demand all of our Obligations to you. If at any time you pay any state, city, local, federal or other tax or levy arising from sales hereunder, we will repay to you the amount of tax so paid by you.

12. This Agreement shall be in effect from the date hereof until September 4, 2015 (the "Original Term") and shall automatically renew itself from year to year thereafter (each such one-year renewal being referred to herein as a "Renewal Term") unless (a) you make demand for repayment prior to the end of the Original Term or the then current Renewal Term; (b) the due date of the Obligations is accelerated; or (c) we elect to terminate this Agreement at the end of the Original Term or at the end of any Renewal Term by giving you written notice of such election at least ninety (60) days prior to the end of the Original Term or the then current Renewal Term and by paying all of the Obligations in full on the last day of such term. If this Agreement is terminated by us prior to the end of the First year of the Original Term, we shall pay to you a fee (as liquidated damages and compensation for the costs of being prepared to make funds available hereunder and not as a penalty) of one percent (1.00%) of the Maximum Credit Facility during the Original Term. We agree that this fee is a reasonable calculation of your lost profit in view of the difficulties and impracticality of determining actual damages resulting from an early termination of this Agreement. If one or more of the events specified in clauses (a), (b) and (c) occurs, this Agreement shall terminate on the date thereafter that the Obligations are paid in full, provided, however, that the security interests and liens created under this Agreement shall survive such termination until the payment of the Obligations have become indefeasible. At such time as we have repaid all of the Obligations and this Agreement has terminated, we shall deliver to you a release, in form and substance satisfactory to you, of all Obligations and liabilities of you and your officers, directors, employees, agents, parents, subsidiaries and affiliates to us, and if we obtain new financing from another lender, we shall deliver such lender's indemnification of you, in form and substance satisfactory to you, for checks which you have credited to our account, but which subsequently are dishonored for any reason. Notice of termination shall be given either personally or by registered or certified mail to the addresses shown herein, or to any other address designated in writing by either of us to the other. Notwithstanding the foregoing, should either party breach this Agreement or become insolvent or unable to pay our debts as they mature, or should we make an assignment for the benefit of creditors, or should a petition under any chapter of the Federal Bankruptcy Code, as amended, be filed by or against us, or should any guarantor of the Obligations hereunder terminate or revoke or attempt to terminate or revoke such guaranty, or should you deem yourselves insecure, or should we fail to pay promptly any amount due hereunder, or should we be in default under any of the terms or conditions of this Agreement, of any other agreement or agreements now or hereafter effective between us, then, and in any of the aforesaid events, the party aggrieved shall have the right to terminate this Agreement at any time without notice. Upon termination, all of our Obligations to you shall become immediately due and payable. Notwithstanding such termination, all the terms, conditions and provisions hereof shall continue to be fully operative until all transactions entered into, rights created or obligations incurred hereunder prior to termination and all our Obligations have been fully disposed of, concluded, paid, satisfied and liquidated. No delay or failure on your part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege or option, and no waiver shall be valid unless in writing signed by you and then only to the extent therein stated.

13. This Agreement is submitted by us to you for your acceptance or rejection at your principal place of business as an offer by us to borrow monies from you now and from time to time hereafter and shall not be binding upon you or become effective until accepted by you, in writing, at said place of business. If accepted by you, this Agreement shall be deemed to have been made in the State of Georgia. We hereby waive demand, presentment, protest and notice of nonpayment, and further waive the benefit of all valuation, appraisal and exemption laws. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or remaining provisions of this Agreement. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. If this Agreement is accepted by you, it shall be effective on the date set forth above, and shall continue in full force and effect until one year from such effective date, and from year to year thereafter, unless terminated, on any such anniversary date, or otherwise by reason of default, by either of us giving to the other not less than sixty (60) days prior written notice. You may terminate this Agreement at any time without notice to us should we breach any of our Obligations hereunder or under any other agreement or document evidencing financial arrangements between us, or should you deem yourself insecure. If any Obligation of ours to you is collected by or through an attorney, we agree to pay all costs and expenses of collection, including fifteen (15%) percent of the total amount involved as attorneys' fees. No termination of this Agreement shall terminate or adversely affect your rights hereunder or under any other agreement or document evidencing financial arrangements between us.

14. This Agreement is an amendment and a restatement of the Receivables Financing Agreement entered between us and you dated May 24 ^th , 2011. It is not intended by either of us to be a novation, accord and satisfaction, discharge or release of any Obligation.

15. Disputes regarding the nonpayment of any amount due under this Agreement to you or any of your affiliates which arise from, result from or relate to a counterclaim, offset, recoupment, claim or defense of us which is founded upon, arises out of or is related to, any theory of lender liability or other similar theory, and all disputes and claims relating to any provision hereof or relating to or arising out of the parties relationship or creation or termination hereof (including, without limitation, any claim that any provision of this Agreement is illegal, unenforceable or voidable under any law, ordinance or ruling) shall be settled by arbitration at the Office of the American Arbitration Association in Atlanta, Georgia, in accordance with the United States Arbitration Act (9 U.S.C. Section 1 et seq. ) and the Rules of the American Arbitration Association . Suits to compel arbitration or to determine arbitrability shall be brought in the United States District Court for the Northern District of Georgia. All awards of the arbitration shall be binding and non-appealable except as otherwise provided in the United States Arbitration Act. Judgment upon the award of the arbitrator may be entered in any court having jurisdiction thereof. PROVIDED, HOWEVER, that nothing contained in this Paragraph shall be interpreted or construed so as to make claims by you to enforce your rights in the Collateral or for the payment of sums due to you or to others by you (whether prior or subsequent to an event of default), subject to arbitration, even though counterclaims, offsets, recoupments, and other defenses and claims by us are subject to arbitration.

16. THE VALIDITY OF THIS AGREEMENT, AND ALL OTHER AGREEMENTS BETWEEN THE PARTIES, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF COBB, STATE OF GEORGIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF COBB, STATE OF GEORGIA, OR, AT YOUR SOLE OPTION, IN ANY OTHER COURT IN WHICH YOU SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF THE PARTIES HERETO WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE RIGHT TO A TRIAL BY JURY AND ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS AGREEMENT. We represent and warrant that no representative or agent of yours has represented, expressly or otherwise, that you will not, in the event of litigation, seek to enforce this right to jury waiver. Undersigned acknowledges that you have been induced and enter into this Agreement by, among other things, the provisions of this paragraph.

17. WE HEREBY WAIVE ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY YOU OF YOUR RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

18. Your failure, at any time or times hereafter, to require strict performance by us of any provision of this Agreement shall not waive, affect or diminish any of your rights thereafter to demand strict compliance and performance therewith. Any suspension or waiver by you a default under this Agreement shall not suspend, waive or affect any other default under this Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. No delay on your part in the exercise of any right or remedy under this Agreement shall preclude other or further exercise thereof or the exercise of any right or remedy. None of our undertakings, agreements, warranties, covenants and representations contained in this Agreement and no default under this Agreement shall be deemed to have been suspended or waived by you unless such suspension or waiver is in writing, signed by your duly authorized officer and directed to us specifying such suspension or waiver.

		ONE UP INNOVATIONS, INC.

BY:	/s/ Ronald P. Scott	BY:	/s/ Louis S. Friedman
	Ronald P. Scott		Louis S. Friedman
Its:	Secretary	Its:	President

A C C E P T A N C E

The foregoing Receivables Financing Agreement is accepted in Atlanta, Georgia, this 25th day of May , 2011.

			ADVANCE FINANCIAL CORPORATION

			BY:	/s/ A. James Perry
				A. James Perry
			Its:	President

BY: /s/

A. James Perry

Its: President

EXHIBIT A

Schedule of Collateral Location

Street	City	State	Zip

2745 Bankers Industrial Drive	Atlanta	Georgia	30360

Exhibit B

SECURITY AGREEMENT

(ACCOUNTS RECEIVABLE, INVENTORY AND EQUIPMENT)

STATE OF: GEORGIA

COUNTY OF: DEKALB

DATE: May 24, 2011

FOR VALUE RECEIVED One Up Innovations, Inc. , a Georgia corporation (hereinafter called the "Borrower") hereby conveys to Advance Financial Corp., a Georgia corporation (hereinafter called the "Secured Party") and hereby grants to the Secured Party security title to and a security interest in and lien upon the goods held by the Borrower for sale or lease or furnished or to be furnished by the Borrower under any contract of service or held by the Borrower as raw materials or work in process and made a part hereof to be used or consumed in Borrower's business (such goods being referred to herein as ("Inventory") all equipment, tools, furniture and fixtures (“Equipment”) and all rights of the Borrower now owned or hereafter acquired in payment for Inventory sold or leased or for services rendered ("Accounts")' and to all rights of the Borrower pursuant to a writing or writings which evidences both a monetary obligation and a security interest in or lease of Inventory ("Chattel Paper") and all rights of the Borrower to payment under a contract for the sale or lease of Inventory or the rendering of services which right is at the time not yet earned by performance ("Contract Rights") (said Inventory, Accounts, Chattel Paper and Contract Rights being referred to herein collectively as "Collateral", and said Equipment, Accounts, Contract Rights and Chattel Paper being referred to herein collectively as "Non-Inventory Collateral") and all proceeds thereof whether cash, negotiable instruments or otherwise to secure the payment of the principal of, interest on and satisfaction of all Obligations of Borrower under that certain Accounts Receivable Financing Agreement (hereafter referred to as the "Agreement") dated on or about the date hereof, between the Borrower and the Secured Party, satisfaction of all obligations of the Borrower hereunder, and satisfaction of all other obligations of the Borrower to the Secured Party, its successors and assigns, however created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, due or to become due. The obligations under the Agreement and all other obligations secured hereby are herein collectively called the "Obligations."

Until Default (as defined herein) the Borrower: (a) may in the ordinary course of its business, at its own expense, sell, lease or furnish under contract of service any of the Inventory normally held by the Borrower for such purpose and use and consume in the ordinary course of its business any raw material, work in process, or materials normally held by Borrower for such purpose, (b) will at its own expense endeavor to collect as, and when due, all amounts due with respect to any of the Accounts, Chattel Paper, Contract Rights or proceeds therefore, or any of the proceeds of the Inventory, including the taking of such action with respect to such collection as the Secured Party may reasonably request, or in the absence of such request, as the Borrower may deem advisable, and (c) may grant in the ordinary course of business to any party obligated on any of the Non-Inventory Collateral any rebate, refund or adjustment to which such party may be lawfully entitled, and may accept in connection therewith, the return of such goods, the sale or lease of which shall have given rise to such Non-Inventory Collateral.

The Borrower hereby warrants and agrees that: (a) to the extent, if any, it shall have advised the Secured Party that any of the Collateral is being acquired with the proceeds of any loan from Secured Party to the Borrower, such proceeds may be disbursed by the Secured Party directly to the seller of such Collateral; (b) the principal place of business of the Borrower is located at 2745 Bankers Industrial Drive, Atlanta, Georgia 30360 and the Borrower will notify Secured Party in advance of any change in such principal place of business; (c) the Collateral and all records relating to the Collateral as appropriate will be kept at the Borrower's principal place of business set forth above, unless the Secured Party shall otherwise consent in writing; (d) the Borrower will continuously operate its business as now conducted and according to the customary and usual business practices (including business hours) as similar types of business; (e) the Secured Party or any person designated by it shall have the right to call at the Borrower's various places of business at any time and without notice to inspect, audit, check and make extracts from the Borrower's books, records, journals, orders, receipts and other correspondence and other data relating to the Borrower's business and any other transaction between the Borrower and Secured Party without hindrance or delay, and Secured Party shall have the right to make direct verification from any persons obligated on any of the Non-Inventory Collateral with respect to any or all of the Non-Inventory Collateral assigned to the Secured Party hereunder; (f) the Borrower has full power and authority to enter into this agreement, and the execution of this agreement shall not constitute a default under or be in violation of any contract, agreement, debenture, note or similar document or any public law, rule, regulation or ordinance by which the Borrower is bound; (g) the Borrower will, upon request of Secured Party, indicate by notation, signs or otherwise upon any of the Collateral or records relating thereto, a notation in form and content satisfactory to the Secured Party of the security interest of the Secured Party hereunder; (h) the Borrower will furnish to the Secured Party such information concerning the Borrower, the Collateral and any persons obligated on Non-Inventory Collateral as the Secured Party may from time to time reasonably request; (i) the Borrower has, or forthwith will acquire, full title to the Collateral, and will at all times keep the Collateral free of all liens and claims whatsoever, other than the security interest hereunder; (j) no financing statement covering any of the Collateral is on file in any public office other than financing statement in favor of Secured Party and it will from time to time, on request of the Secured Party, execute such financing statements and other documents (and pay the cost of filing or recording the same in all offices deemed necessary or desirable by the Secured Party) and do such other acts and things, all as the Secured Party may request to establish and maintain a valid security title and interest in the Collateral (free of all other liens and claims whatsoever) to secure the payment of the Obligations, including, without limitation, deposit with the Secured Party any negotiable instruments covered by this agreement as proceeds or otherwise, any documents constituting chattel paper or any contracts, the proceeds of which are included in Collateral; (k) except for the sale or lease of any of the Inventory in the ordinary course of its business, the Borrower will not sell, transfer, lease, abandon or otherwise dispose of any of the Collateral or any interest therein except with the prior written consent of the Secured Party; (l) the Borrower will at all times keep the Collateral in first class order and repair, excepting any loss, damage or destruction which is fully covered by proceeds of insurance; (m) the Borrower will at all times keep the Collateral insured against loss, damage, theft and other risks, in such amounts and companies and under such policies and in such form, all as shall be satisfactory to the Secured Party, which policies shall, among other things, provide for 30 days' notice of cancellation or non-renewal to Secured Party and that loss thereunder shall be payable to the Secured Party as its interest may appear (and the Secured Party may apply any proceeds of such insurance which may be received by it toward payment of the Obligations, whether or not due, in such order of application as the Secured Party may determine) and such policies or certificates thereof shall, if the Secured Party so requests, be deposited with the Secured Party; and (n) none of the Inventory will be delivered to a warehouseman or other bailee.

The Secured Party may from time to time, at its option, perform any agreement of the Borrower hereunder which the Borrower shall fail to perform and take any other action which the Secured Party deems necessary for the maintenance or preservation of any of the Collateral or its interest therein, and the Borrower agrees to forthwith reimburse the Secured Party for all expenses of the Secured Party in connection with the foregoing, together with interest thereon at the rate of 12% per annum.

The occurrence of any of the following events shall constitute a Default (as such term is used herein): (a) non-payment, when due, of any amount payable on any of the Obligations or failure to perform any agreement of the Undersigned contained herein; (b) if any statement, representation or warranty of the Borrower herein or in any other writing at any time furnished by the Borrower to the Secured Party is untrue in any material respect as of the date made; (c) if the Borrower becomes insolvent or unable to pay debts as they mature or makes an assignment for the benefit of creditors or an order for relief is entered against the Borrower following the filing of any petition by or against it pursuant to the Bankruptcy Code, as amended or voluntarily takes the benefit of any debtor's relief proceeding (including the appointment of a receiver or trustee) under Federal or state law; (d) if an involuntary petition pursuant to the Bankruptcy Code is filed against the Borrower and is not dismissed for thirty (30) days or if a receiver is appointed for any of the property of the Borrower and is not dismissed for a period of thirty (30) days after such appointment or if a judgment is entered against the Borrower pursuant to which a sale of any part of the assets of the Borrower is scheduled for enforcement of said judgment or if a sale of any of the assets of the Borrower is scheduled pursuant to any other form of legal proceeding (including without limitation enforcement pursuant to the Georgia Uniform Commercial Code or exercise of a power of attorney contained in any deed to secure debt, trust deed or mortgage) instituted against the Borrower. Provided, that no such judgment, sale or enforcement shall be deemed a default pursuant to this sub-section (d) in the event the Borrower furnishes a surety company bond from a company acceptable to Secured Party in lieu of discharge, judgment, lien or foreclosure at the earlier of (i) five (5) days prior to the date upon which such enforcement or sale is scheduled, or (ii) ten (10) days after such judgment, enforcement, lien, sale or foreclosure is first entered, scheduled or instituted; (e) the dissolution, merger or consolidation, or transfer of a substantial part of the property of the Borrower; (f) the sale, transfer or exchange, either directly or indirectly, of a controlling stock interest of the Borrower; or (g) if Secured Party reasonably deems itself insecure for any other reason whatsoever.

Whenever a Default shall exist, all Obligations may (notwithstanding any provisions thereof), at the option of Secured Party, and without demand or notice of any kind, be declared, and thereupon immediately shall become in default and due and payable; and the Secured Party may exercise from time to time any rights and remedies available to it under applicable law. The Borrower agrees, in case of Default, to assemble, at its expense, all the Collateral at a convenient place acceptable to the Secured Party and to pay all costs of the Secured Party of collection of all of the Obligations, and enforcement of rights hereunder (including 15% of amounts due as attorneys' fees) and legal expenses and expenses of any repairs to any realty or other property to which any of the Collateral may be affixed or be a part.

In the event of Default, the Borrower will (except as the Secured Party may otherwise consent in writing) forthwith upon receipt, transmit and deliver to the Secured Party in the form received all cash, checks, draft items, chattel paper and other instruments for the payment of money (properly endorsed where required) so that such items may be collected by the Secured Party which may be received by the Borrower at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Secured Party may otherwise consent in writing, upon default such proceeds which may be received by the Borrower will not be commingled with any other of its funds or property but will be held separate and apart from its own funds or property and upon express trust for the Secured Party until delivery is made to the Secured Party. The Borrower will comply with the terms and conditions of any consent given by the Secured Party pursuant to the provisions of this paragraph.

In the event of default as defined herein or in the Agreement, the Borrower agrees that the actual amount of damages by Secured Party shall be difficult and impossible to determine, and that the remedies of Secured Party to recover such damages may be inadequate; therefore, Secured Party is authorized to enforce its rights hereunder by injunctive or other equitable relief without regard to the existence of actual damages. The Borrower hereby constitutes and appoints, upon Default, any officer of the Secured Party its true and lawful agent and attorney in fact for the purpose of filing any and all notices of lien and waivers thereof, actions, lawsuits and other appropriate documents to enforce the rights of Secured Party in and to any of the Non-Inventory Collateral.

If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if mailed at least five (5) days before such disposition, postage prepaid, addressed to the Borrower either at the address shown above, or at any other address of the Borrower which the Secured Party reasonably believes to be the Borrower's then current address. Any and all other notices given to the Borrower shall be deemed when personally delivered or when mailed registered or certified mail and addressed to the Borrower as provided in the preceding sentence.

Any proceeds of any disposition of any of the Collateral may be applied by the Secured Party to the payment of expenses in connection with the Collateral, (including 15% of amounts due as attorneys' fees) and legal expenses, and any balance of such proceeds may be applied by the Secured Party toward the payment of such of the Obligations, and in such order of application, as the Secured Party may from time to time elect.

The Secured Party may exercise any right or remedy provided herein in its discretion without exercising any other right or remedy provided herein. The Secured Party shall be under no duty to exercise any or all of the rights and remedies given by this agreement. No forbearance or indulgence shall operate as a waiver of any right or remedy of Secured Party or obligation of the Borrower and no single or partial exercise by the Secured Party of any rights or remedy shall preclude, as other or further exercise thereof or the exercise of any other right or remedy and unless Secured Party shall otherwise agree in writing, Secured Party shall be entitled to invoke any remedy available to Secured Party under any agreement or by law or in equity and enforce any covenant or condition against the Borrower despite said forbearance or indulgence.

The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Secured Party takes such action for that purpose as the Borrower shall request in writing, but failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care and no failure of the Secured Party to preserve or protect any rights with respect to the Collateral against prior parties or do any act with respect to the preservation of the Collateral not so requested by the Borrower shall be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral.

The delivery of any checks, drafts or other orders for the payment of money to Secured Party shall not constitute payment thereof until such checks, drafts or other items are finally paid.

Time is of the essence of this agreement.

If this agreement is not dated when executed by the Borrower, the Secured Party is authorized, without notice to the Borrower, to date this agreement.

This agreement has been delivered in the State of Georgia and shall be construed in accordance with the laws of the State. Wherever possible, each provision of this agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this agreement.

The rights and privileges of the Secured Party hereunder shall inure to the benefit of its heirs, legal representatives, successors and assigns.

IN WITNESS WHEREOF, this agreement has been duly executed under seal as of the 30th day of May, 2011.

(CORPORATE SEAL)

			ONE UP INNOVATIONS, INC.

			BY:	/s/ Louis S. Friedman
				Louis S. Friedman
			Title:	President

			BY:	/s/ Ronald P. Scott
				Ronald P. Scott
			Title:	Secretary

LSF /RPS_

(initial)

One Up Innovations, Inc.

EXHIBIT 10.11

ADVANCE SCHEDULE No. 04

ONE UP INNOVATIONS, INC. FOAM LABS, INC.

Funding Date: May 14, 2013

This Advance Schedule (the “ Schedule ”) is issued pursuant to and is subject to all terms and conditions of the Credit Card Receivables Advance Agreement, dated on or about November 2, 2010 (as amended from time to time in accordance with its terms, the “ Master Agreement ”), between CC FUNDING a division of CREDIT CASH NJ, LLC (the “ Lender ”) and ONE UP INNOVATIONS, INC. and FOAM LABS, INC., (individually and collectively, the “ Merchant ”). Capitalized terms used and not defined in this Schedule have the meanings given to them in the Master Agreement.

The Merchant has requested that the Lender make an Advance to the Merchant, and the Lender is willing to make such Advance, in each case subject to the following terms and conditions:

The Advance Amount is:

$400,000.00

The fee is::

$48,000.00

The Collection Amount of this Advance Schedule No. 04 is $ 448,000.00 . The outstanding balance of Advance Schedule No. 03 as of May 14, 2013 is in the amount of $119,172.07. The proceeds of the Advance Amount are to be used to (a) to payoff in full the outstanding balance of Advance Schedule No. 03 (which may be lower due to ongoing collections) and (b) remit the remaining balance of the Advance Amount to Merchant.

The Fixed Daily payment is:

$2,074.08

The Collection Date is 10 months from the funding date, estimated to be on or about February 14, 2014.

The Collection Account Bank and Collection Account are as follows :

Bank name:	Signature Bank
	111 Broadway
	New York, NY 10006
Routing/ABA Number:	026------
Account Name to credit:	One Up Innovations
Account Number to credit:	1500-------

The Merchant agrees to repay the Collection Amount (plus all Reimbursable Expenses) by remitting (or causing to be remitted) to the Lender, on or before the Collection Date, the Collection Amount plus all Reimbursable Expenses, by authorizing Lender to retain the Fixed Daily Payment from the Collection Account as provided in the Master Agreement. If the Collection Amount is remitted to the Lender before the Collection Date, the Merchant shall not be entitled to any refund or other compensation. If the Collection Amount is not remitted to the Lender by the Collection Date, Merchant may be subject to extension fees as set forth in the Master Agreement. :

Page 1 of 2

The Merchant hereby reaffirms and further grants to the Lender a security interest in the Collection Account and Collateral (including, without limitation, all Credit Card Receivables and/or proceeds thereof at any time deposited therein) to secure the Merchant's obligation to pay the Collection Amount (plus all Reimbursable Expenses) and to secure all other existing and future obligations of the Merchant to the Lende :

10.

The Merchant understands and agrees that all Advances by Lender to Merchant under the Master Agreement, this Advance Schedule, and under any other Related Agreements constitute one loan, and all indebtedness and obligations of Merchant to Lender under the Master Agreement, this Advance Schedule and the Related Agreements, present and future, constitute one general obligation secured by the Collateral. Merchant further understands that they shall be jointly and severally liable for payment of all of the obligations owing to Lender under all Advance Schedules, the Master Agreement and the Related Agreements and under any other agreement between Lender and any Merchant. :

11.

The Merchant reaffirms all terms, conditions and agreements set forth in the Master Agreement and any Related Agreements and further represents and warrants to the Lender that all representations and warranties made by the Merchant in the Master Agreement and any Related Agreements entered into on or before the date hereof are true and correct on the date hereof as if made on the date hereof. :

This Schedule may be executed in counterparts. Each counterpart shall be deemed an original but all of which together shall constitute one and the same instrument. An executed facsimile of this Schedule shall be deemed to be a valid and binding agreement between the parties hereto.

Agreed to:

CC FUNDING, a division of		ONE UP INNOVATIONS, INC.
CREDIT CASH NJ, LLC		for itself and as Disbursing Agent

BY:	/s/ Dean Landis	BY:	/s/ Louis S. Friedman
	Dean Landis		Louis S. Friedman
Its:	President	Its:	President & CEO

STATE OF GEORGIA		)
		)ss.:
COUNTYOF		)

On this 14 ^th day of May, 2013 before me personally appeared Louis S. Friedman , personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she is the President of ONE UP INNOVATIONS, INC. and FOAM LABS, INC., the corporations herein described and that he/she executed the same in his/her capacity as an officer of said corporations, and that he/she signed the instrument by order of the board of directors of said respective corporations.

_____________________________

Notary Public

Page 2 of 2

EXHIBIT 21.1

List of Subsidiaries of Liberator, Inc.

Name		State of Organization

One Up Innovations, Inc.		Georgia

Foam Labs, Inc.		Georgia

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-180451) pertaining to the Liberator, Inc. 2009 Stock Option Plan of our report dated September 30, 2013, with respect to the consolidated financial statements of Liberator, Inc. included in its Annual Report (Form 10-K) for the years ended June 30, 2013 and 2012.

Liggett, Vogt & Webb, P.A.

LIGGETT, VOGT & WEBB, P.A.

Certified Public Accountants

Boynton Beach, Florida

September 30, 2013

Exhibit 31.1

CERTIFICATION

I, Louis S. Friedman, certify that:

1.	I have reviewed this annual report on Form 10-K of Liberator, Inc.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 30, 2013	/s/ Louis S. Friedman
	Louis S. Friedman
	Chief Executive Officer (Principal Executive Officer) of Liberator, Inc.

Exhibit 31.2

CERTIFICATION

I, Ronald P. Scott, certify that:

1. I have reviewed this annual report on Form 10-K of Liberator, Inc.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 30, 2013	/s/ Ronald P. Scott
	Ronald P. Scott
	Chief Financial Officer (Principal Financial and Accounting
	Officer) of Liberator, Inc.

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Liberator, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2013 as filed with the Securities and Exchange Commission (the “Report”), I, Louis S. Friedman, Chief Executive Officer (Principal Executive Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: September 30, 2013

/s/ Louis S. Friedman

Louis S. Friedman

Chief Executive Officer (Principal Executive Officer)

of Liberator, Inc.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Liberator, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2013 as filed with the Securities and Exchange Commission (the “Report”), I, Ronald P. Scott, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: September 30, 2013	/s/ Ronald P. Scott
	Ronald P. Scott
	Chief Financial Officer (Principal Financial and Accounting Officer) of Liberator, Inc.