Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended March 31, 2014

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

For the transition period from to

Commission File No.: 000-54661

EMPOWERED PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

Nevada

27-0579647

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number

3367 West Oquendo Road, Las Vegas, Nevada 89118

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

800-929-0407

(COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

_______________________________________________

(Former Name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company x

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

The registrant had 62,788,856 shares of common stock, par value $0.001 per share, outstanding as of May 12, 2014.

EMPOWERED PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended March 31, 2014

INDEX

			Page
Part I	Financial Information

	Item 1	Financial Statements

		(a) Consolidated Condensed Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013	2

		(b) Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	3

		(c) Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	4

		(d) Notes to Unaudited Consolidated Condensed Financial Statements	5

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	15

	Item 4	Controls and Procedures	15

Part II

	Item 1	Legal Proceedings	17

	Item 1A	Risk Factors	17

	Item 2	Unregistered Sale of Equity Securities and Use of Proceeds	17

	Item 3	Default Upon Senior Securities	17

	Item 4	Mine Safety Disclosures	17

	Item 5	Other Information	17

	Item 6.	Exhibits	17

Signature			18

Item 1. Financial Statements

Empowered Products, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

	March 31,			December 31,
	2014			2013
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	235,713		$	157,396
Restricted cash		502,000			502,000
Accounts receivable, less allowance for doubtful accounts of $48,372 and $36,532, respectively		730,425			661,135
Inventory, net		1,179,154			1,093,466
Prepaid and other current assets		232,621			343,873
Total current assets		2,879,913			2,757,870

Plant and equipment, net		174,186			183,106
Trademarks and other intangibles, net		543,330			544,507
Other assets		52,918			48,397
Total assets	$	3,650,347		$	3,533,880

Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit	$	–		$	100,000
Accounts payable and other accrued expenses		331,701			193,417
Deferred revenue		125,712			125,712
Total current liabilities		457,413			419,129

Commitments and contingencies

Stockholders' Equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding		–			–
Common stock, $.001 par value, 2,200,000,000 shares authorized, 62,788,856 shares issued and outstanding at March 31, 2014 and December 31, 2013		62,789			62,789
Additional paid-in capital		6,929,816			6,759,633
Accumulated deficit		(3,799,671	)		(3,707,671	)
Total stockholders' equity		3,192,934			3,114,751
Total liabilities and stockholders' equity	$	3,650,347		$	3,533,880

See Notes to Unaudited Consolidated Condensed Financial Statements.

Empowered Products, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations

(Unaudited)

	Three Months Ended
	March 31,
	2014			2013

Revenue	$	1,342,612		$	833,019
Cost of revenue		468,530			329,234
Gross profit		874,082			503,785

Selling and distribution		453,338			202,512
General and administrative		511,699			573,458
Loss from operations		(90,955	)		(272,185	)

Interest income		2			140
Interest expense		(1,047	)		(4,118	)
Net loss	$	(92,000	)	$	(276,163	)



Earnings (loss) per share:
Basic	$	(0.00	)	$	(0.00	)
Diluted	$	(0.00	)	$	(0.00	)

Weighted average common shares outstanding for basic		62,788,856			62,388,856
Weighted average common shares outstanding for diluted		62,788,856			62,388,856

See Notes to Unaudited Consolidated Condensed Financial Statements.

Empowered Products, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Three Months Ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net loss	$	(92,000	)	$	(276,163	)
Adjustments to reconcile net loss to cash flows provided by operating activities:
Depreciation and amortization		17,275			17,675
Share based compensation		170,183			278,134
Provision for doubtful accounts		11,840			26,740
Changes in assets and liabilities:
(Increase) in restricted cash		–			(140	)
(Increase) decrease in accounts receivable		(81,130	)		7,811
(Increase) decrease in inventory		(85,688	)		3,580
(Increase) decrease prepaid and other current assets		111,252			(21,994	)
(Increase) other assets		(4,521	)		(18,496	)
Increase accounts payable and other accrued expenses		138,284			84,740
Cash flows provided by operating activities		185,495			101,887

Cash flows from investing activities:
Purchase of plant and equipment		(5,580	)		–
Payment of fees for trademarks		(1,598	)		(4,320	)
Cash flows used in investing activities		(7,178	)		(4,320	)

Cash flows from financing activities:
Line of credit repayments		(100,000	)		(96,532	)
Cash flows used in financing activities		(100,000	)		(96,532	)

Net increase in cash and cash equivalents		78,317			1,035

Cash and cash equivalents at the beginning of the period		157,396			116,990

Cash and cash equivalents at the end of the period	$	235,713		$	118,025

Supplementary disclosure of cash flow information:
Cash paid for interest	$	1,047		$	4,118

See Notes to Unaudited Consolidated Condensed Financial Statements.

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

Note 1. Nature of Operations

Empowered Products, Inc. and Subsidiaries (the “Company”) is engaged in the manufacture, sale and distribution of personal care products, principally throughout the United States, Europe and Asia. All of its business has been categorized as one segment.

Note 2. Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions from Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and notes normally provided in the audited financial statements and should be read in conjunction with the Company’s audited financial statements for fiscal year ended December 31, 2013 filed with the United States Securities and Exchange Commission on March 31, 2014. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated condensed balance sheets, statements of operations and cash flows reflect all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position of the Company at March 31, 2014 and the results of operations and cash flows for the three months ended March 31, 2014 and 2013.

Liquidity

As of March 31, 2014, the Company has cash and cash equivalents of approximately $236,000, restricted cash of $502,000 and an accumulated deficit of approximately $3,800,000. The Company generated a net loss of approximately $92,000 which included certain non-cash transactions, such as stock compensation expenses which generated the reported loss. The Company showed positive cash flows from operations and has paid off its line of credit, on which, the Company can borrow up to $500,000. With the accounts receivable balances from large retail chain customers and based on anticipated 2014 results, management believes that it has sufficient evidence that it can continue as a going concern.

Consolidation

The consolidated condensed financial statements include the accounts of Empowered Products, Inc. and its direct and indirect wholly-owned subsidiaries, Empowered Products Nevada, Inc., Empowered Products Limited, Empowered Products Asia Limited, and Empowered Products Pty Ltd. All material intercompany balances have been eliminated in consolidation.

Revenue recognition

Revenue is recognized when all significant contractual obligations, which involve the shipment of the products sold and reasonable assurance as to the collectability of the resulting account receivable has been satisfied. Returns are permitted primarily due to damaged or unsalable items. Revenue is shown after deductions for prompt payment, volume discounts and returns. The Company participates in various promotional activities in conjunction with its retailers and distributors, primarily through the use of trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions and coupons . These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. These costs have been subtracted from revenue and for the three months ended March 31, 2014 and 2013 approximated $15,000 and $3,000, respectively. The allowances for sales returns are established based on the Company’s estimate of the amounts necessary to settle future and existing obligations for such items on products sold as of the balance sheet date. The Company regularly reviews and revises, when deemed necessary, its estimates of sales returns based primarily upon the historical rate of actual product returns, planned product discontinuances, new product launches and estimates of customer inventory and promotional sales. The Company records deferred revenue when cash is received or goods are shipped in advance of the revenue recognition criteria being met.

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

Cost of revenue

Cost of revenue includes the cost of raw materials, packaging, inbound freight, direct labor, manufacturing facility costs, and depreciation. Other overhead costs, including purchasing, receiving, quality control, and warehousing are classified as selling and distribution or general and administrative expenses.

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

Use of estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenue and expenses. Such estimates primarily relate to the collectability of accounts receivable, provision for sales returns and allowances, inventory obsolescence, useful life of plant and equipment and the valuation of warrants and stock options. Actual results could vary from the estimates that were used.

Fair value of financial instruments

The Company’s financial instruments are cash and cash equivalents, restricted cash, accounts receivable, line of credit, and accounts payable. The recorded values of cash and cash equivalents, restricted cash, accounts receivable, line of credit and accounts payable approximate their fair values based on their short-term nature.

Restricted cash

Included in restricted cash is a certificate of deposit securing the Company’s line of credit.

Accounts receivable

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

Inventory

Inventory consists primarily of raw materials and finished goods that the Company holds for sale in the ordinary course of business. Inventory is stated at the lower of cost (determined on the first-in, first-out basis) or market. Other manufacturing overhead costs are also allocated to finished goods inventory. The amount of these allocations to inventory was approximately $275,000 at March 31, 2014 and $239,000 at December 31, 2013, respectively. Management periodically evaluates the composition of inventory and estimates an allowance to reduce inventory for slow moving, obsolete or damaged inventory. An allowance of approximately $65,000 and $65,000 was recorded at March 31, 2014 and December 31, 2013, respectively.

Trademarks and other intangibles, net

The Company capitalizes fees in connection with the development of various product trademarks. These assets are considered indefinite lived intangible assets and are reviewed for impairment annually or when circumstances indicate that the carrying amount of the trademark may not be fully recoverable. The amount attributable to trademarks at March 31, 2014 and December 31, 2013 was approximately $531,000 and $530,000, respectively. An impairment loss would be recorded if the carrying amount of the indefinite lived intangible asset exceeds its estimated fair value. The Company performed an impairment test as of December 31, 2013 and concluded that based on its undiscounted cash flows, the related trademarks were not impaired.

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

Share-based compensation

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

Note 3. Earnings (Loss) per Share (“EPS”)

Earnings (loss) per share are calculated in accordance with FASB ASC 260, Earnings Per Share . Basic net earnings (loss) per share are based upon the weighted average number of common shares outstanding, but excluding shares issued as compensation that have not yet vested. Diluted net earnings (loss) per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised, and that all unvested shares have vested. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.

	Three Months Ended March 31,
	2014			2013

Net loss available to common shares	$	(92,000	)	$	(276,163	)

Basic:
Weighted average shares		62,788,856			62,388,856

Diluted:
Weighted average shares, basic		62,788,856			62,388,856
Dilutive effect of warrants and options		–			–
Weighted average shares, diluted		62,788,856			62,388,856

Basic earnings per share	$	(0.00	)	$	(0.00	)
Diluted earnings per share	$	(0.00	)	$	(0.00	)

Weighted average anti-dilutive shares excluded from diluted EPS		5,725,000			4,700,000

Note 4. Inventory

Inventory consists of the following at:

	March 31,			December 31,
	2014			2013

Raw materials	$	410,214		$	328,345
Finished goods		833,940			830,121
		1,244,154			1,158,466
Less: inventory reserve		(65,000	)		(65,000	)
	$	1,179,154		$	1,093,466

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

Note 5. Plant and Equipment, net

Depreciation for the three months ended March 31, 2014 and 2013 was approximately $14,500 and $14,900, respectively. Cost, accumulated depreciation and estimated useful lives are as follows:

	Estimated	March 31,			December 31,
Category	Useful Lives	2014			2013

Manufacturing and computer equipment	5 - 7 Years	$	388,190		$	388,190
Office furniture and computer software	3 - 7 Years		87,003			87,003
Vehicle	5 Years		19,442			19,442
Leasehold improvements	10 Years		5,580			–
			500,215			494,635
Less: accumulated depreciation			(326,029	)		(311,529	)
		$	174,186		$	183,106

Note 6. Line of Credit

The Company has a new $500,000 line of credit with a financial institution bearing interest at 2.3%, secured by restricted cash with a maturity date of October 28, 2014. The balance was $-0- and $100,000 at March 31, 2014 and December 31, 2013, respectively.

Note 7. Stockholders’ Equity

On June 30, 2011, the Company entered into a subscription agreement with New Kaiser Limited (the “Investor”) to sell an aggregate of 2,000,000 shares of common stock for $1.00 per share. In connection with the shares being issued, the Investor received five-year warrants which allow the Investor to purchase 2,000,000 shares of its common stock at an exercise price of $1.25 per share. The closing of the sale occurred subsequent to June 30, 2011 and included an exchange of the $500,000 note payable and the receipt of $1,500,000 in cash in exchange for 2,000,000 shares of the Company’s common stock and the warrants. The warrants were deemed to have a fair value of approximately $885,000 and are included in additional paid-in capital. The warrants have been valued using the Black-Scholes pricing model with assumptions of a five year term, common stock price of $1.00 per share, 58% expected volatility, 1.54% risk-free interest rate and a dividend yield of 0%. Expected volatility was based on average volatilities of a sampling of four companies with similar attributes to the Company. The risk free rate for the contractual life of the warrants was based on the U.S. Treasury yield at the time of grant.

On February 22, 2013, the Company entered into an agreement with a related party, whereby, the Company agreed to grant to the individual as partial consideration of services to be rendered to the Company and/or its subsidiaries, an aggregate of 400,000 shares of the Company’s common stock, pursuant to the Company’s stock incentive plan below, to be granted in equal installments of 200,000 shares on April 1, 2013 and October 1, 2013, respectively. The Company valued the 400,000 shares at $152,000 based on the Company’s stock price at the dates of the grants.

Share-Based Compensation

Stock Options

In April 2012, the Board of Directors adopted and the shareholders approved the Empowered Products, Inc. 2012 Omnibus Incentive Plan (the “Plan”). The Plan provides for the grant of stock options, stock appreciation rights (none issued), restricted stock, and other stock awards, including short-term cash incentive awards (none issued). In addition, the Plan provides for the grant of restricted stock units of which none are currently issued. Awards granted under the Plan may be granted individually or in any combination. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may be subsequently re-priced by the Plan Administrator without stockholder consent. Equity granted under the Plan vests in various increments generally over one to three years and stock options expire in ten years.

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

The Plan provides for grants of awards to our directors, employees and consultants. The maximum number of awards which may be granted is 5.0 million of which 3,725,000 have been granted as of March 31, 2014. A summary of activity related to stock options is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2013		2,700,000	$	0.28		9.0	$	294,521
Granted		1,025,000		0.40		9.8		–
Exercised		–		–				–
Forfeited		–		–				–
Expired		–		–				–
Outstanding at March 31, 2014		3,725,000	$	0.31		9.2	$	294,521

Fully vested and expected to vest at March 31, 2014		2,408,335	$	0.29		9.1	$	232,708

Exercisable at March 31, 2014		2,408,335	$	0.29		9.1	$	232,708

For the year ended December 31, 2013, 2.7 million non-qualified stock options were granted with an aggregate fair market value of approximately $484,000. For the year ended December 31, 2013, no stock options were exercised; therefore, the tax effect/benefit from stock option exercises had no effect on our additional paid-in capital or income tax provision. As of March 31, 2014, there was approximately $103,000 of unamortized compensation expense related to stock options that is expected to be recognized as an expense over a weighted average period of 0.95 years.

During the three months ended March 31, 2014, 1,025,000 non-qualified stock options were granted with an aggregate fair market value of approximately $249,000. For the period ended March 31, 2014, no stock options were exercised; therefore, the tax effect/benefit from stock option exercises had no effect on our additional paid-in capital or income tax provision. As of March 31, 2014, there was approximately $182,000 of unamortized compensation expense related to stock options that is expected to be recognized as an expense over a weighted average period of 0.58 years.

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. The options have been valued using the Black-Scholes pricing model with assumptions of a five and a half year term, common stock price of $0.28 - $0.40 per share, 74% - 78% expected volatility, 0.88% - 1.55% risk-free interest rate and a dividend yield of 0%. Expected volatility was based on average volatilities of a sampling of four companies with similar attributes to the Company as the Company has a limited trading history. The risk free rate for the contractual life of the options was based on the U.S. Treasury yield at the time of grant. The expected term of the options granted is derived using the “simplified method” which computes the expected term as the average of the sum of the vesting term and the contract term, as the Company had limited activity surrounding its options to provide a historical term.

Warrants

In July 2013, the Company entered into Service Agreements with two companies agreeing to issue five-year warrants to purchase an aggregate of three million shares of the Company’s common stock for services to be rendered. Of the issuable warrants, warrants equivalent to one million shares were granted on July 29, 2013, warrants to purchase one million shares will be issued in July 2014, and warrants to purchase one million shares will be issued in July 2015. If the Service Agreements are terminated prior to the issuance date, the Company has no obligation to issue the remaining unissued warrants. The Company valued the warrants at $240,000 based on the Company’s stock price on July 12, 2013, the date of the service contracts.

Warrant valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. The warrants have been valued using the Black-Scholes pricing model with assumptions of a two and a half year term, common stock price of $0.43 per share, exercise price of $0.33 per share, 83% expected volatility, 0.52% risk-free interest rate and a dividend yield of 0%. Expected volatility was based on average volatilities of a sampling of four companies with similar attributes to the Company as the Company has a limited trading history. The risk free rate for the contractual life of the warrants was based on the U.S. Treasury yield at the time of grant.

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

Note 8. Revenue by Geographic Area

Revenue by geographic area is determined based on the location of the Company’s customers. The following provides financial information concerning the Company’s operations by geographic area for the three months ended March 31:

	March 31,
	2014			2013
Revenue:
United States	$	1,281,192	95.4%	$	765,250	91.9%
Europe		48,532	3.6%		43,832	5.2%
Asia		12,888	1.0%		23,937	2.9%
	$	1,342,612	100.0%	$	833,019	100.0%

Note 9. Related Party Transactions and Operating Leases

The Company rents office space from an affiliate, EGA Research, LLC, that is controlled by the Company’s majority stockholder under a triple net lease expiring on February 28, 2016. The lease calls for monthly rental payments of $7,000. Total rent expense for each of the three months ended March 31, 2014 and 2013 was $21,000.

The Company entered into an office lease with an unrelated party for additional rental space in 2011 which expired on May 31, 2013 and was renewed through May 31, 2015. The lease calls for monthly rental payments of $4,000. The Company has an option to purchase the building for its fair value at any time during the term of the lease. Total rent expense under this lease for each of the three months ended March 31, 2014 and 2013 was $12,000.

Included in selling and distribution expenses for the three months ended March 31, 2014 and 2013 are marketing fees of approximately $139,000 and $192,000, respectively, paid to a company owned by the Company’s majority stockholder.

The Company purchased sample products from a related party of approximately $18,000 and $18,000 for the three months ended March 31, 2014 and 2013, respectively.

Minimum future rentals under the lease agreements are as follows:

Year ending
2014	$	99,000
2015		104,000
2016		14,000
	$	217,000

Note 10. Income Taxes

Income taxes are calculated using the asset and liability method of accounting. Deferred income taxes are computed by multiplying statutory rates applicable to estimated future year differences between the financial statement and tax basis carrying amounts of assets and liabilities.

The Company has federal net operating loss (“NOL”) carry forwards of approximately $2,924,000, and $3,014,000 at March 31, 2014 and December 31, 2013, respectively. The federal net operating loss carry forwards begin to expire in 2024. A 34% statutory federal income tax rate was used for the calculation of the deferred tax asset. Management has established a valuation allowance equal to the estimated deferred tax asset due to uncertainties related to the ability to realize these tax assets. The valuation allowance decreased by approximately $31,000 during the three months ended March 31, 2014.

The NOL carry forwards may be significantly limited under Section 382 of the Internal Revenue Code (“IRC”) as a result of the Company’s merger on June 30, 2011. The limitation imposed by Section 382 would place an annual limitation on the amount of the NOL carry forwards that can be utilized. The Company has not performed any analysis of whether or not there has been a cumulative change in ownership of greater than 50%. If this analysis were completed and it was determined that there has been a change in ownership, the amount of the NOL carry forwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carry forwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenue, and expenses for the periods presented.

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

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

Forward-Looking Statements

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated condensed financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements for the year ended December 31, 2013 and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 31, 2014 (the “Annual Report”).

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

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

our ability to grow and increase awareness of our brand;

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

our ability to control advertising and marketing costs;

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

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

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

our ability to obtain certification in the European Union;

the occurrence of foul weather that disrupts our operations;

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

our vulnerability to interruptions in shipping lanes;

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

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

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

our ability to protect our trademarks;

market acceptance of our new line of nutritional supplements;

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

exposure to product liability claims;

exposure to intellectual property claims from third parties;

our ability to manage inventory in an effective manner;

our reliance on the expected growth in the nutritional supplement industry;

our compliance with FDA regulations and other regulatory requirements;

implementation of new regulations governing our products and operations;

our ability to protect against security breaches and inappropriate behavior of Internet users;

our exposure to credit card fraud;

our reliance on our current president and chief executive officer;

our ability to maintain effective disclosure controls and internal control over financial reporting;

our ability to raise additional capital;

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

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

Company Overview

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

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

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

Through EP Nevada and its subsidiaries, we offer a line of topical gels, lotions and oils, designed to enhance a person’s sex life and make people feel good about their sexual health in general. We currently have 13 exclusively formulated skin lubricants sold under our PINK® for Women and GUN OIL® for Men trademarks and intend to continue to expand our products offerings. Our proprietary formulated products are designed to increase mental focus and to improve the bond of interpersonal relationships. Our trademarked products are currently sold in 30 countries through more than 21,000 retail outlets. We also sell two herbal supplements for women under our PINK® for Women brand, PINK® Elevate Libido and PINK® Elevate Performance, and two herbal supplements for men under our GUN OIL® for Men brand, GUN OIL® High Caliber Drive and GUN OIL® High Caliber Performance.

Results of Operations

The following table sets forth information from our consolidated condensed statements of operations for the three months ended March 31, 2014 and 2013 in dollars and as a percentage of revenue (unaudited):

	Three Months Ended March 31,
	2014						2013
	In Dollars			Percentage of Revenue			In Dollars			Percentage of Revenue
Revenues	$	1,342,612			100%		$	833,019			100%
Cost of revenue		468,530			35%			329,234			40%
Gross profit		874,082			65%			503,785			60%

Selling and distribution		453,338			34%			202,512			24%
General and administrative		511,699			38%			573,458			69%

Loss from operations		(90,955	)		(7%	)		(272,185	)		33%

Interest income		2			0%			140			0%
Interest expense		(1,047	)		(0%	)		(4,118	)		(0%	)
Net loss	$	(92,000	)		(7%	)	$	(276,163	)		(33%	)
Earnings (loss) per share	$	(0.00	)				$	(0.00	)

Three Months Ended March 31, 2014 and 2013

Revenue for the three months ended March 31, 2014 was approximately $1.3 million as compared to approximately $833,000 in the comparable period in 2013. The 61% increase in revenue was primarily due to new sales of Pink, Pink Water, Hot Pink, Gunoil and Gunoil H2O to national retail chains throughout the United States. The major chain stores now carrying our lubricant products are Walgreens, CVS, Rite Aid, Kroger/Fred Meyer, HEB, Meijer and Wal-Mart.

Cost of revenue primarily consists of costs related to the production and purchase of products for sale. Cost of revenue for the three months ended March 31, 2014 was approximately $469,000 as compared to approximately $329,000 in the comparable period in 2013. The increase in cost of revenue for the three months ended March 31, 2014 relative to the same period in 2013 was primarily due to increased sales to national retail chains and the resulting costs associated with those sales.

For the three months ended March 31, 2014, our gross profit increased by approximately $370,000 when compared to the three months ended March 31, 2013. The gross margin was 65% and 60% for the three months ended March 31, 2014 and 2013, respectively. The gross profit margin increase was attributable to an increase in sales made directly to retailers, including national retail chains, at our standard rates, based on our manufacturer suggested retail price as compared to sales made through our wholesale distribution channels which are made at lower prices due to higher discounts given to such customers. The percentage of sales to national retail chains during the three months ended March 31, 2014 and 2013 were approximately 44% and 15%, respectively.

Selling and distribution expenses for the three months ended March 31, 2014 were approximately $453,000, or 34% of revenue, compared to approximately $203,000, or 24% of revenue, for the same period in the prior year, an increase of 123%. The increase in selling and distribution expenses was primarily the result of an increase in marketing our products, direct mailers, fees charged back from the national retail chains for in store promotion of our product, increased freight expense and increased sales commissions.

General and administrative expenses for the three months ended March 31, 2014 were approximately $512,000, or 38% of revenue, compared to approximately $573,000, or 69% of revenue, for the same period in the prior year, a 10% decrease. The decrease in general and administrative expenses was primarily due to a decrease in share based compensation.

No expense or benefit from income taxes was recorded in the three months ended March 31, 2014 or 2013 due to our net losses. We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry forwards.

We had net loss of $92,000 for the three months ended March 31, 2014 compared with a net loss of approximately $276,000 for the three months ended March 31, 2013.

Liquidity and Capital Resources

We had unrestricted cash and cash equivalents of approximately $236,000 as of March 31, 2014, as compared to approximately $157,000 as of December 31, 2013.

We rely on the Company’s operations to generate sufficient income and cash to fund our operations, along with borrowings under our line of credit. We have a line of credit with Bank of Nevada providing for borrowings of up to $500,000. As of March 31, 2014, we had no borrowings outstanding under this line of credit. The Company did have approximately $502,000 of cash that is restricted and tied to its line of credit.

For the three months ended March 31, 2014, net cash provided by operating activities was approximately $185,000 as compared to net cash provided by operating activities of approximately $102,000 for the comparable period in 2013. The increase in net cash provided by operating activities is primarily attributable to a decrease in prepayments and other assets of approximately $107,000 and an increase in accounts payable of approximately $138,000 which was partially offset by increases in accounts receivable of approximately $81,000 and inventory of approximately $86,000.

For the three months ended March 31, 2014, net cash used in investing activities was approximately $7,000, as compared to net cash used in investing activities of approximately $4,000 for the comparable period in 2013. The increase in net cash used in investing activities is primarily attributable to costs surrounding leasehold improvements at our bottling line warehouse.

Net cash used in financing activities was $100,000 for the three months ended March 31, 2014 as compared to net cash used in financing activities of approximately $97,000 for the comparable period in 2012. The increase in cash used in financing activities was primarily the result of the paydown of our line of credit.

Off-Balance-Sheet Arrangements

In August 2011, the Company entered into an agreement to purchase product sample packets of Gun Oil and PINK products. In connection with the agreement, the related party vendor provides the manufacturing equipment, machine operator, and management of production. The Company is required to make minimum monthly purchases of $5,880 pursuant to the agreement. Since inception through March 31, 2014, the Company made purchases of approximately $188,000 pursuant to the purchase obligation.

Critical Accounting Policies

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

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

Revenue recognition

We recognize revenue when all significant contractual obligations, which involve the shipment of the products sold and reasonable assurance as to the collectability of the resulting account receivable, have been satisfied. Returns are permitted for damaged or unsalable items only. Revenue is shown after deductions for prompt payment, volume discounts and returns. We estimate that these discounts and returns will approximate 2% of gross revenues and the costs are accrued accordingly. We participate in various promotional activities in conjunction with our retailers and wholesalers, primarily through the use of discounts. The allowances for sales returns are established based on our estimate of the amounts necessary to settle future and existing obligations for such items on products sold as of the balance sheet date.

Accounts receivable

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

Inventory

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

Trademarks and other intangibles

The Company capitalizes fees in connection with the development of various product trademarks. These assets are considered indefinite lived intangible assets and are reviewed for impairment annually or when circumstances indicate that the carrying amount of the trademark may not be fully recoverable. An impairment loss would be recorded if the carrying amount of the indefinite lived intangible asset exceeds its estimated fair value. Other intangibles consisted of customer lists acquired in 2011 and website development costs incurred in 2012. Other intangible assets are amortized over their useful lives ranging from 2 to 5 years.

Share-Based Compensation

The Company’s incentive compensation plan allows the Company to grant awards to employees, directors, and consultants in the form of stock options, stock awards, warrants, restricted stock units, and stock appreciation rights. Compensation related to these awards is determined based on the fair value on the date of grant and is amortized to expense over the vesting period. For warrants granted to non-employees, the Company recognizes compensation expense as the performance or services are completed. For restricted stock units, the Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, our principal accounting and financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act), our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting.

In our Annual Report, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that as of December 31, 2013, our internal control over financial reporting was not effective based on those criteria because of the existence of material weaknesses. The specific deficiencies contributing to these material weaknesses related to (a) ineffective procedures and controls over reserves and allowances, (b) inadequate segregation of duties, (c) an inadequate number of independent board members and lack of an independent audit committee, and (d) an insufficient complement of personnel with appropriate levels of knowledge and experience. Due to the actual and potential errors on financial statement balances and disclosures, management has concluded that these deficiencies in internal controls over the period-end financial close and reporting processes constituted a material weakness in internal control over financial reporting.

We intend to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us. Management believes that the appointment of one or more outside directors, who would be appointed to serve an audit committee function, will remedy the lack of a functioning audit committee. We originally anticipated these initiatives to be at least partially, if not fully, implemented by December 31, 2013; however, due to limited resources and varying Company business priorities, we currently intend to take action during fiscal 2014, depending on the availability of Company resources. There is no guarantee that we will be able to take sufficient actions to remedy the material weaknesses described above.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013 .

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None.

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

Exhibit Number		Description of Document

31.1		Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

EMPOWERED PRODUCTS, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Empowered Products, Inc.


Dated: May 15, 2014	/s/	Scott Fraser
	By:	Scott Fraser
	Its:	President and Chief Executive Officer (Principal Executive Officer and Authorized Officer)

	/s/	Kurt Weber
	By:	Kurt Weber
	Its:	Chief Financial Officer (Principal Financial and Accounting Officer)