The accompanying notes are
an integral part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Luvu Brands, 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 Company is primarily a designer and
manufacturer of various specialty furnishings for the sexual wellness, lifestyle and casual furniture and seating market.
The Company has also become an online retailer of products for the sexual wellness market. All of the Company’s operations
are located in the same facility in Atlanta, Georgia, including product development, sales, manufacturing and administration. Sales
are generated through internet and print advertisements. We have a diversified customer base with only 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 fiscal quarters.
NOTE 2. 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 of approximately $312,000 and $474,000 for the years ended June
30, 2016 and 2015, respectively and as of June 30, 2016 the Company has an accumulated deficit of approximately $9.2 million and
a working capital deficit of approximately $2.4 million. This raises substantial doubt about 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.
These actions include an ongoing initiative
to increase sales, gross profits and our gross profit margin. To that end, we continued to make improvements to our e-commerce
sites during fiscal 2015 and 2016. We also installed new equipment during fiscal 2015 to increase the efficiency and capacity of
our foam repurposing operation. At the end of fiscal 2015 we ordered new equipment to increase our fabric cutting capacity; this
equipment was delivered and installed during the first quarter of fiscal 2016. At the end of fiscal 2016, we evaluated various
options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2017, we purchased
new equipment for installation during the second quarter of fiscal 2017. These actions should yield higher sales at a lower cost
of goods sold. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue
levels. We estimate that the operational and strategic growth plans we have identified will require approximately $250,000 of funding,
of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.
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 3. 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
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:
income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves, 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, 2016 and June 30, 2015.
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(in thousands)
|
Accounts receivable
|
|
$
|
842
|
|
|
$
|
783
|
|
Allowance for doubtful accounts
|
|
|
(24
|
)
|
|
|
(22
|
)
|
Allowance for discounts and returns
|
|
|
(24
|
)
|
|
|
(13
|
)
|
Total accounts receivable, net
|
|
$
|
794
|
|
|
$
|
748
|
|
F-7
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 2016 and 2015 that
exceeded the balance insured by the FDIC by $282,910 and $242,448, respectively.
Accounts receivable are typically unsecured
and are derived from revenue earned from customers primarily located in North America and Europe.
During 2016, we purchased 21% and 15%
of total inventory purchases from two vendors.
During 2015, we purchased 27% and 13%
of total inventory purchases from two vendors.
As of June 30, 2016 and 2015,
one of the Company’s customers (Amazon) represents 32% and 32% of the total accounts receivables, respectively. Sales to
(and through) Amazon accounted for 28% of our net sales during the year ended June 30, 2016 and 26% of our sales for the year ended
June 30, 2015.
Fair Value of Financial Instruments
At June 30, 2016 and 2015, our financial
instruments included cash and cash equivalents, accounts receivable, accounts payable, short-term debt, 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.
F-8
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments (continued)
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 $19,946 at June 30, 2016 and $25,937 at June 30, 2015. Advertising expense for the years ended June 30, 2016 and 2015 was $345,393
and $411,469, respectively.
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 $169,500 for the year ended June 30, 2016 and $124,674 for the year ended June 30, 2015.
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
On July 23, 2014, the Company entered
into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on
December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment was effective August 1, 2014
and included a four-month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company agreed
to make improvements to the facility totaling $123,505 within six months of August 1, 2014. As of June 30, 2016, the Company has
completed $65,224 of the leasehold improvements. In addition, the monthly rent on the facility decreased from the current rent
of $33,139 to $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating
schedule with the final year of the lease at $35,123 per month. The rent expense under this lease for the years ended June 30,
2016 and 2015 was $352,479 and $350,082, respectively.
The Company also leases certain equipment
under operating leases, as more fully described in Note 15 -
Commitments and Contingencies
.
F-9
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2016
|
|
Year Ended
June 30, 2015
|
|
%
Change
|
|
|
(in thousands)
|
|
|
Net Sales by Channel:
|
|
|
|
|
|
|
Direct
|
|
$
|
5,089
|
|
|
$
|
5,260
|
|
|
|
(3
|
)%
|
Wholesale
|
|
$
|
11,284
|
|
|
$
|
9,835
|
|
|
|
15
|
%
|
Other
|
|
$
|
453
|
|
|
$
|
459
|
|
|
|
(1
|
)%
|
Total Net Sales
|
|
$
|
16,826
|
|
|
$
|
15,554
|
|
|
|
8
|
%
|
|
|
Year Ended
|
|
Margin
|
|
Year Ended
|
|
Margin
|
|
%
|
|
|
June 30, 2016
|
|
%
|
|
June 30, 2015
|
|
%
|
|
Change
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
Gross Profit by Channel:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
2,470
|
|
|
|
49
|
%
|
|
$
|
2,361
|
|
|
|
45
|
%
|
|
|
5
|
%
|
Wholesale
|
|
$
|
2,277
|
|
|
|
20
|
%
|
|
$
|
1,863
|
|
|
|
19
|
%
|
|
|
22
|
%
|
Other
|
|
$
|
(519
|
)
|
|
|
(115
|
)%
|
|
$
|
(468
|
)
|
|
|
(102
|
)%
|
|
|
(11
|
)%
|
Total Gross Profit
|
|
$
|
4,228
|
|
|
|
25
|
%
|
|
$
|
3,756
|
|
|
|
24
|
%
|
|
|
13
|
%
|
Recent Accounting Pronouncements
In March 2016, the
FASB issued Accounting Standards Update (“ASU”) 2016-09, “
Compensation – Stock Compensation (Topic 718)
:
Improvements to Employee Share-Based Payment Accounting” (“
ASU No. 2016-09
”)
. This ASU makes
several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation,
and the financial statement presentation of excess tax benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of
cash flows presentation for certain components of share-based awards. The standard is effective for interim periods beginning after
December 15, 2016, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently evaluating
the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In February 2016,
the FASB issued ASU 2016-02, “
Leases (Topic 842)” (“
ASU No. 2016-02”). The principle objective of
ASU No. 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet. ASU No. 2016-02 continues to retain a distinction between finance and operating leases but requires lessees
to recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a corresponding lease
liability on the balance sheet for all leases with terms greater than twelve months. ASU No. 2016-02 is effective for fiscal years
and interim periods beginning after December 15, 2018. Early adoption of ASU No. 2016-02 is permitted. The Company is currently
assessing the impact this standard may have on its consolidated financial statements and the related disclosures.
F-10
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
In November 2015, the FASB issued ASU
No. 2015-17, “
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
. This guidance simplifies
the presentation of deferred income taxes and requires that deferred tax assets and liabilities be classified as noncurrent in
the classified statement of financial position. This guidance is effective for the Company as of June 30, 2018 and is not expected
to have a material impact on the consolidated financial statements as the guidance only changes the classification of deferred
income taxes.
In August 2015, the FASB issued ASU 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”
, which defers the effective
date of ASU 2014-09 by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted
early adoption of the standard, but not before the original effective date The Company expects to adopt this guidance when effective
and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related
disclosures.
In July 2015, the FASB issued ASU No.
2015-11,”
Inventory: Simplifying the Measurement of Inventory”
, that requires inventory not measured using
either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion,
disposal, and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years, and will be applied prospectively. Early adoption is permitted. The Company
is evaluating the impact that this standard will have on its consolidated financial statements.
In April 2015, the
FASB issued ASU No. 2015-03, “
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs
,” which requires debt issuance costs related to a recognized debt liability to be presented in
the balance sheet as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective for fiscal years
beginning after December 15, 2015. Early adoption is permitted. Upon adoption, an entity must apply the new guidance retrospectively
to all prior periods presented in the financial statements, and must provide certain disclosures about the change in accounting
principle, including the nature of and reason for the change, the transition method, a description of the prior-period information
that has been retrospectively adjusted and the effect of the change on the financial statement line items (that is, debt issuance
cost asset and the debt liability). The implementation of this guidance is not expected to have a material impact on the Company’s
consolidated financial statements.
All other newly
issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
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, 2016 and 2015, 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, 2016 and 2015 are as follows:
|
|
2016
|
|
2015
|
Convertible Preferred Stock
|
|
|
4,300,000
|
|
|
|
4,300,000
|
|
Stock options
|
|
|
6,870,000
|
|
|
|
4,160,500
|
|
Convertible debt
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
11,170,000
|
|
|
|
8,460,500
|
|
F-11
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2016, we carried a valuation allowance of $2.8 million against our net deferred
tax assets.
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.
NOTE 4. 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, 2016 or 2015.
F-12
NOTE 5. 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, 2016 and 2015:
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Raw materials
|
|
$
|
659
|
|
|
$
|
554
|
|
Work in process
|
|
|
182
|
|
|
|
160
|
|
Finished goods
|
|
|
663
|
|
|
|
615
|
|
Total inventories
|
|
|
1,504
|
|
|
|
1,329
|
|
Allowance for inventory reserves
|
|
|
(60
|
)
|
|
|
(26
|
)
|
Total inventories, net of allowance
|
|
$
|
1,444
|
|
|
$
|
1,303
|
|
NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property and equipment at June 30,
2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
|
Estimated
Useful Life
|
|
|
(in thousands)
|
|
|
Factory equipment
|
|
$
|
2,231
|
|
|
$
|
1,910
|
|
|
2-10 years
|
Computer equipment and software
|
|
|
1,049
|
|
|
|
909
|
|
|
5-7 years
|
Office equipment and furniture
|
|
|
167
|
|
|
|
167
|
|
|
5-7 years
|
Leasehold improvements
|
|
|
408
|
|
|
|
402
|
|
|
10 years
|
Subtotal
|
|
|
3,855
|
|
|
|
3,388
|
|
|
|
Accumulated depreciation
|
|
|
(2,985
|
)
|
|
|
(2,760
|
)
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
870
|
|
|
$
|
628
|
|
|
|
Depreciation expense was $225,312 and
$219,168 for the years ended June 30, 2016 and 2015, respectively.
NOTE 7. OTHER ACCRUED LIABILITIES
Other accrued liabilities at June 30,
2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Accrued compensation
|
|
$
|
314
|
|
|
$
|
266
|
|
Accrued expenses and interest
|
|
|
135
|
|
|
|
174
|
|
Current portion of deferred rent payable
|
|
|
28
|
|
|
|
16
|
|
Other accrued liabilities
|
|
$
|
477
|
|
|
$
|
456
|
|
F-13
NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY
Current and long-term debt at June
30, 2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
Current debt:
|
|
(in thousands)
|
Unsecured lines of credit (Note 14)
|
|
|
27
|
|
|
|
41
|
|
Line of credit (Note 13)
|
|
|
737
|
|
|
|
720
|
|
Short-term unsecured notes payable (Note 9)
|
|
|
1,047
|
|
|
|
483
|
|
Current portion of term note payable – shareholder (Note 11)
|
|
|
130
|
|
|
|
108
|
|
Current portion of equipment notes payable (Note 15)
|
|
|
52
|
|
|
|
—
|
|
Current portion of leases payable (Note 15)
|
|
|
57
|
|
|
|
71
|
|
Credit card advance (net of discount) (Note 12)
|
|
|
231
|
|
|
|
316
|
|
Notes payable – related party (Note 10)
|
|
|
116
|
|
|
|
116
|
|
Total current debt
|
|
|
2,397
|
|
|
|
1,855
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Leases payable (Note 15)
|
|
|
76
|
|
|
|
155
|
|
Unsecured notes payable (Note 9)
|
|
|
200
|
|
|
|
300
|
|
Equipment note payable (Note 15)
|
|
|
185
|
|
|
|
—
|
|
Term note payable – shareholder (Note 11)
|
|
|
392
|
|
|
|
522
|
|
Total long-term debt
|
|
$
|
853
|
|
|
$
|
977
|
|
F-14
NOTE 9. UNSECURED NOTES
PAYABLE
Unsecured notes payable at June 30,
2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Unsecured note payable for $400,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing August 28, 2015. Personally guaranteed by principal stockholder.
|
|
$
|
—
|
|
|
$
|
83
|
|
Unsecured note payable for $150,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing December 12, 2016. $72,951 from the proceeds of the $300,000 unsecured note payable (described below) was used to retire this note.
|
|
|
—
|
|
|
|
—
|
|
Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing June 30, 2017. Personally guaranteed by principal stockholder. $72,951 of the proceeds from this note was used to retire the balance of the unsecured note listed above. Personally guaranteed by principal stockholder.
|
|
|
300
|
|
|
|
—
|
|
Unsecured note payable for $200,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing August 30, 2016. $81,671 from the proceeds of the $300,000 unsecured note payable (described below) was used to retire this note.
|
|
|
—
|
|
|
|
—
|
|
Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing April 7 2017. Personally guaranteed by principal stockholder. $81,671 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note listed above. Personally guaranteed by principal stockholder.
|
|
|
247
|
|
|
|
—
|
|
Unsecured note payable for $100,000 to an individual with interest at 20% payable monthly; principal originally due in full on October 31, 2014; extended to October 31, 2015. Subsequent to September 30, 2015, the due date on this note was extended by the holder to October 31, 2017 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder.
|
|
|
100
|
|
|
|
100
|
|
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. Subsequent to June 30, 2015, the due date on this note was extended by the holder to July 31, 2017. Personally guaranteed by principal stockholder.
|
|
|
100
|
|
|
|
100
|
|
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 4, 2016 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder. Subsequent to December 31, 2015, the due date on this note was extended by the holder to January 2, 2017.
|
|
|
300
|
|
|
|
300
|
|
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. Subsequent to May 1, 2015, the due date on this note was extended by the holder to May 1, 2017. Personally guaranteed by principal stockholder.
|
|
|
200
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
Total unsecured notes payable
|
|
$
|
1,247
|
|
|
$
|
783
|
|
Less: current portion
|
|
|
(1,047
|
)
|
|
|
(483
|
)
|
Long-term unsecured notes payable
|
|
$
|
200
|
|
|
$
|
300
|
|
F-15
NOTE 10. NOTES PAYABLE- RELATED PARTY
Related party notes payable at June
30, 2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Unsecured note payable to an officer, with interest at 3.25%, due on demand
|
|
$
|
40
|
|
|
$
|
40
|
|
Unsecured note payable to an officer, with interest at 3.25%, due on demand
|
|
$
|
76
|
|
|
$
|
76
|
|
Total unsecured notes payable
|
|
$
|
116
|
|
|
$
|
116
|
|
Less: current portion
|
|
|
(116
|
)
|
|
|
(116
|
)
|
Long-term unsecured notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 11. TERM NOTES PAYABLE - SHAREHOLDER
On September 5, 2014, the Company amended
and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to Hope Capital,
Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible Note in the original
principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September 2009 Note”),
the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to provide for a 3% unsecured
promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due on or before August 31, 2019
and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall be made on a monthly basis,
starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly payments. The first 12
payments are $9,405.60 each and increase 15% each year, with 12 payments of $16,450.45 during year five. In the event the Company
fails to make a monthly payment under the Note or the Company is subject to an bankruptcy event (as defined under the Note), subject
to the Company’s ability to cure such default, HCI may convert all or any portion of the outstanding principal, accrued and
unpaid interest, and any other sums due and payable under the Note into shares of our common stock at a conversion price equal
to $0.10 per share. Conversion is subject to HCI not being able to beneficially own more than 9.99% of our outstanding common stock
upon any conversion, subject to waiver by HCI. The Company has the right to prepay the Note, in whole or in part, subject to notice
to HCI, without penalty. As of June 30, 2016 the principal balance under this Note was $522,324.
The principal payments required at
maturity under the Company’s outstanding short term notes, secured line of credit, unsecured line of credit, credit cards
loans, short term related party notes and term note payable at June 30, 2016 are as follows:
Fiscal Years Ending June 30,
|
|
(in thousands)
|
2017
|
|
$
|
2,288
|
|
2018
|
|
|
358
|
|
2019
|
|
|
184
|
|
2020
|
|
|
50
|
|
|
|
|
|
|
Total
|
|
$
|
2,880
|
|
NOTE 12. CREDIT CARD ADVANCES
On April 24, 2015, the Company entered
into an agreement with Power Up Lending Group, Ltd. (“Power Up”) whereby Power Up agreed to loan OneUp and Foam Labs
a total of $400,000. The loan was secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms
of the loan called for a repayment of $448,000, which included a one-time finance charge of $48,000, approximately ten months
after the funding date. This loan was repaid in full on February 18, 2016 and was guaranteed by the Company and personally guaranteed
by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 16).
On October 1, 2015 the Company borrowed
an additional $100,000 from Power Up. Terms for this additional amount call for a repayment of $119,000, which includes a one-time
finance charge of $19,000, approximately ten months after the funding date. This will be accomplished by Power Up withholding a
fixed amount each business day of $566.67 from OneUp’s credit card receipts until full repayment is made. This loan is guaranteed
by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note
16).
F-16
NOTE 12. CREDIT CARD ADVANCES (continued)
On February 22, 2016 the Company received
another loan that calls for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months
after the funding date. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling
shareholder, Louis S. Friedman (see Note 16).
As of June 30, 2016, the principle
amount of the credit card advances totaled $230,798, net of a discount of $30,700.
On August 4, 2016, the Company borrowed
an additional amount of $150,000 from Power Up. The loan calls for a repayment of $168,000, which includes a one-time finance charge
of $18,000, approximately ten months after the funding date. This loan is guaranteed by the Company and is personally guaranteed
by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 16).
On September 22, the Company borrowed
an additional amount of $400,000 from Power Up. The loan calls for a repayment of $452,000, which includes a one-time finance charge
of $52,000, approximately ten months after the funding date. The balance of the February 22, 2016 credit card loan was deducted
from this loan and the Company received net proceeds of approximately $270,000. This loan is guaranteed by the Company and is personally
guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 16).
NOTE 13. 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
was 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 was 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 were charged interest at a rate of 2.5% over the lenders Index Rate. In addition there
was a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month.
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 to 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% (as of June 30, 2016, the interest rate was 6.5%) and the Monthly Service Fee was changed to .5% per month.
On December 9, 2015, the credit agreement
with Advance Financial Corporation was amended to increase the asset based line of credit to $1,200,000 to 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. All other terms of the credit facility remain the same.
The Company’s CEO, Louis Friedman,
has personally guaranteed the repayment of the facility. In addition, Luvu Brands has provided its corporate guarantee
of the credit facility (see Note 16). On June 30, 2016, the balance owed under this line of credit was $737,264. As
of June 30, 2016, we were current and in compliance with all terms and conditions of this line of credit.
Management believes cash flows generated
from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient
to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may
be required.
F-17
NOTE 14. UNSECURED LINES OF CREDIT
The Company has drawn a cash advance
on one unsecured lines of credit that is in the name of the Company and Louis S. Friedman (see Note 16). The terms of this unsecured
line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured
line of credit was $ 27,188 at June 30, 2016 and $40,731 at June 30, 2015.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Operating Leases
On July 23, 2014, the Company entered
into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on
December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment was effective August 1, 2014
and included a four month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company agreed
to make improvements to the facility totaling $123,505 within six months of August 1, 2014. As of June 30, 2016, the Company has
completed $65,224 of the leasehold improvements. In addition, the monthly rent on the facility decreased from the current rent
of $33,139 to $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating
schedule with the final year of the lease at $35,123 per month. The rent expense under this lease for the years ended June 30,
2016 and 2015 was $352,479 and $350,082, respectively.
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 expired
in September 2015. Subsequent to September 2015, this operating lease was extended to September 2016 with the monthly lease amount
at $1,602.
Future minimum lease payments under non-cancelable
operating leases at June 30, 2016 are as follows:
Years ending June 30,
|
|
(in thousands)
|
2017
|
|
|
384
|
|
2018
|
|
|
392
|
|
2019
|
|
|
403
|
|
2020
|
|
|
415
|
|
Thereafter through 2021
|
|
|
211
|
|
Total minimum lease payments
|
|
$
|
1,805
|
|
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 $287,104. These assets are included in the fixed
assets listed in Note 6 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, 2016:
Years ending June 30,
|
|
(in thousands)
|
2017
|
|
|
68
|
|
2018
|
|
|
45
|
|
2019
|
|
|
29
|
|
2020
|
|
|
8
|
|
Future Minimum Lease Payments
|
|
$
|
150
|
|
Less Amount Representing Interest
|
|
|
(17
|
)
|
Present Value of Minimum Lease Payments
|
|
|
133
|
|
Less Current Portion
|
|
|
(57
|
)
|
Long-Term Obligations under Leases Payable
|
|
$
|
76
|
|
F-18
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued)
Equipment Notes Payable
The Company has acquired equipment under
the provisions of long-term equipment notes. For financial reporting purposes, minimum note payments relating to the equipment
have been capitalized. The equipment acquired with these equipment notes has a total cost of $283,218. These assets are included
in the fixed assets listed in Note 6 -
Equipment and Leasehold Improvements
and include production equipment. The equipment
notes have stated or imputed interest rates ranging from 10.5% to 11.3%.
The following is an analysis of the minimum
future equipment note payable payments subsequent to June 30, 2016:
Year ending June 30,
|
|
(in thousands)
|
2017
|
|
$
|
75
|
|
2018
|
|
|
75
|
|
2019
|
|
|
72
|
|
2020
|
|
|
61
|
|
2021
|
|
|
8
|
|
Future Minimum Note Payable Payments
|
|
$
|
291
|
|
Less Amount Representing Interest
|
|
|
(54
|
)
|
Present Value of Minimum Note Payable Payments
|
|
|
237
|
|
Less Current Portion
|
|
|
(52
|
)
|
Long-Term Obligations under Equipment Notes Payable
|
|
$
|
185
|
|
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. 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
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.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company has a subordinated note payable
to the wife of the Company’s CEO (Louis Friedman) and majority shareholder in the amount of $76,000. Interest on the note
during the year ended June 30, 2016 was accrued by the Company at the prevailing prime rate (which is currently 3.5%) and totaled
$2,579. The accrued interest on the note as of June 30, 2016 was $17,570. This note is subordinate to all other credit facilities
currently in place.
On October 30, 2010, Mr. Friedman, loaned
the Company $40,000. Interest on the note during the year ended June 30, 2016 was accrued by the Company at the prevailing prime
rate (which is currently 3.5%) and totaled $1,358. The accrued interest on the note as of June 30, 2016 was $3,302. 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, 2015; then extended to January 2, 2017 with the principle
due on maturity (see Note 9). Mr. Friedman personally guaranteed the repayment of the loan obligation.
F-19
NOTE 16. RELATED PARTY TRANSACTIONS (continued)
The Company’s CEO, Louis Friedman,
has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 13 – Line of Credit). In
addition, Luvu Brands has provided its corporate guarantees of the credit facility. On June 30, 2016, the balance owed
under this line of credit was $737,264.
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. Subsequent to June 30, 2015, the note was extended to July 31, 2017 under the same terms (see Note 9). Repayment of the
promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.
On October 31, 2013, 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) beginning on November 30, 2013, with the principal amount due in full on or before
October 31, 2014. Prior to October 31, 2014, the note was extended to October 31, 2015 under the same terms. Prior to October 31,
2015, the note was extended to October 31, 2017 under the same terms (see Note 9). Repayment of the promissory note is personally
guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.
On May 1, 2012, an individual loaned
the Company $200,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on
May 1, 2013; then extended to May 1, 2015; then extended to May 1, 2017 with the principle due on maturity (see Note 9). Mr. Friedman
personally guaranteed the repayment of the loan obligation.
The loans from Power Up Lending Group,
Ltd. (see Note 12) are guaranteed by the Company (including OneUp and Foam Labs) and are personally guaranteed by the Company’s
CEO and majority shareholder, Louis S. Friedman. Power Up Lending Group, Ltd. is controlled by Curt Kramer, who also controls Hope
Capital. As last reported to us, Hope Capital, Inc. owns 7.5% of our common stock.
On August 26, 2014, the Company
issued an unsecured promissory note for $400,000 to two individual shareholders. Proceeds from the promissory note were used to
retire three other notes held by the two individual shareholders including the $250,000 note dated December 19, 2013 with a balance
of $92,228; the $250,000 note dated January 20, 2014 with a balance of $111,874 and the $130,000 note dated April 4, 2014 with
a balance of $87,899 (collectively the “Prior Notes”). The remaining balance, after paying the balance on the Prior
Notes, of $107,999 was received in cash by the Company. Terms of the $400,000 note are 26 bi-weekly payments of principal and interest
of $17,033 (see Note 9). At June 30, 2015, the principal balance of this note was $83,235 and was repaid in full on August 28,
2015.
On April 11, 2016, the Company borrowed
$300,000 from two individual shareholders with interest at 20% on an unsecured note payment, principal and interest paid bi-weekly
with the final payment due April 7, 2017. The balance due on the $200,000 unsecured note payable due August 30, 2016 was paid in
full and the Company received net proceeds of $218,329 after the repayment of the September 1, 2015 loan. At June 30, 2016, the
principal balance of this note was $246,852. The loan is personally guaranteed by the Company’s CEO and majority shareholder,
Louis S. Friedman.
On June 29, 2016, the Company borrowed
$300,000 from two individual shareholders with interest at 20% on an unsecured note payment, principal and interest paid bi-weekly
with the final payment due June 30, 2017. The balance due on the $150,000 unsecured note payable due December 14, 2016 was paid
in full and the Company received net proceeds of $227,049 after the repayment of the December 12, 2015 loan. At June 30, 2016,
the principal balance of this note was $300,000. The loan is personally guaranteed by the Company’s CEO and majority shareholder,
Louis S. Friedman.
The Company has drawn a cash advance
on one unsecured lines of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of
credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line
of credit was $27,188 at June 30, 2016 and $40,731 at June 30, 2015. The loan is personally guaranteed by the Company’s CEO
and majority shareholder, Louis S. Friedman.
F-20
NOTE 16. RELATED PARTY TRANSACTIONS (continued)
On September 5, 2014, the Company amended
and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to Hope Capital,
Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible Note in the original
principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September 2009 Note”),
the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to provide for a 3% unsecured
promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due on or before August 31, 2019
and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall be made on a monthly basis,
starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly payments. The first 12
payments are $9,405.60 each and increase 15% every year, with 12 payments of $16,450.45 during year five. In the event the Company
fails to make a monthly payment under the Note or the Company is subject to an bankruptcy event (as defined under the Note), subject
to the Company’s ability to cure such default, HCI may convert all or any portion of the outstanding principal, accrued and
unpaid interest, and any other sums due and payable under the Note into shares of our common stock at a conversion price equal
to $0.10 per share. Conversion is subject to HCI not being able to beneficially own more than 9.99% of our outstanding common stock
upon any conversion, subject to waiver by HCI. The Company has the right to prepay the Note, in whole or in part, subject to notice
to HCI, without penalty. At June 30, 2016, the principal balance under the Note was $522,324.
On November 6, 2015, the Company sold
750,000 shares of restricted common stock to the Company’s President and CEO, Louis Friedman, for $75,000. We relied upon
the exemption from registration as set forth in Section 4(a)(2) of the Securities Act of 1933, as amended, for the issuance of
these securities as the transaction was by the issuer and did not involve any public offering.
NOTE 17. STOCKHOLDERS’ EQUITY
Options
At June 30, 2016, the Company had
the 2009 and 2015 Stock Option Plans (the “Plans”), which are shareholder-approved and under which 4,170,000 shares
are reserved for issuance under the 2009 Plan until that Plan terminates on October 20, 2019 and 5,000,000 shares are reserved
for issuance under the 2015 Plan until that Plan terminates on August 31, 2025.
Under the Plans, 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, 2016, the number of shares available for issuance
under the 2015 Plan was 2,300,000. There are no shares available for issuance under the 2009 Plan, other than the 4,170,000 stock
options that have already been granted.
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.
F-21
NOTE 17. STOCKHOLDERS’ EQUITY (continued)
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,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Cost of Goods Sold
|
|
$
|
7
|
|
|
$
|
12
|
|
Other Selling and Marketing
|
|
|
8
|
|
|
|
6
|
|
General and Administrative
|
|
|
21
|
|
|
|
24
|
|
Total
|
|
$
|
36
|
|
|
$
|
42
|
|
Stock-based compensation expense recognized
in the consolidated statements of operations for each of the twelve month period ended June 30, 2016 and 2015 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, 2016 and 2015 is presented below:
Option Activity
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at June 30, 2014
|
|
|
4,270,500
|
|
|
$
|
.09
|
|
|
|
3.2 years
|
|
|
$
|
-0-
|
|
Granted
|
|
|
350,000
|
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(460,000
|
)
|
|
$
|
.04
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
4,160,500
|
|
|
$
|
.07
|
|
|
|
2.2 years
|
|
|
|
-0-
|
|
Granted
|
|
|
3,700,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(990,500
|
)
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
6,870,000
|
|
|
$
|
.04
|
|
|
|
3.0 years
|
|
|
$
|
16,900
|
|
Exercisable at June 30, 2016
|
|
|
2,504,500
|
|
|
$
|
.08
|
|
|
|
1.5 years
|
|
|
$
|
270
|
|
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 $.0183 for such day.
A summary of the Company’s
non-vested options for the year ended June 30, 2016 is presented below:
Non-vested Options
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value
|
Non-vested at June 30, 2015
|
|
|
2,080,500
|
|
|
$
|
.08
|
|
Granted
|
|
|
3,700,000
|
|
|
|
.02
|
|
Vested
|
|
|
(784,500
|
)
|
|
|
.05
|
|
Forfeited
|
|
|
(630,500
|
)
|
|
|
.08
|
|
Non-vested at June 30, 2016
|
|
|
4,365,500
|
|
|
$
|
.02
|
|
The weighted average grant-date fair
value of stock options granted during fiscal years 2016 and 2015 were $54,940 and $10,395, respectively. The total grant-date
fair values of stock options that vested during fiscal years 2016 and 2015 were $40,979 and $69,492, respectively.
F-22
NOTE 17. STOCKHOLDERS’ EQUITY (continued)
The following table summarizes the weighted
average characteristics of outstanding stock options as of June 30, 2016:
|
|
Outstanding Options
|
|
Exercisable Options
|
Exercise Prices
|
|
Number
of Shares
|
|
Remaining
Life
(Years)
|
|
Weighted
Average
Price
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
$
|
|
|
.02 to .03
|
|
|
|
3,700,000
|
|
|
|
4.4
|
|
|
$
|
.02
|
|
|
|
125,000
|
|
|
$.02
|
$
|
|
|
.05 to .09
|
|
|
|
2,638,000
|
|
|
|
1.7
|
|
|
$
|
.06
|
|
|
|
1,847,500
|
|
|
$.06
|
$
|
|
|
.16
|
|
|
|
532,000
|
|
|
|
.7
|
|
|
$
|
.16
|
|
|
|
532,000
|
|
|
$.16
|
Total stock options
|
|
|
6,870,000
|
|
|
|
3.0
|
|
|
$
|
.04
|
|
|
|
2,504,500
|
|
|
$.08
|
The range of fair
value assumptions related to options granted during the years ended June 30, 2016 and 2015 were as follows:
|
|
2016
|
|
|
2015
|
|
Exercise Price:
|
|
$
|
.01 - .03
|
|
|
$
|
0.03
|
|
Volatility:
|
|
|
259% - 320%
|
|
|
|
259%
|
|
Risk Free Rate:
|
|
|
1.23% - 1.6%
|
|
|
|
1.09% to 1.11%
|
|
Vesting Period:
|
|
4 years
|
|
|
4 years
|
|
Forfeiture Rate:
|
|
|
0%
|
|
|
|
0%
|
|
Expected Life
|
|
4.1 years
|
|
|
4.1 years
|
|
Dividend Rate
|
|
|
0%
|
|
|
|
0%
|
|
As of June 30, 2016, total unrecognized
stock-based compensation expense related to all unvested stock options was $62,412, which is expected to be expensed over a weighted
average period of 3.4 years.
Share Purchase Warrants
As of June 30, 2016 and 2015, there were
no share purchase warrants outstanding.
Common Stock
The Company’s authorized common
stock was 175,000,000 shares at June 30, 2016 and 2015. Common shareholders are entitled to dividends if and when declared
by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At June 30, 2016, the Company had
reserved the following shares of common stock for issuance:
|
|
June 30,
|
|
|
2016
|
Shares of common stock reserved for issuance under the 2009 Stock Option Plan
|
|
|
4,170,000
|
|
Shares of common stock reserved for issuance under the 2015 Stock Option Plan
|
|
|
5,000,000
|
|
Shares of common stock issuable upon conversion of the Preferred Stock
|
|
|
4,300,000
|
|
Total shares of common stock equivalents
|
|
|
13,470,000
|
|
|
|
|
|
|
On November 6, 2015, the Company sold
750,000 shares of restricted common stock to the Company’s President and CEO, Louis Friedman, for $75,000. We relied upon
the exemption from registration as set forth in Section 4(a)(2) of the Securities Act of 1933, as amended, for the issuance of
these securities as the transaction was by the issuer and did not involve any public offering (see Note 16).
F-23
NOTE 17. STOCKHOLDERS’ EQUITY (continued)
Preferred Stock
On February 18, 2011, the Company filed
an amendment to its Articles of Incorporation, effective February 9, 2011, authorizing the issuance of preferred stock and the
Company now has 10,000,000 authorized shares of preferred stock, par value $.0001 per share, of which 4,300,000 shares have been
designated and issued as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible
into one share of common stock and has a liquidation preference of $.2325 ($1,000,000 in the aggregate). Liquidation payments to
the preferred holders have priority and are made in preference to any payments to the holders of common stock. In addition, each
share of Series A Convertible Preferred Stock is entitled to 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 Shares issued and outstanding at the time of such vote. At each meeting of shareholders of the
Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including
the election of directors, holders of Series A Convertible Preferred Shares shall vote together with the holders of common shares
as a single class.
NOTE 18. 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, 2016 and 2015, 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, 2016 and 2015 are approximately as follows:
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
13
|
|
|
$
|
—
|
|
Allowance for doubtful accounts
|
|
|
13
|
|
|
|
8
|
|
Stock-based compensation
|
|
|
61
|
|
|
|
48
|
|
Net operating loss carry-forwards
|
|
|
2,714
|
|
|
|
2,626
|
|
Valuation allowance
|
|
|
(2,801
|
)
|
|
|
(2,682
|
)
|
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 operations
for the years ended June 30, 2016 and 2015 due to the following:
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
88
|
|
|
$
|
159
|
|
Temporary differences
|
|
|
31
|
|
|
|
21
|
|
Valuation (allowance)
|
|
|
(119
|
)
|
|
|
(180
|
)
|
Net tax benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
F-24
NOTE 18. INCOME TAXES (continued)
At June 30, 2016, the Company had net
operating loss (NOL) carryforwards of approximately $7.2 million that may be offset against future taxable income. During 2016
and 2015, the total increase in the valuation allowance was $118,549 and $179,834, 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 2025 through 2036.
The tax years that remain subject to
examination by major taxing jurisdictions are those for the years ended June 30, 2010 through 2016.
NOTE 19. – SUBSEQUENT EVENTS
On August 4, 2016, the Company borrowed
$150,000 from Power Up. The loan calls for a repayment of $168,000, which includes a one-time finance charge of $18,000, approximately
ten months after the funding date. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO
and controlling shareholder, Louis S. Friedman (see Note 12).
On September 22, 2016, the company borrowed
an additional $400,000 from Power Up. Terms for this additional amount call for a repayment of $452,000, which includes a one-time
finance charge of $52,000, approximately ten months after the funding date. This will be accomplished by Power Up withholding a
fixed amount each business day of $2,152 from OneUp’s credit card receipts until full repayment is made. The balance of the
February 22, 2016 credit card loan was deducted from this loan and the Company received net proceeds from Power Up of approximately
$270,000.This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder,
Louis S. Friedman (see Note 12).
F-25