Annual Report (10-k)

Years ending June 30,

(in thousands)

Total minimum lease payments

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended June 30, 2019

☐

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

For the transition period from _______ to ____________

Commission file number: 000-53314

Luvu Brands, Inc.

(Exact name of registrant as specified in its charter)

Florida		59-3581576
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2745 Bankers Industrial Drive, Atlanta, Georgia 30360

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (770) 246-6400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(Title of class)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit such files) þYES ☐ NO

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

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer þ		Smaller reporting company þ
		Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the voting and non-voting common equity held by non−affiliates computed by reference to the price at which the common equity was last sold, or the average of the bid and asked price of such common equity, on December 31, 2018, the last trading day of the registrant’s most recently completed second fiscal quarter, was $1,099,041.

The number of shares of Common Stock, $.01 par value, outstanding as of the close of business on October 11, 2019 was 73,452,596.

Luvu Brands, Inc.

Index to Annual Report on Form 10-K

PART I		PAGE

ITEM 1.	Business.	1
ITEM 1A.	Risk Factors.	8
ITEM 1B.	Unresolved Staff Comments.
ITEM 2.	Properties.	8
ITEM 3.	Legal Proceedings.	8
ITEM 4.	Mine Safety Disclosures.	8

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	9
ITEM 6.	Selected Financial Data.	9
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	9
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk.	14
ITEM 8.	Financial Statements and Supplementary Data.	15
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	16
ITEM 9A.	Controls and Procedures.	16
ITEM 9B.	Other Information.	17

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance.	17
ITEM 11.	Executive Compensation.	20
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	21
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence.	23
ITEM 14.	Principal Accounting Fees and Services.	24

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules.	25

FORWARD-LOOKING STATEMENTS

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

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

· Statements relating to our business strategy;

· Statements relating to our business objectives; and

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

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

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

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

the loss of one or more significant customers;

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

our plan to make continued investments in advertising and marketing;

our ability to maintain our brands;

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

our reliance on credit cards as a form of payment;

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

our ability to continue as a going concern;

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

security breaches may cause harm to our systems;

supply interruptions from raw material vendors;

changes in U.S. trade policies could significantly increase the costs of certain raw materials, parts or components used in our products and our sales;

our ability to improve manufacturing efficiency at our production facility;

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

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

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

changes in government laws affecting our business;

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

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

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

risks associated with currency fluctuations;

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

management’s goals and plans for future operations;

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

iii

PART I.

ITEM 1. Business.

General

Luvu Brands, Inc. designs, manufactures and markets a portfolio of consumer lifestyle brands through the Company’s websites, online mass merchants and specialty retail stores worldwide. Brands include: Liberator^®, a brand category of iconic products for enhancing sensuality and intimacy; Avana^®, inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery and chronic pain; and Jaxx^®, a diverse range of casual fashion daybeds, sofas and beanbags made from virgin and re-purposed polyurethane foam. Many of our products are offered flat-packed and vacuum compressed to save on shipping and reduce our carbon footprint. The Company is headquartered in Atlanta, Georgia in a 140,000 square foot vertically-integrated manufacturing facility that employs over 170 people. Bringing sewn products manufacturing back to the USA and creating innovative consumer brands are core to the Company's operating principles.

In addition to wholesale sales channels, the Company also markets and distributes its products directly to consumers through several websites that include: liberator.com, jaxxliving.com, and avanacomfort.com. We reach additional consumers through a retail concept store located within our Atlanta factory.

Unless the context requires otherwise, all references in this report to the “Company,” “Luvu Brands,” “we,” “our,” and “us” refers to Luvu Brands, Inc. and its subsidiaries.

Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400.

Corporate History

The Company was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc., a Nevada corporation (“Old Liberator”). Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”). On February 28, 2011, the Company name was changed from WES Consulting, Inc. to Liberator, Inc.

Effective November 5, 2015, the Company changed its corporate name from Liberator, Inc. to Luvu Brands, Inc. to reflect its broader offering of wellness and lifestyle products designed for mass market channels.

Overview of our Facilities and Operations

Since inception we have used a vertically integrated business model, with manufacturing, distribution, product development and marketing performed in-house. We believe this allows us to create new products with reduced lead times at a lower cost while enabling us to quickly respond to market and customer demands for our existing products. For our wholesale accounts, being able to fulfill large orders with shorter turnaround times allows us to capture business during December and February when wholesale customers make just-in-time holiday purchases.

Our 140,000 square foot facility on eight acres is located in a suburb of metro Atlanta, Georgia and includes manufacturing and distribution, sales and marketing, product development, customer service and administrative staff. All of the Liberator, Jaxx and Avana branded products are designed, produced and marketed from our facility in Atlanta, Georgia where we currently employ 170 people. As of the date of this report, the Company employs 134 people in Production and Distribution, 2 people in Product Development, 16 people in Sales and Marketing, and 18 people in Administration. The Company’s employment levels may change seasonally based on current and anticipated order levels.

Our Atlanta-based manufacturing operation has two CAD controlled fabric cutters, one CAD controlled wood cutter, one CAD controlled foam contouring machine and two state-of-the-art conveyor unit production sewing systems. Our sewing equipment is also highly automated with conveyor based lines leading into vacuum and roll compression packaging of finished products. We believe that our in-house manufacturing capabilities have enabled us to achieve greater efficiencies and cost savings, as well as strict control over the entire manufacturing cycle including raw material procurement, finished goods production and logistics optimization. In addition to providing us with greater production flexibility, our in-house manufacturing provides us with the opportunity to improve fulfillment response time, reduces the risk of out-of-stock situations, limits finished goods obsolescence and improves overall operating margins.

Because cutting, sewing, foam contouring, assembly and vacuum packaging are performed in-house, we believe we can exercise greater control over product quality and respond faster to changing customer demands, which gives us a competitive advantage over companies that utilize out-sourced sewing services. We can source raw materials from multiple domestic and foreign suppliers and we have supply contracts in place to produce our specialty fabrics under specific quality control and performance standards with just-in-time deliveries.

During fiscal 2018, we expanded the conveyor sewing system for our Jaxx and Avana products and, in the second half of fiscal 2018, we installed new roll pack and compression equipment used for the majority of our foam-based products. All of these actions resulted in increased throughput and lower production costs in these operations. However, these operational improvements were offset in fiscal 2019 by increases in wages and raw materials costs, resulting in lower overall margins.

All business activity of the Company is done through our wholly-owned subsidiary, OneUp Innovations, Inc. (“OneUp”). OneUp was organized in 2000 and began operations in 2002.

Business Strategy

Our goals are to achieve long-term growth and profitability and diversify our sales base. We plan to achieve these goals using the following strategies:

· Delivering value to our customers. Our primary goal is to deliver the highest value to every customer, before, during and after they purchase a product from us. This means designing relevant products with the most utility and benefit, creating an informative and efficient buying experience, and delivering on our promises. We believe that serving the customer is the center of everything we do, and by doing so we create value for our customers and wealth for our shareholders.

· Manufacturing. To improve our business results, we constantly look for ways to manage the impact of rising raw material and labor costs by improving the productivity of our manufacturing processes. The recent production equipment purchases should continue to yield higher gross profit as a result of the lower cost of goods sold.

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

· Eco-Packaging. In fiscal 2013, we developed vacuum compressed packaging to reduce our carbon foot print, make our products more convenient for the consumer and easier to display for the retailer, and reduce our outbound shipping costs. During fiscal 2014, we expanded the number of products that used Eco-Packaging to include all foam-based products. In fiscal 2015, we further vacuum compressed our products to even smaller sizes while adding more product marketing information to our retail consumer packages. In fiscal 2018 and 2019, the new roll pack compression equipment expanded the number of products offered in smaller boxes.

· Liberator Concept Store. Our 2,500 square foot Liberator exhibition store is the retail extension of our Liberator.com website. Located at our Atlanta factory, it is a gallery-like setting for sensual and erotic discovery, offering a presentation of products that celebrate intimacy and romantic imagination. In our opinion, Liberator and luxury pleasure objects are meant to go together. Our concept store is a destination where customers can learn about, touch and purchase the Liberator products. In addition to Liberator branded shapes, furniture and accessories, the store features a range of better brands from around the globe including: designer sex toys, masks, cuffs and intimate accessories. Also included are limited edition hand-made items in glass and leather. The store also serves as a laboratory to listen and observe consumer reaction to new products and evaluate price points and merchandising techniques.

Products, Principal Markets and Methods of Distribution

Liberator Products

We developed a product category which we call “Liberator Bedroom Adventure Gear”^®. Many of the pieces in this product line are designed to elevate, rock and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting. Liberator Bedroom Adventure Gear combines functional design with sensuous textures that transform ordinary bedrooms into supportive landscapes for intimacy. Liberator products present angles, elevations, curves and motion that help people of all sizes, including those with back injuries and other medical conditions, find comfortable ways to connect intimately while assisting their stamina and performance.

Liberator foam-based products (called “Liberator Shapes”) are manufactured in a variety of heights and widths to accommodate variations in the human body. They consist of differently shaped cushions and props that are available in an assortment of fabric colors to add to the visual excitement. Each of the product profiles of the Liberator Shapes is unique, designed to introduce positions to the sexual experience that were previously difficult to achieve or impossible to achieve with standard pillows or cushions. Liberator Shapes are manufactured from structured polyurethane foam, cut at various angles, platforms and profiles. The foam base is encased in a tight, fluid resistant polyester shell, helping the cushions to maintain their shape. The original offering of the Liberator Wedge^® and Ramp^®, sold as a set, continue to be our best-selling items. Many of the Liberator Shapes are also available in our Black Label Series which includes blindfolds and snap-on Velcro cuffs.

We have also developed vacuum compressed large profile designs that are commonly referred to as “sex furniture”. Most of the sex furniture pieces are made from contoured urethane foam and covered in a variety of fabrics and colors. These items are marketed as the Esse^®, Flip Stage^®, Equus Wave^® and the Prelude^®. Other larger designs include products based on shredded polyurethane foam encased in a wide range of fabric types and colors and sold under our Zeppelin^® product offering. The Liberator larger profile designs can also be used as seating when not being used for relaxed interaction and creative intimacy. Newer designs are also flat-packed with wooden bases and feet.

We conduct our wholesale business for Liberator sexual wellness products through four primary channels: (1) adult and female friendly retailers, flash sites and specialty boutiques, (2) e-tailers who sell our products through adult, mass market, drug and other sites offering sexual wellness products, (3) mail order catalogers, and (4) wholesale distributors of adult / sexual wellness products. These wholesale accounts have approximately 950 retail locations and/or websites in the United States and Canada. We have a growing number of retailers who have added a dedicated Liberator exhibition concept to their merchandising space. We also sell our products in Europe through a Netherlands-based third-party fulfillment service.

All products sold under the Liberator brand provided 44% of our revenues for our fiscal years ended June 30, 2019 and 2018.

Products Purchased for Resale

Beginning in 2006, we began importing high-quality pleasure objects from around the world. These resale products provided 10% and 15% of our revenues in each of our fiscal years ended June 30, 2019 and 2018, respectively.

Jaxx Casual Seating

The Company sells a line of contemporary casual indoor and outdoor seating under the Jaxx^® brand. Jaxx beanbags are an offshoot from Liberator manufacturing as it provides additional revenue from repurposing our polyurethane foam trim into shredded beanbag fill. The Jaxx product line also includes solid foam indoor furniture collections and outdoor furniture collections that use polystyrene bead filling. The Jaxx product line and accessory products are sold through the following four wholesale channels: (1) beanbag e-tailers, (2) mass marketers, (3) mail order catalogers, and (4) retail furniture stores. The Company also owns and manages a website under the URL www.JaxxLiving.com for direct to consumer sales of Jaxx products. Jaxx products provided 23% and 22% of our revenues in each of our fiscal years ended June 30, 2019 and 2018, respectively.

The contemporary seating business is highly competitive. We believe we can compete effectively on the basis of product quality, design, customer service and price. We believe that our primary competitive advantages are consumer recognition of the Jaxx brand, as well as distribution through the multiple sales channels where consumers prefer to purchase.

Avana Comfort Products

The Company also sells a unique collection of comfort products that aid in sleep, meditation, and relaxation under the Avana^® brand. The Avana product line is sold through e-merchants, mail order catalogers and through our website under the URL www.AvanaComfort.com. Our Avana products provided 19% and 14% of our revenues in our fiscal years ended June 30, 2019 and 2018, respectively. Sales of Avana products increased 39% to $3.2 million in fiscal 2019 over fiscal 2018.

Sales and Distribution

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

In international markets, the Company has a direct sales model with the a US-based salesperson. This salesperson is responsible for wholesale sales, marketing operations and customer service in the European Union and other international markets. Customer orders are filled from our third-party warehouse in the Netherlands or directly from our facilities in Atlanta. Total international sales represented approximately 4% of our total net sales in the years ended June 30, 2019 and 2018.

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

Internet Websites

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

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

Our www.JaxxLiving.com website offers contemporary indoor and outdoor seating, which is particularly appealing to the young adult and children’s market.

Our www.AvanaComfort.com website blends rest, relaxation and health products in an offering that appeals to a broad range of consumers.

Our corporate website is www.LuvuBrands.com. There we make available copies of Luvu Brands documents, news releases and our filings with the U.S. Securities and Exchange Commission, the “SEC”, including financial statements.

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

Sources and Availability of Raw Materials

We obtain all of the raw materials and components used to produce our products from outside sources. A number of components, including certain fabrics and zippers, are sourced from suppliers who currently serve as our sole or primary source of supply for these components. We believe we can obtain these raw materials and components from other sources of supply, although we could experience some short-term disruption in our ability to fulfill orders in the event of an unexpected loss of supply from one of the primary suppliers. We utilize dual sourcing on targeted components when effective.

Recent changes in U.S. trade policy, including tariffs on certain goods imported into the United States from China, have increased the costs of certain raw materials, parts or components used in our products. Such an increase may materially and adversely affect our sales and our business, as we may increase the selling prices of our products. If any increase in costs of goods cannot be passed on to our customers, our business and gross profit may be materially and adversely affected.

Major Customers

Our ten largest customers (excluding our own e-commerce sites and retail store) accounted for approximately 53% of net sales for the year ended June 30, 2019 and 48% of net sales for the year ended June 30, 2018. Sales to (and through) Amazon accounted for 34% of our net sales during the year ended June 30, 2019 and 33% of our sales for the year ended June 30, 2018. The loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Competition

We compete with other manufacturers, distributors and marketers of wellness, lifestyle and casual seating, both within and outside the U.S. The sexual wellness and furniture industries are highly fragmented and competition for the sale of such products comes from many sources. These products are sold primarily through retailers (independent retailers, drug store chains, and mass market retailers), distributors, and direct sales channels (internet marketing and mail order companies).

For Liberator products, we believe that our primary competitive advantage is consumer recognition of our brand. Due to the strength of our brand, we have no direct competition for the majority of our Liberator branded products. In fact, many e-commerce websites refer to Liberator as a product category and not as a discrete product. And since we sell through multiple sales channels, we provide consumers with the ability to shop for Liberator intimacy products in an environment or website that they are most comfortable in. We also believe that we differentiate ourselves from conventional sexual wellness products based on our utility of design and overall customer satisfaction as it relates to enhanced intimacy.

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

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

We believe competition in our industries is based on, among other things, the ability to deliver the right product at the right time, product quality and safety, innovation, customer service and price. We believe we compete favorably with other companies because of our ability to provide a broad product offering for customers, our vertically integrated manufacturing operation which allows us to quickly respond to customer demand, our commitment to quality and safety, and our commitment to minimizing our environmental impact.

Our future competitive position will likely depend on, but not be limited to, the following:

· the continued acceptance of our products by our customers and consumers;

· our ability to protect our proprietary rights in our patent and trademarks and the continued validity of such intellectual property;

· our ability to successfully expand our product offerings;

· our ability to maintain adequate inventory levels to meet our customers’ demands;

· our ability to expand;

· our ability to continue to manufacture high quality products at competitive prices;

· our ability to attract and retain qualified personnel;

· the effect of any future governmental regulations on our products and business;

· the continued growth of the global sexual wellness industry; and

· our ability to respond to changes within the industry and consumer demand, financially and otherwise.

Government Regulation

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

Intellectual Property

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

Employees and Labor Relations

As of September 21, 2019, we had 170 employees (135 in production and warehouse operations, and 35 in sales, marketing and administrative operations). Additional staffing is typically required to support the peak holiday period through Valentine’s Day. None of our employees are represented by a union. We have had no labor-related work stoppages, and we believe our relationships with our employees are good.

Seasonality

Our business is seasonal and, as a result, revenues will vary from quarter to quarter. During the past three years, we have realized an average of approximately 29% of our annual revenues in our second quarter, which includes Christmas, and an average of approximately 25% of our revenues in the third quarter, which includes Valentine’s Day.

Financial Information about Our Business Segments

We conduct our business through two primary sales channels: Direct (consisting of our Internet websites and our Atlanta store) and Wholesale (consisting of our stocking reseller, drop-ship, contract manufacturing and distributor accounts). During our last two years, substantially all of our revenue was generated within North America, and all of our long-lived assets are located within the United States. The following is a summary of our revenues:

*(Dollars in thousands)*	Fiscal 2019		Fiscal 2018
Direct	$	4,929	$	5,326
Wholesale		11,757		10,718
Other		317		382
Total Net Sales	$	17,003	$	16,426

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

Direct

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

(Dollars in thousands)	Fiscal 2019			Fiscal 2018
Direct sales channel net sales	$	4,929		$	5,326
Direct net sales as a percentage of total revenues		29.0	%		32.4	%

Wholesale

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

(Dollars in thousands)	Fiscal 2019			Fiscal 2018
Wholesale sales channel net sales	$	11,757		$	10,718
Wholesale net sales as a percentage of total revenues		69.1	%		65.3	%

As of June 30, 2019, the Company has over 1,000 active wholesale accounts, most of which are located in the United States.

Sales by Product Type

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

*(Dollars in thousands)*	Year Ended June 30, 2019				Year Ended June 30, 2018
Net sales:
Liberator	$	7,444	44	%	$	7,275	44	%
Jaxx		3,947	23	%		3,664	22	%
Avana		3,159	19	%		2,332	14	%
Products purchased for resale		1,664	10	%		2,407	15	%
Other		789	4	%		748	5	%
Total Net Sales	$	17,003	100	%	$	16,426	100	%

Liberator - Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market. Liberator products are sold to retailers and distributors as well as directly through our three e-commerce sites and single retail store. Net sales of Liberator products increased 2% during the year ended June 30, 2019, from the comparable year earlier period. This increase is primarily related to higher sales to e-merchant as consumers increasingly purchase through online merchants.

Jaxx - Jaxx products are contemporary seating products manufactured by us and sold under the Jaxx brand. Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site. Net sales of Jaxx products increased 8% during the year ended June 30, 2019, compared to the prior year. This increase is primarily due to greater sales of Jaxx products to (and through) Amazon and other e-merchants and an expanded product offering of outdoor and solid foam furniture products.

Avana - The Avana product line is a unique collection of comfort products that aid in sleep, meditation, and massage. Avana products are sold through e-merchants, mail order catalogers and through our e-commerce site. Net sales of Avana products increased 35% during the year ended June 30, 2019, compared to the prior year.

Products purchased for resale – Products purchased for resale are other branded products that we purchase from others at wholesale or distributor prices and resell through our sales channels to retailers, or through one of our e-commerce sites and single retail store. Sales of these products decreased 31% during the year ended June 30, 2019 from the prior year. Sales of these products on-line is increasingly competitive and, as a result, the Company has elected to only offer a more curated selection of products that typically have a higher gross profit.

Other - Other products include sales from contract manufacturing and fulfillment services. Net sales during the year ended June 30, 2019 increased 5% from the prior year.

ITEM 1A. Risk Factors.

Not applicable to a smaller reporting company.

ITEM 1B. Unresolved Staff Comments.

None.

ITEM 2. Properties.

We are headquartered in Atlanta, Georgia. Our mailing address is 2745 Bankers Industrial Drive, Atlanta, GA 30360. We lease a 140,000 square feet building on eight acres which we believe allows for expansion when needed. Our facility houses manufacturing, distribution and fulfillment, call center, in-house advertising and creative departments, product design group, administrative offices and a 2,500 square foot factory concept store. 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 amended 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, 2019, the Company has completed $101,776 of the leasehold improvements. Under the lease amendment, the monthly rent on the facility was $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent changed to an escalating schedule with the final year of the lease at $35,123 per month. The rent expense under this lease for the 12 months ended June 30, 2019 and 2018 was $352,479 and $352,479, respectively.

Our facilities are currently adequate for their intended purposes and are adequately maintained.

ITEM 3. Legal Proceedings.

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

ITEM 4. Mine Safety Disclosures.

None.

PART II.

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

Market Information

Our common stock is quoted on the OTC Markets Group on the OTCQB tier (“OTCQB”) under the symbol “LUVU.”

Holders

As of September 28, 2019, we had 81 stockholders of record of our common stock and approximately 450 beneficial holders.

Dividend Policy

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

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6. Selected Financial Data.

Not applicable to smaller reporting company.

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

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Company during the fiscal years ended June 30, 2019 and 2018 and should be read in conjunction with our financial statements and accompanying notes thereto included elsewhere herein. Certain information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results may differ materially from the results discussed in this section because of various factors, including those set forth elsewhere herein. See “Forward-Looking Statements” included in this report.

Results of Operations

Overview

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

	Year Ended June 30, 2019			Year Ended June 30, 2018
Net sales		100	%		100	%
Cost of goods sold		74	%		71	%
Gross profit		26	%		29	%
Selling, General and Administrative Expenses		22	%		25	%
Operating income		2	%		4	%

Fiscal Year ended June 30, 2019 Compared to the Fiscal Year Ended June 30, 2018

Net sales. The net sales increase of 4% in fiscal 2019 from fiscal 2018 consists of a 10% increase in sales of manufactured branded consumer products (including Liberator, Jaxx and Avana) offset, in part, by a 31% decrease in sales of products purchased for resale. Sales of Jaxx products increased 8% from the prior year to $3.9 million during fiscal 2019, and sales of Avana products increased 35% during fiscal 2019 to $3.2 million. Sales of Liberator branded products increased 2% to $7.4 million during fiscal 2019. Sales through the Wholesale sales channel in fiscal 2019 increased 10% from the prior year while the Direct sales channel decreased 7% from the prior year. The Wholesale sales channel includes branded products and resale products sold to brick-and-mortar retailers, and e-merchants including, but not limited to, Amazon, Overstock and Wayfair. The Wholesale sales channel also includes contract manufacturing services which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. The Direct sales channel consists of consumer sales through our five websites and, to a lesser extent, our single retail store. The decrease in sales through the Direct channel was due to lower sales of products sold through our websites, offset in part by greater sales of Liberator, Jaxx and Avana products sold through and to Amazon and other e-merchants

Gross profit. Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead and depreciation. Total gross profit as a percentage of sales for the year ended June 30, 2019 decreased to 26% from 29% in the prior year. Gross profit dollars decreased to $4,424,000 from $4,795,000 in the prior year and represented an 8% decrease. The production improvements implemented in fiscal 2018 were more than offset by higher labor and raw material costs in 2019 and the Company has not yet passed on the higher costs to its customers.

Operating expenses. Excluding depreciation expense, total operating expenses for the year ended June 30, 2019 were 23% of net sales, or $3,849,000, compared to 24% of net sales, or $3,926,000, for the year ended June 30, 2018. The 2% decrease in operating expenses from the prior year was primarily due to lower General and administrative costs, primarily product development costs and greater absorption of facilities overhead costs into inventory.

Other income (expense). Other income (expense) increased to $(567,000) from the $(529,000) in the prior fiscal year, primarily due to higher interest expense.

Income taxes. No expense or benefit from income taxes was recorded in the twelve months ended June 30, 2019 and 2018. We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

We had a net loss from operations of $(157,000), or $(0.00) per diluted share, for the year ended June 30, 2019 compared with net income from operations of $147,000, or $0.00 per diluted share, for the year ended June 30, 2018.

Variability of Results

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

Liquidity and Capital Resources

	Year ended
The following table summarizes our cash flows:	June 30,
	2019			2018
	(in thousands)
Cash flow data from continuing operations:
Cash provided by operating activities	$	158		$	210
Cash used in investing activities	$	(13	)	$	(40	)
Cash provided by (used in) financing activities	$	73		$	(481	)

As of June 30, 2019, our cash and cash equivalents totaled $649,027 compared to $430,526 in cash and cash equivalents as of June 30, 2018.

Operating Activities

Net cash provided by operating activities primarily consists of the net income (loss) adjusted for certain non-cash items, including depreciation, stock-based compensation, and the effect of changes in operating assets and liabilities. Net cash provided by operating activities decreased from the prior year due to the net loss from operations and an increase in accounts receivable and inventory offset, in part, by an increase in accounts payable.

Investing Activities

Cash used in investing activities in the years ended June 30, 2019 and 2018 was primarily for the purchase of production equipment, leasehold improvements and computer equipment.

Financing Activities

Cash used in financing activities in the years ended June 30, 2019 and 2018 was primarily due to the repayment of short-term debt and repayment of the advances secured by our credit card receipts, offset in part by borrowing from the new credit card advance and other credit facilities.

Inflation

During fiscal 2018 and 2019, we experienced increases in various raw material costs and increases in labor costs and government mandated employee benefits. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2020, although there is no assurance this will occur. Inflation and import tariffs can harm our margins and profitability if we are unable to increase prices or improve productivity enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease.

Sufficiency of Liquidity

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company reported a net loss of approximately $(157,000) for the year ended June 30, 2019 and net income of approximately $147,000 for the year ended June 30, 2018 and as of June 30, 2019 the Company has an accumulated deficit of approximately $9.0 million and a working capital deficit of approximately $2.3 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, during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation during the second quarter of fiscal 2018. These actions did yield higher factory throughput at a lower cost of goods sold but were not sufficient to offset rising raw material and labor costs. 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 over the next twelve months will, at a minimum, require approximately $150,000 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.

Capital Resources

We expect total capital expenditures for fiscal 2020 to be less than $100,000 and to be funded by equipment loans and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit with Advance Financial Corporation. This includes capital expenditures in support of our normal operations.

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

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 30, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain equipment and our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Future minimum lease payments under our operating leases as of June 30, 2019 are detailed in the section entitled “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements.

Effect of Recently Issued Accounting Standards and Estimates

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

Application of Critical Accounting Policies and Estimates

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

Revenue Recognition

We record revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of our revenue is generated by fulfilling orders for the purchase of manufactured products and product purchased for resale to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which we are responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill our promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. We have elected to exclude sales, use and similar taxes from the measurement of the transaction price. The impact of this policy election is insignificant, as it aligns with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer.

Allowance for Doubtful Accounts

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

Inventories

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

Accounting for Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2019, we carried a valuation allowance of $3.0 million against our net deferred tax assets.

Impairment of Long-Lived Assets

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

In fiscal year 2018 and 2019, we did generate positive cash flows from operations. However, if our long-term future results do not continue to yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

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

Non-GAAP Financial Measures

Reconciliation of net income (loss) from continuing operations to Adjusted EBITDA income from continuing operations for the years ended June 30, 2019 and 2018:

	Year ended June 30,
	2019			2018
	(in thousands)
Net income (loss)	$	(157	)	$	147
Plus interest expense		567			529
Plus depreciation and amortization expense		165			193
Plus stock-based compensation		23			24
Adjusted EBITDA income from continuing operations	$	598		$	893

As used herein, Adjusted EBITDA represents income (loss) from continuing operations before interest income, interest expense, depreciation, amortization, and stock-based compensation expense. We have excluded the non-cash expenses and stock-based compensation expense as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income (loss) from continuing operations of the Company or net cash used in operating activities.

Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss from continuing operations as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for stock-based compensation expense and loss on disposal of assets.

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

Not applicable for a smaller reporting company.

ITEM 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of June 30, 2019 and 2018	F-2

Consolidated Statements of Operations for the years ended June 30, 2019 and 2018	F-3

Consolidated Statements of Changes in Stockholders’ Deficit for the years ended June 30, 2019 and June 30, 2018	F-4

Consolidated Statements of Cash Flows for the years ended June 30, 2019 and 2018	F-5

Notes to Consolidated Financial Statements	F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders’ of Luvu Brands, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Luvu Brands, Inc. and Subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for each of the two years in the period ended June 30, 2019 and 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for the years ended June 30, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a working capital deficit and an accumulated deficit. The Company has financed its working capital requirements primarily through the issuance of debt. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ Liggett & Webb, P.A.

LIGGETT & WEBB, P.A.

Certified Public Accountants

We have served as the Company’s auditor since 2012

Boynton Beach, Florida

October 11, 2019

F-1

Luvu Brands, Inc. and Subsidiaries

Consolidated Balance Sheets

As of June 30, 2019 and 2018

	2019			2018
Assets:	(in thousands, except share data)
Current assets:
Cash and cash equivalents	$	649		$	431
Accounts receivable, net of allowance for doubtful accounts of $20 in 2019 and $30 in 2018		830			657
Inventories, net of allowance for inventory reserve of $81 in 2019 and $58 in 2018		1,751			1,692
Prepaid expenses		52			135
Total current assets		3,282			2,915

Equipment and leasehold improvements, net		792			786
Other assets		13			12
Total assets	$	4,087		$	3,713

Liabilities and stockholders’ deficit:
Current liabilities:
Accounts payable	$	2,561		$	2,273
Current debt		2,373			2,359
Other accrued liabilities		618			565
Total current liabilities		5,552			5,197

Noncurrent liabilities:
Long-term debt		656			440
Deferred rent payable		34			97
Total noncurrent liabilities		690			537
Total liabilities		6,242			5,734
Commitments and contingencies (See Note 15)		—			—
Stockholders’ deficit:
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding		—			—
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000 as of June 30, 2019 and 2018		—			—
Common stock, $0.01 par value, 175,000,000 shares authorized, 73,452,596 shares issued and outstanding in 2019 and 2018		735			735
Additional paid-in capital		6,126			6,103
Accumulated deficit		(9,016	)		(8,859	)
Total stockholders’ deficit		(2,155	)		(2,021	)
Total liabilities and stockholders’ deficit	$	4,087		$	3,713

F-2

Luvu Brands, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended June 30, 2019 and 2018

	2019			2018
	(in thousands, except share data)

Net Sales	$	17,003		$	16,426
Cost of goods sold		12,579			11,631
Gross profit		4,424			4,795
Operating expenses:
Advertising and promotion		356			404
Other selling and marketing		1,157			1,113
General and administrative		2,336			2,409
Depreciation		165			193
Total operating expenses		4,014			4,119
Operating income		410			676

Other expense:
Interest expense and financing costs		(567	)		(529	)
Total other expense		(567	)		(529	)
Income (loss) from operations before income taxes		(157	)		147
Provision for income taxes		—			—
Net income (loss)	$	(157	)	$	147

Net income (loss) per share:
Basic and diluted	$	(0.00	)	$	0.00
Shares used in calculation of net income (loss) per share:
Basic		73,452,596			73,452,596
Diluted		73,452,596			74,478,742

F-3

Luvu Brands, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Deficit

For the years ended June 30, 2018 and June 30, 2019


	Series A Preferred								Additional					Total
	Stock				Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
	(in thousands, except share data)

Balance, June 30, 2017		4,300,000	$	—		73,452,596	$	735	$	6,079	$	(9,006	)	$	(2,192	)

Stock-based compensation expense		—		—		—		—		24		—			24
Net income		—		—		—		—		—		147			147
Ending balance, June 30, 2018		4,300,000		—		73,452,596		735		6,103		(8,859	)		(2,021	)

Stock-based compensation expense		—		—		—		—		23		—			23
Net loss		—		—		—		—		—		(157	)		(157	)
Ending balance, June 30, 2019		4,300,000	$	—		73,452,596	$	735	$	6,126	$	(9,016	)	$	(2,155	)

F-4

Luvu Brands, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2019 and 2018

	2019			2018
	(in thousands)
OPERATING ACTIVITIES:
Net income (loss)	$	(157	)	$	147
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		165			193
Stock-based compensation expense		23			24
Loss on disposal of fixed assets
Provision for bad debt		(1	)		20
Provision for inventory reserve		23			(32	)
Deferred rent payable		(51	)		(39	)
Change in operating assets and liabilities:
Accounts receivable		(172	)		(47	)
Inventory		(82	)		(114	)
Prepaid expenses and other assets		81			(57	)
Accounts payable		288			97
Accrued expenses and interest		32			12
Accrued payroll and related		9			6
Net cash provided by operating activities		158			210

INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(13	)		(40	)
Net cash used in investing activities		(13	)		(40	)

FINANCING ACTIVITIES:
Issuance of common stock		—
Borrowing (repayment) under revolving line of credit		281			38
Borrowing (repayment) of unsecured line of credit		(8	)		18
Proceeds from credit card advance		635			500
Repayment of credit card advance		(816	)		(673	)
Borrowings under secured note payable		452			—
Repayments under secured note payable		(3	)		—
Proceeds from unsecured notes payable		1,150			850
Repayment of unsecured notes payable		(1,291	)		(924	)
Repayment of term note – shareholder		(186	)		(156	)
Payments on equipment notes		(113	)		(94	)
Principal payments on capital leases		(28	)		(40	)
Net cash provided by (used in) financing activities		73			(481	)
Net increase (decrease) in cash and cash equivalents		218			(311	)
Cash and cash equivalents at beginning of period		431			742
Cash and cash equivalents at end of period	$	649		$	431

Supplemental Disclosure of Cash Flow Information:
Non cash items:
Additions to capital leases/equipment notes	$	158		$	70
Cash paid during the year for:
Interest	$	564		$	525
Income taxes	$	—		$	—

F-5

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS

Luvu Brands, Inc. (the “Company” or Luvu) 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”). All operations of the Company are currently conducted by OneUp Innovations, Inc.

The Company is an Atlanta, Georgia based designer, manufacturer and marketer of a portfolio of consumer lifestyle brands including: Liberator^®, a brand category of iconic products for enhancing sensuality and intimacy; Avana^® inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery and chronic pain; and Jaxx^®, a diverse range of casual fashion daybeds, sofas and beanbags made from virgin and re-purposed polyurethane foam. These products are sold through the Company’s websites, concept factory store, online mass merchants and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce our carbon footprint.

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 typically experience higher sales in our second and third fiscal quarters.

NOTE 2. GOING CONCERN

These actions include an ongoing initiative to increase sales, gross profits and our gross profit margin. To that end, we evaluated various options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation during the second quarter of fiscal 2018. These actions have yielded higher factory throughput at a lower cost of goods sold. However, these operational improvements have been more than offset by rising wages and raw material costs. 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 over the next twelve months will, at a minimum, require approximately $150,000 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.

F-6

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

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”).

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

Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Outbound shipping charged to customers is recognized at the time the related merchandise revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar taxes collected from customers.

A description of our principal revenue generating activities is as follows:

E-commerce revenues - consumer products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due on the date of shipment.

Wholesale revenues - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms are typically 30 days from the date control over the product is transferred to the customer.

Retail revenues - consumer products sold through our retail store. Revenue is recognized when control of the goods is transferred to the customer, at the point of sale, at which time payment is received.

The Company accounts for revenue in accordance with Topic 606 which was adopted at the beginning of fiscal year 2019 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial. The adoption of these standards did not have a material impact on the Company's condensed consolidated statements of operations during the year ended June 30, 2019. Refer to Note 3 – Segment Information for disclosure of disaggregated revenues.

Deferred revenues

Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. Deferred revenues primarily relate to gift cards purchased, but not used, prior to the end of the fiscal period. Our total deferred revenue as of June 30, 2018 was $13,324 and was included in “Accrued expenses” on our consolidated balance sheets. The deferred revenue balance as of June 30, 2019 was $14,198.

F-7

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Cost of Goods Sold

Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense.

Shipping and Handling Costs

We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold.

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, 2019 and June 30, 2018.

	June 30, 2019			June 30, 2018
	(in thousands)
Accounts receivable	$	850		$	687
Allowance for doubtful accounts		(20	)		(24	)
Allowance for discounts and returns		—			(6	)
Total accounts receivable, net	$	830		$	657

Inventories and Inventory Reserves

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value 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 net realizable value 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, 2019 and 2018 that exceeded the balance insured by the FDIC by $134,016 and $191,101, respectively. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During 2019, we purchased 37% of total inventory purchases from one vendor.

During 2018, we purchased 17% of total inventory purchases from one vendor.

F-8

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

As of June 30, 2019 and 2018, one of the Company’s customers (Amazon) represents 50% and 54% of the total accounts receivables, respectively. Sales to (and through) Amazon accounted for 34% of our net sales during the year ended June 30, 2019 and 33% of our sales for the year ended June 30, 2018.

Fair Value of Financial Instruments

At June 30, 2019 and 2018, 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.

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).

F-9

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 $1,500 at June 30, 2019 and $13,040 at June 30, 2018. Advertising expense for the years ended June 30, 2019 and 2018 was $356,154 and $404,436, 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 $123,478 for the year ended June 30, 2019 and $150,742 for the year ended June 30, 2018.

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 amended 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, 2019, the Company has completed $101,776 of the leasehold improvements. Under the lease amendment, the monthly rent on the facility was $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent increases annually with the final year of the lease at $35,123 per month. The rent expense under this lease for the years ended June 30, 2019 and 2018 was $352,479 in each year.

The Company also leases certain equipment under operating leases, as more fully described in Note 16 - Commitments and Contingencies .

Segment Information

We have identified three reportable sales channels: Direct, Wholesale and Other. Direct includes product sales through our five e-commerce sites and our single retail store. Wholesale includes Liberator, Jaxx, and Avana branded products sold to distributors and retailers, purchased 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.

F-10

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

	Year Ended June 30, 2019		Year Ended June 30, 2018		% Change
	(in thousands)
Net Sales by Channel:
Direct	$	4,929	$	5,326		(7	)%
Wholesale	$	11,757	$	10,718		10	%
Other	$	317	$	382		(17	)%
Total Net Sales	$	17,003	$	16,426		4	%

	Year Ended			Margin			Year Ended			Margin			%
	June 30, 2019			%			June 30, 2018			%			Change
		(in thousands)
Gross Profit by Channel:
Direct	$	2,229			45	%	$	2,400			45	%	(7)%
Wholesale	$	3,077			26	%	$	3,097			29	%	(1)%
Other	$	(882	)		(278	)%	$	(702	)		(183	)%	(26)%
Total Gross Profit	$	4,424			26	%	$	4,795			29	%	(8)%

Recent accounting pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date.

Recently adopted

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which creates a single, comprehensive revenue recognition model for all contracts with customers. Under this ASU and subsequently issued amendments, an entity should recognize revenue to reflect the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods and services. ASU 2014-9 may be adopted either retrospectively or on a modified retrospective basis. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the standard for its 2019 fiscal year. The impact of adopting the standard was not material.

Not yet adopted

In February 2016, the FASB issued ASU No. 2016-12, Leases, which requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new guidance also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. This amendment is effective for the Company's fiscal year ending June 2020 with early adoption permitted. The adoption of ASU 2016-02 will have an impact on the consolidated balance sheet as the Company will record assets and obligations primarily related to our facility. The Company has estimated that the adoption of this guidance will result in an operating lease liability of approximately $545,000 being recorded on July 1, 2019 which is calculated based on the present value of the remaining minimum rental payments using discount rates as of the effective date. The Company also has estimated the corresponding right to use asset of approximately $448,000, based upon the operating lease liability adjusted for deferred rent, unamortized initial direct costs, liabilities associated with lease termination costs and impairment of right-of-use assets. The adoption is expected to be done on a modified retrospective basis with no adjustments made to periods prior to July 1, 2019. The Company does not expect a material impact on the consolidated statement of income or statement of cash flows.

F-11

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. As part of the FASB's disclosure framework project, it has eliminated, amended and added disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements. Public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not believe it will materially impact the disclosures.

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

Net Income (Loss) Per Share

In accordance with FASB Accounting Standards Codification No. 260, “Earnings Per Share”, basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (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, 2019, which consists of options and convertible preferred stock, have been excluded from the diluted net loss per common share calculation for the year ended June 30, 2019 because they are anti-dilutive.

The total potential dilutive securities as of June 30, 2019 and 2018 are as follows:

	2019		2018
Convertible Preferred Stock		4,300,000		4,300,000
Stock options		4,050,000		5,065,000
Total		8,350,000		9,365,000

Income Taxes

Stock Based Compensation

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

F-12

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 4. IMPAIRMENT OF LONG-LIVED ASSETS

We follow 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 a 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, 2019 or 2018.

NOTE 5. INVENTORIES

All inventories are stated at the lower of cost (which approximates first-in, first-out) or net realizable value. The Company’s inventories consist of the following components at June 30, 2019 and 2018:

	2019			2018
	(in thousands)
Raw materials	$	872		$	759
Work in process		111			238
Finished goods		849			753
Total inventories		1,832			1,750
Allowance for inventory reserves		(81	)		(58	)
Total inventories, net of allowance	$	1,751		$	1,692

NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

Property and equipment at June 30, 2019 and 2018 consisted of the following:

	2019			2018			Estimated Useful Life
	(in thousands)
Factory equipment	$	2,558		$	2,472		2-10 years
Computer equipment and software		1,050			1,048		5-7 years
Office equipment and furniture		205			205		5-7 years
Leasehold improvements		446			446		10 years
Projects in process		83			—
Subtotal		4,342			4,171
Accumulated depreciation		(3,550	)		(3,385	)
Equipment and leasehold improvements, net	$	792		$	786

Depreciation expense was $165,116 and $192,637 for the years ended June 30, 2019 and 2018, respectively.

F-13

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 7. OTHER ACCRUED LIABILITIES

Other accrued liabilities at June 30, 2019 and 2018 consisted of the following:

	2019		2018
	(in thousands)
Accrued compensation	$	367	$	358
Accrued expenses and interest		188		156
Current portion of deferred rent payable		63		51
Other accrued liabilities	$	618	$	565

NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY

Current and long-term debt at June 30, 2019 and 2018 consisted of the following:

	2019		2018
Current debt:	(in thousands)
Unsecured lines of credit (Note 14)	$	25	$	33
Line of credit (Note 13)		953		672
Short-term unsecured notes payable (Note 9)		523		865
Current portion of term note payable – shareholder (Note 11)		49		182
Current portion of equipment notes payable (Note 16)		127		103
Current portion secured notes payable (Note 15)		392		—
Current portion of leases payable (Note 16)		8		27
Credit card advance (net of discount) (Note 12)		180		361
Notes payable – related party (Note 10)		116		116
Total current debt		2,373		2,359
Long-term debt:
Leases payable (Note 16)		—		8
Unsecured notes payable (Note 9)		400		200
Secured notes payable (Note 15)		57		—
Equipment note payable (Note 16)		199		178
Term note payable – shareholder (Note 11)		—		54
Total long-term debt	$	656	$	440

F-14

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 9. UNSECURED NOTES PAYABLE

Unsecured notes payable at June 30, 2019 and 2018 consisted of the following:

	2019		2018
Current debt:	(in thousands)
20% Unsecured note, interest only, due January 2, 2019 (1)	$	—	$	300
20% Unsecured note, interest only, due May 1, 2019 (4)		—		200
20% Unsecured note, bi-weekly principal and interest, due March 1, 2019 (5)		—		214
20% Unsecured note, bi-weekly principal and interest, due October 26, 2018 (6)(9)		—		99
20% Unsecured note, bi-weekly principal and interest, due September 7, 2018 (7)(8)		—		52
20% Unsecured note, bi-weekly principal and interest, due April 26, 2020 (11)		247		—
20% Unsecured note, bi-weekly principal and interest, due September 13, 2019 (9)		62		—
20% Unsecured note, bi-weekly principal and interest, due March 1, 2020 (10)		214		—
Total current debt		523		865
Long-term debt:
20% Unsecured note, interest only, due May 1, 2021 (4)		200		—
20% Unsecured note, interest only, due October 31, 2021 (2)		100		100
20% Unsecured note, interest only, due July 31, 2021 (3)		100		100
Total long-term debt		400		200
Total unsecured notes payable	$	923	$	1,065

(1) 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 2, 2019 with interest payable monthly and principal due on maturity. $200,000 was repaid prior to December 1, 2018 and the balance was repaid on January 31, 2019. Personally guaranteed by principal stockholder.

(2) 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, 2019; then extended to October 31, 2021. Personally guaranteed by principal stockholder.

(3) Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2013; extended to July 31, 2019; then extended by the holder to July 31, 2021. Personally guaranteed by principal stockholder.

(4) Unsecured note payable for $200,000 to an individual, with interest payable monthly at 20%, principal due in full on May 1, 2013; extended to May 1, 2019; then extended to May 1, 2021. Personally guaranteed by principal stockholder.

(5) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing March 1, 2019. The loan was repaid in full on March 1, 2019. Personally guaranteed by principal stockholder.

(6) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing October 26, 2018. The note was repaid in full on September 13, 2018. Personally guaranteed by principal stockholder.

(7) Unsecured note payable for $250,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing September 7, 2018. The note was repaid in full on July 30, 2018. Personally guaranteed by principal stockholder.

F-15

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 9. UNSECURED NOTES PAYABLE (continued)

(8) Unsecured note payable for $250,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing July 26, 2019. $31,452 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note maturing on September 7, 2018. This note was repaid in full on April 26, 2019. Personally guaranteed by principal stockholder.

(9) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing September 13, 2019. $37,743 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note maturing October 26, 2018. This note was fully paid on September 13, 2019. Personally guaranteed by principal stockholder.

(10) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing March 1, 2020. Personally guaranteed by principal stockholder.

(11) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing April 26, 2020. $72,279 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note payable maturing July 26, 2019. Personally guaranteed by principal stockholder.

NOTE 10. NOTES PAYABLE- RELATED PARTY

Related party notes payable at June 30, 2019 and 2018 consisted of the following:

	2019			2018
	(in thousands)
Unsecured note payable to an officer, with interest at 5%, due on demand	$	40		$	40
Unsecured note payable to an officer, with interest at 5%, due on demand		76			76
Total unsecured notes payable		116			116
Less: current portion		(116	)		(116	)
Long-term unsecured notes payable	$	—		$	—

F-16

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

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 $9,406 each and increase 15% each year, with 12 payments of $16,450 during year five. In the event the Company fails to make a monthly payment under the Note or the Company is subject to a 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, 2019 the principal balance under this Note was $49,106 and this Note was repaid in full on September 1, 2019.

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, 2019 are as follows:

Fiscal Years Ending June 30,		(in thousands)
	2020	$	2,238
	2021		457
	Total	$	2,695

NOTE 12. CREDIT CARD ADVANCES

On June 29, 2017, OneUp Innovations 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 from Power Up. The loan called for a repayment of $452,000, which included a one-time finance charge of $52,000, approximately ten months after the funding date. The balance of the September 22, 2016 credit card loan was deducted from this loan and the Company received net proceeds of approximately $374,173. This loan was repaid in full on April 18, 2018. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17).

On April 6, 2018, OneUp Innovations borrowed an additional amount of $500,000 from PowerUp. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. The loan calls for a repayment of $570,000, which includes a one-time finance charge of $70,000, approximately ten months after the funding date. This loan was repaid in full on January 29, 2019. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17).

On October 12, 2018, the Company borrowed an additional $250,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after the funding date. A .5% loan origination fee was deducted, and the Company received net proceeds of $248,750. This loan was repaid in full on August 6, 2019. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

On January 29, 2019, the Company borrowed an additional $300,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $345,000 which includes a one-time finance charge of $45,000, approximately ten months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $297,000. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

As of June 30, 2019, the principal amount of the credit card advance totaled $179,738, net of a discount of $26,500.

F-17

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, 2019, the interest rate was 8.5%) 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.

On November 27, 2018, the credit agreement with Advance Financial Corporation was amended to increase the Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $500,000 or 125% 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, 2019, the balance owed under this line of credit was $952,758. As of June 30, 2019, 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.

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 $25,278 at June 30, 2019 and $33,145 at June 30, 2018.

NOTE 15. SECURED NOTE PAYABLE

On June 11, 2019, the Company entered into an agreement with a secured lender, whereby the lender agreed to loan OneUp Innovations a total of $150,000. Repayment of this note is by 78 weekly payments of $2,327. This note payable is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On June 28, 2019, the Company entered into an agreement with Amazon, whereby Amazon agreed to loan OneUp Innovations a total of $302,000. Repayment of this note is by 12 monthly payments of $26,301, which includes interest at 8.22%. The Company has granted Amazon a security interest in the assets of the Company.

F-18

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 16. 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, 2019, the Company has completed $101,776 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 changed to 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, 2019 and 2018 was $352,479 in each year.

The Company also leases certain postage equipment under an operating lease. The monthly lease is $102 per month and expires January 2023.

Future minimum lease payments under non-cancelable operating leases at June 30, 2019 are as follows:

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 $145,916. 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, 2019:

Years ending June 30,	(in thousands)
2020	$	8
2021		—
Future Minimum Lease Payments	$	8
Less Amount Representing Interest		—
Present Value of Minimum Lease Payments		8
Less Current Portion		(8	)
Long-Term Obligations under Leases Payable	$	—

F-19

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 16. 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 $657,187. 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, 2019:

Year ending June 30,		(in thousands)
	2020	$	157
	2021		104
	2022		62
	2023		40
	2024		23
	Future Minimum Note Payable Payments	$	386
	Less Amount Representing Interest		(60	)
	Present Value of Minimum Note Payable Payments		326
	Less Current Portion		(127	)
	Long-Term Obligations under Equipment Notes Payable	$	199

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 the Company or properties to which the Company is a party, and to the Company’s knowledge there are no material proceedings to which any of its directors, executive officers or affiliates are a party adverse to the Company or which have a material interest adverse to the Company.

F-20

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 17. RELATED PARTY TRANSACTIONS

The Company has a subordinated note payable to an officer of the Company who is also the wife of the Company’s CEO (Louis Friedman) and majority shareholder in the amount of $76,000 (see Note 10). Interest on the note during the year ended June 30, 2019 was accrued by the Company at the prevailing prime rate (which is currently 5.5%) and totaled $4,045. The accrued interest on the note as of June 30, 2019 was $27,846. This note is subordinate to all other credit facilities currently in place.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000 (see Note 10). Interest on the note during the year ended June 30, 2019 was accrued by the Company at the prevailing prime rate (which is currently 5.5%) and totaled $2,128. The accrued interest on the note as of June 30, 2019 was $8,710. 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, 2019 (see Note 9). This loan was fully repaid on January 31, 2019. Mr. Friedman personally guaranteed the repayment of the loan obligation.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 13 – Line of Credit). In addition, Luvu Brands has provided its corporate guarantees of the credit facility. On June 30, 2019, the balance owed under this line of credit was $952,758.

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; extended by the holder to July 31, 2021 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 extended by the holder to October 31, 2021 (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, 2021 (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 HCI. As last reported to us, HCI owns 7.5% of our common stock.

On September 7, 2017, the Company borrowed $250,000 from two individual shareholders with interest at 20% on an unsecured note payment, principal and interest paid bi-weekly with the final payment due September 7, 2018. This note was repaid in full on July 30, 2018. The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On October 26, 2017, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due October 26, 2018. This note was repaid in full on September 13, 2018. The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On March 1, 2018, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due March 1, 2019. This loan was repaid in full on March 1, 2019. The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

F-21

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 17. RELATED PARTY TRANSACTIONS (continued)

On July 30, 2018, the Company borrowed $250,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due July 26, 2019. A portion of the note proceeds were used to satisfy the balance due on the September 7, 2018 note payable and the remaining proceeds of $218,548 are for working capital purposes. This loan was repaid in full from the proceeds of the April 26, 2019 loan. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On September 13, 2018, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due September 13, 2019. A portion of the note proceeds were used to satisfy the balance due on the October 27, 2017 note payable and the remaining proceeds of $262,257 are for working capital purposes. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On March 1, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due March 1, 2020. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On April 26, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due April 24, 2020. A portion of the note proceeds were used to satisfy the balance due on the July 30, 2018 note payable and the remaining proceeds of $227,721 are for working capital purposes. 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 line 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 $25,278 at June 30, 2019 and $33,145 at June 30, 2018 (see Note 14). The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On September 5, 2014, the Company amended and restated its HCI 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 a 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, 2019 the principal balance under this Note was $49,106 and this Note was repaid in full on September 1, 2019.

F-22

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 18. STOCKHOLDERS’ EQUITY

Options

At June 30, 2019, the Company had the 2009 and 2015 Stock Option Plans (the “Plans”), which are shareholder-approved and under which 200,000 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, 2019, the number of shares available for issuance under the 2015 Plan was 1,150,000. There are no shares available for issuance under the 2009 Plan, other than the 200,000 stock options that have already been granted.

A summary of option activity under the Company’s stock plan for the years ended June 30, 2019 and 2018 is presented below:

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at June 30, 2017		6,975,000		$	.03		2.7 years	$	135,975
Granted		1,100,000		$	.03
Exercised		—		$	—
Forfeited or Expired		(3,010,000	)	$	.06
Outstanding at June 30, 2018		5,065,000		$	.03		2.7 years	$	98,600
Granted		400,000		$	.04
Exercised		—		$	—
Forfeited or Expired		(1,415,000	)	$	.04
Outstanding at June 30, 2019		4,050,000		$	.02		2.3 years	$	13,500
Exercisable at June 30, 2019		2,237,500		$	.02		1.9 years	$	10,125

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 $.02, $.05, and $.05 at June 30, 2019, 2018 and 2017, respectively.

There were 400,000 stock options granted during the year ended June 30, 2019 and 1,100,000 stock options granted during the year ended June 30, 2018.

The range of fair value assumptions related to options granted during the years ended June 30, 2019 and 2018 were as follows:

	2019		2018
Exercise Price:	$	.038-.046	$	.03-.04
Volatility:		380% - 391%		403% - 409%
Risk Free Rate:		2.3% - 2.7%		2.06% - 2.49%
Vesting Period:		4 years		4 years
Forfeiture Rate:		0%		0%
Expected Life:		4.1 years		4.1 years
Dividend Rate:		0%		0%

F-23

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 18. STOCKHOLDERS’ EQUITY (continued)

The following table summarizes the weighted average characteristics of outstanding stock options as of June 30, 2019:

	Outstanding Options						Exercisable Options
Exercise Prices	Number of Shares		Remaining Life (Years)		Weighted Average Price		Number of Shares		Weighted Average Price
.01 to .03		3,650,000		2.2	$	.02		2,137,500	$.02
.034 to .09		400,000		3.2	$	.05		100,000	$.04
Total stock options		4,050,000		2.3	$	.02		2,237,500	$.02

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 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.

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.

Stock-based compensation expense recognized in the consolidated statements of operations for each of the fiscal years ended June 30, 2019 and 2018 is based on awards ultimately expected to vest.

As of June 30, 2019, total unrecognized stock-based compensation expense related to all unvested stock options was $36,770 which is expected to be expensed over a weighted average period of 2.3 years.

In determining the grant date fair value of option awards under the equity incentive plans, the Company applied the Black-Scholes option pricing model. Based upon limited option exercise history, the Company has generally used the “simplified” method outlined in SEC Staff Accounting Bulletin No. 110 to estimate the expected life of stock option grants. Management believes that the historical volatility of the Company’s stock price on OTCQB best represents the expected volatility over the estimated life of the option. The risk-free interest rate is based upon published U.S. Treasury yield curve rates at the date of grant corresponding to the expected life of the stock option. An assumed dividend yield of zero reflects the fact that the Company has never paid cash dividends and has no intentions to pay dividends in the foreseeable future.

F-24

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 18. 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:

	For the Years Ended June 30,
	2019		2018
	(in thousands)
Cost of Goods Sold	$	—	$	1
Other Selling and Marketing		4		6
General and Administrative		19		17
Total	$	23	$	24

Share Purchase Warrants

As of June 30, 2019 and 2018, there were no share purchase warrants outstanding.

Common Stock

The Company’s authorized common stock was 175,000,000 shares at June 30, 2019 and 2018. 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, 2019, the Company had reserved the following shares of common stock for issuance:

	June 30, 2019
Shares of common stock reserved for issuance under the 2009 Stock Option Plan		200,000
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		9,500,000

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.

F-25

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 19. 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, 2019 and 2018, 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, 2019 and 2018 are approximately as follows:

	2019			2018
	(in thousands)
Deferred tax assets:
Inventory reserves	$	21		$	12
Allowance for doubtful accounts		14			14
Stock-based compensation		91			82
Net operating loss carry-forwards		2,884			2,843
Total gross deferred tax assets		3,010			2,951
Valuation allowance		(3,010	)		(2,951	)
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 (income) loss from operations for the years ended June 30, 2019 and 2018 due to the following:

	2019			2018

Net (income) loss	$	41		$	222
Temporary differences		18			5
Valuation (allowance)		(59	)		(227	)
Net tax benefit	$	—		$	—

At June 30, 2019, the Company had net operating loss (NOL) carryforwards of approximately $3.0 million that may be offset against future taxable income. During 2019 and 2018, the total increase in the valuation allowance was $59,021 and $227,411, 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.

F-26

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2019 and 2018

NOTE 19. INCOME TAXES (continued)

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 through 2037.

The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended June 30, 2012 through 2019. The Company has not filed its Federal or State tax returns for 2016 through 2018 but expects to file these returns before the end of calendar year 2019.

NOTE 20. – SUBSEQUENT EVENTS

Subsequent to June 30, 2019, the Company borrowed an additional $250,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $247,500. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder.

Subsequent to June 30, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due September 18, 2020. The lenders charged a 3% loan origination fee and the remaining proceeds of $291,000 will be used working capital purposes. This note payable is personally guaranteed by the principal stockholder.

F-27

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

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

ITEM 9A. Controls and Procedures.

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of June 30, 2019, our CEO and CFO believe that:

(i)

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

(ii)

our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

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

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

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

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

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

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

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2019. This assessment was based on the framework in 1992 Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, using those criteria, management concluded that our internal control over financial reporting was effective as of June 30, 2019.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a permanent exemption of the SEC that permits the Company to provide only management’s report in the Annual Report on Form 10-K. Accordingly, our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2019, has not been audited by our auditors or any other independent registered accounting firm.

(b) Changes in internal control over financial reporting

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

ITEM 9B. Other Information.

None.

PART III.

ITEM 10. Directors, Executive Officers and Corporate Governance. [WANT D&O TO COMPLETE NEW D&O QUESTIONNAIRES?]

The following table sets forth the officers and directors of Luvu Brands, Inc. as of June 30, 2019.

Name	Age	Position
Louis S. Friedman	67	Chief Executive Officer, President, Director
Manuel Munoz	45	Chief Information Officer
Ronald P. Scott	64	Chief Financial Officer, Secretary, Director
Leslie S. Vogelman	67	Treasurer

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

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

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

Background of Executive Officers and Directors

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

Manuel Munoz, Chief Information Officer. Mr. Munoz joined the company in July 2018 and has delivered technological advice and services for the Company. Prior to that, he served as VP of Technical Operations at Brighter Brain LLC from 2015 to 2018, working with a wide variety of technological platforms and going from mobile technologies such as Android and iOS all the way up to Content Managements Systems like SharePoint and technologies like Big Data and Data Science. From 2013 to 2015 he worked as a Director of Technology for Techfield, LLC, where he primarily focused on web technologies such as .NET, SQL and Business Intelligence solutions. Mr. Munoz holds a B.S. degree in Informatics and Computer Systems from the Universidad Iberoamericana in Mexico City.

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

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

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

Family Relationships

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

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

Committees

As of June 30, 2019, we have not established an audit committee or any other committee of the board of directors and, therefore, the responsibilities of such committees have been conducted by our board of directors as a whole.

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

We may, in the future, establish an audit committee and/or other committees of the board of directors. We currently do not have any independent directors.

Audit Committee Financial Expert

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

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

Our board of directors has determined that Ronald Scott, our Chief Financial Officer, is an “audit committee financial expert” within the meaning of the foregoing definition.

Diversity

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

Directors’ Compensation

For the fiscal years ended June 30, 2019 and 2018, our directors did not receive any compensation in their capacity as a director.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership, and annual reports concerning their ownership of our common shares and other equity securities on Forms 3, 4, and 5 respectively. Executive officers, directors, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based on a review of the copies of such forms received by us, and to the best of our knowledge, there were no reports untimely filed during the fiscal year ended June 30, 2019.

Code of Ethics

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

ITEM 11. Executive Compensation.

Summary Compensation Table

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal years ended June 30, 2019 and 2018 by our named executive officers as defined in Item 402(a) of Regulation S-K (each an “NEO”).

	Fiscal	Salary	Bonus	Stock Awards	Option Awards	Non-Equity Incentive Plan Compensation	All Other Comp- ensation	Total
Name and Principal Position	Year	($)	($)	($)	($)(1)	($)	($)	($)
Louis S. Friedman	2019	150,000	—	—	—	—	—	150,000
President, Chief Executive	2018	150,000	—	—	6,875	—	—	156,875
Officer and Chairman of the Board
Ronald P. Scott	2019	145,000	—	—	—	—	—	145,000
Chief Financial Officer, Secretary	2018	145,000	—	—	3,750	—	—	148,750
Manuel Munoz (2)	2019	128,423	—	—	9,200	—	—	137,623
Chief Information Officer	2018	—	—	—	—	—	—	—

(1) The amounts reported in this column represent the full grant date fair value of stock awards in accordance with ASC 718, net of estimated forfeitures. Refer to Note 17 of the financial statements included in Item 8 of this Annual Report for the assumptions made in the valuation of stock awards. See Grants of Plan-Based Awards table below.

(2) Mr. Munoz joined the Company as Chief Information Officer on July 2, 2018.

Grants of Plan-Based Awards

The following table summarizes information concerning each grant of an award made in our fiscal year ending June 30, 2019 to each of our NEOs:

Name

Grant Date

All Other Option Awards: Number of Securities Underlying Options

(#)

Exercise or base price of option awards per share

($)

Grant Date Fair Value of Stock and Option Awards

($)

Manuel Munoz

7/2/2018

200,000

.046

9,200

Outstanding Equity Awards at Fiscal Year End

The following table shows, for the fiscal year ended June 30, 2019, certain information regarding outstanding equity awards at fiscal year-end for our NEOs.

		Outstanding Equity Awards at June 30, 2019 Option Awards								Stock Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)
Louis S. Friedman			375,000		125,000	$	.0138	12/29/2020	(1)		—	—
			150,000		150,000	$	.033	2/13/2022	(2)		—	—
			50,000		150,000	$	.031	12/11/2022	(3)
Ronald P. Scott			225,000		75,000	$	.0125	12/29/2020	(1)		—	—
			100,000		100,000	$	.03	2/13/2022	(2)		—	—
			31,250		93,750	$	.028	12/11/2022	(3)		—	—
Manuel Munoz			—		200,000	$	.046	7/2/2023	(4)		—	—


(1)	The common stock option vests pro rata over a four-year period on each of December 29, 2016, December 29, 2017, December 29, 2018 and December 29, 2019.
(2)	The common stock option vests pro rata over a four-year period on each of February 13, 2018, February 13, 2019, February 13, 2020 and February 13, 2021.
(3)	The common stock option vests pro rata over a four-year period on each of December 11, 2018, December 11, 2019, December 11, 2020 and December 11, 2021.
(4)	The common stock option vests pro rata over a four-year period on each of July 2, 2019, July 2, 2020, July 2, 2021 and July 2, 2022.

Employment Agreement

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

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

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

· all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities;

· each of our directors;

· each of our Named Executive Officers; and

· all current directors and executive officers as a group.

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

Applicable percentage ownership in the following table is based on 73,452,596 shares of common stock outstanding as of October 9, 2019.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of October 9, 2019, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Luvu Brands, Inc., 2745 Bankers Industrial Drive, Atlanta, GA 30360.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Executive Officers and Directors
Common	Louis S. Friedman		35,769,376	(1)		46.3	%
Common	Manuel Munoz		50,000	(2)		*
Common	Ronald P. Scott		670,516	(3)		*
Common	Leslie Vogelman		400,000	(4)		*
Common	All directors and executive officers as a group (4 persons)		37,077,392			46.9	%
5% Shareholders
Common	Hope Capital, Inc. (5)		5,378,001			7.3	%
Executive Officers and Directors
Series A Convertible Preferred Stock	Louis S. Friedman		4,300,000	(6)		100.0	%
Series A Convertible Preferred Stock	Manuel Munoz		0			0.0	%
Series A Convertible Preferred Stock	Ronald P. Scott		0			0.0	%
Series A Convertible Preferred Stock	Leslie Vogelman		0			0.0	%
Series A Convertible Preferred Stock	All directors and executive officers as a group (3 persons)		4,300,000			100.0	%

* Less than 1%

(1)	Includes 4,300,000 shares of common stock issuable upon conversion of 4,300,000 shares of Series A Convertible Preferred stock at the discretion of the holder. Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 71.3 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders. Also includes options for purchase 575,000 shares of Common Stock.
(2)	Includes options to purchase 50,000 shares of Common Stock.
(3)	Includes options to purchase 356,250 shares of Common Stock.
(4)	Includes options to purchase 356,250 shares of Common Stock.
(5)	This person’s address is 111 Great Neck Road, Suite 216, Great Neck, NY 11021. Curt Kramer is the sole shareholder of Hope Capital, Inc. and the natural control person over these securities.
(6)	Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 71.3 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.

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

Related Party Transactions

The Company has a subordinated note payable to an officer of the Company who is also 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, 2019 was accrued by the Company at the prevailing prime rate (which is currently 5.5%) and totaled $4,045. The accrued interest on the note as of June 30, 2019 was $27,846. 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, 2019 was accrued by the Company at the prevailing prime rate (which is currently 5.5%) and totaled $2,128. The accrued interest on the note as of June 30, 2019 was $8,710. This note is subordinate to all other credit facilities currently in place.

Director Independence

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

ITEM 14. Principal Accounting Fees and Services.

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

	Fiscal Year Ended June 30,
	2019		2018
	(in thousands)
Audit Fees (1)	$	42	$	42
Audit-Related Fees (2)	$	—	$	—
Tax Fees (3)	$	—	$	—
All Other Fees (4)	$	—	$	—

(1)	Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
(2)	Audit-Related Fees – This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC.
(3)	Tax Fees – This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
(4)	All Other Fees – This category consists of fees for other miscellaneous items.

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

PART IV

ITEM 15. Exhibits, Financial Statement Schedules.

(a)

Financial Statements; Schedules

Our consolidated financial statements for the fiscal years ended June 30, 2019 and 2018 begin on page 15 of this annual report. We are not required to file any financial statement schedules.

(b) Exhibits.

		Incorporated by Reference			Filed or Furnished Herewith
No.	Exhibit Description	Form	Date Filed	Number	Filed or Furnished Herewith
2.1	Merger and Recapitalization Agreement between WES Consulting, Inc., the majority shareholder of WES Consulting, Inc., Luvu Brands, Inc., and the majority shareholder of Luvu Brands, Inc., dated as of October 19, 2009	8-K	10/22/09	2.1
2.2	Stock Purchase and Recapitalization Agreement between OneUp Acquisition, Inc., Remark Enterprises, Inc., OneUp Innovations, Inc., and Louis S. Friedman, dated March 31, 2009 and fully executed on April 3, 2009	8-K/A	3/24/10	2.2
2.3	Amendment No. 1 to Stock Purchase and Recapitalization Agreement, dated June 22, 2009	8-K/A	3/24/10	2.3
3.1	Amended and Restated Articles of Incorporation	SB-2	3/2/07	3i
3.2	Bylaws	SB-2	3/2/07	3ii
3.3	Articles of Amendment to the Amended and Restated Articles of Incorporation	8-K	2/23/11	3.1
3.4	Articles of Amendment to the Amended and Restated Articles of Incorporation, effective February 28, 2011	8-K	3/3/11	3.1
4.1	Designation of Rights and Preferences of Series A Convertible Preferred Stock of WES Consulting, Inc.	8-K	2/23/11	4.1
4.2	3% Promissory Note issued September 5, 2014	8-K	9/5/14	4.1
10.1	Lease Agreement between Bedford Realty Company, LLC and OneUp Innovations, Inc., dated September 26, 2005	8-K/A	3/24/10	10.7
10.2	Written Description of Oral Agreement between OneUp Innovations, Inc. and Leslie Vogelman, dated June 23, 2006	8-K/A	3/24/10	10.14
10.3	Receivables Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated May 24, 2011	10-K	10/12/11	10.17
10.4	Guarantee between Luvu Brands, Inc. and Advance Financial Corporation, dated May 24, 2011	10-K	10/12/11	10.18
10.5	Guarantee between Foam Labs, Inc. and Advance Financial Corporation, dated May 24, 2011	10-K	10/12/11	10.20
10.6	Guarantee between Louis S. Friedman and Advance Financial Corporation, dated May 24, 2011	10-K	10/12/11	10.21
10.7	Amended and Restated Receivable Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated September 4, 2013	10-K	9/30/13	10.8
10.8	First Amendment to Lease dated July 23, 2014 by and between Bedford Realty Company, LLC and OneUp Innovations, Inc.	10-K	9/29/14	10.12
10.9	Credit Card Receivables Advance Agreement with Power Up Lending Group, dated April 21, 2015	10-Q	5/13/15	10.1
10.10	Form of Credit Card Advance Schedule	10-Q	2/14/19	10.1
21.1	Subsidiaries	10-K	9/29/14	21.1
23.1	Consent of Liggett & Webb P.A. independent registered public accounting firm				Filed
31.1	Section 302 Certificate of Chief Executive Officer				Filed
31.2	Section 302 Certificate of Chief Financial Officer				Filed
32.1	Section 906 Certificate of Chief Executive Officer				Filed
32.2	Section 906 Certificate of Chief Financial Officer				Filed
101.INS	XBRL Instance Document				Filed
101.SCH	XBRL Taxonomy Extension Schema Document				Filed
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*				Filed
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				Filed
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document				Filed
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*				Filed

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	LUVU BRANDS, INC.

Date: October 11 , 2019	/s/ Louis S. Friedman
	Louis S. Friedman, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME	TITLE	DATE

/s/ Louis S. Friedman	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)	October 11, 2019
Louis S. Friedman

/s/ Ronald P. Scott	Chief Financial Officer (Principal Financial and Accounting Officer), Secretary, and Director	October 11, 2019
Ronald P. Scott