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
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, 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
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.
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:
Years ending June 30,
|
|
(in thousands)
|
|
2020
|
|
|
$
|
417
|
|
|
2021
|
|
|
|
212
|
|
|
2022
|
|
|
|
1
|
|
|
2023
|
|
|
|
1
|
|
|
Total minimum lease payments
|
|
|
$
|
631
|
|
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 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 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