See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Luvu Brands, Inc. (the “Company”
or “Luvu Brands”) 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 brand based marketer of consumer products that offers a growing number of product categories including: Liberator®
sexual positioning furniture, Avana™ top-of-bed comfort pillows and Jaxx® casual fashion furniture, child, teen and adult
beanbags, outdoor loungers, loveseats, and daybeds. 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 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 experience higher sales in the second
and third fiscal quarters.
The accompanying unaudited condensed consolidated
financial statements of Luvu Brands, Inc. and all of its wholly-owned subsidiaries (collectively, the "Company" “we”
or "Luvu Brands") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP")
have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered
necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited consolidated
financial statements but do not include all disclosures required by GAAP. The results of operations for the six months ended December
31, 2017 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual
Report on Form 10-K for the fiscal year ended June 30, 2017.
NOTE 2. GOING CONCERN
The accompanying condensed 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. As of December 31, 2017, the Company has an accumulated deficit of approximately $9,050,000
and a working capital deficit of approximately $1,865,000. This raises substantial doubt about our ability to continue as a going
concern.
In view of these matters, realization of a major
portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is
dependent upon 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, at the end of fiscal 2016, we evaluated various options
for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2017, we purchased new foam
compression equipment for installation during the second quarter of fiscal 2017. This action has yielded higher factory throughput
at a lower cost of goods sold. We also plan to continue to manage discretionary expense levels to be better aligned with current
and expected revenue levels. We estimate that the operational and strategic growth plans we have identified over the next twelve
months will require approximately $250,000 of funding, of which we estimate will be provided by debt financing and, to a lesser
extent, cash flow from operations as well as cash on hand.
The ability of the Company to continue as a
going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually
secure other sources of financing and attain profitable operations. However, management cannot provide any assurances
that the Company will be successful in accomplishing these plans. The accompanying financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going concern.
6
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
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 condensed financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial statements. These consolidated condensed financial
statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the
Company’s report on Form 10-K for the year ended June 30, 2017 filed on October 4, 2017.
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses
during the period reported. Management reviews these estimates and assumptions periodically and reflects the effect of revisions
in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Use of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Significant estimates in these consolidated financial statements include estimates of:
income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves, share-based compensation;
and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.
Revenue Recognition
We recognize revenues as goods are shipped to
customers and title is transferred. The criteria for recognition of revenue are when persuasive evidence that an arrangement exists
and both title and risk of loss have passed to the customer, the price is fixed or determinable, and collectability is reasonably
assured. Sales returns and allowances are estimated and recorded as a reduction to sales in the period in which sales are recorded.
The Company records product sales net of estimated
product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have
not been material to date. The Company includes shipping and handling costs in cost of product sales.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
7
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
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 December 31, 2017 and June 30, 2017.
|
|
December 31,
2017
|
|
June 30,
2017
|
|
|
(in thousands)
|
Accounts receivable
|
|
$
|
722
|
|
|
$
|
646
|
|
Allowance for doubtful accounts
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Allowance for discounts and returns
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Total accounts receivable, net
|
|
$
|
708
|
|
|
$
|
631
|
|
Inventories and Inventory Reserves
Inventories are stated at the lower of cost
or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose
and a normal profit margin. Inventory costs include materials, labor, depreciation and overhead. The company establishes
reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events,
such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or market may
be adjusted in response to changing conditions.
Concentration of Credit Risk
The Company maintains
its cash accounts with banks located in Georgia. The total cash balances are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000 per bank. The Company had bank balances on deposit at December 31, 2017
that exceeded the balance insured by the FDIC by $399,078.
Accounts receivable are typically unsecured and are
derived from revenue earned from customers primarily located in North America and Europe.
During the six month ended December 31, 2017,
we purchased 14% of total inventory purchases from one vendor.
During the fiscal year ended June 30, 2017,
we purchased 13% and 10% of total inventory purchases from two vendors.
As of December 31, 2017 one of the Company’s
customers (Amazon) represents 62% of the total accounts receivables compared to 41% as of June 2017.
Fair Value of Financial and Derivative Instruments
At December 31, 2017, our financial instruments
included cash and cash equivalents, accounts receivable, accounts payable, and other debt.
The fair values of these financial instruments
approximated their carrying values based on either their short maturity or current terms for similar instruments.
8
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
The Company measures the fair value
of its assets and liabilities under the guidance of
ASC 820, Fair Value Measurements and Disclosures
, which defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to
all other accounting pronouncements that require or permit fair value measurement.
ASC 820 clarifies that fair value is an exit
price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize
the use of unobservable inputs. These inputs are prioritized as follows:
Level 1
: Observable inputs such as quoted
prices for identical assets or liabilities in active markets;
Level 2
: Inputs, other than the quoted
prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities
or market-corroborated inputs; and
Level 3
: Unobservable inputs for which
there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants
would price the assets or liabilities.
The valuation techniques that may be used to
measure fair value are as follows:
A.
Market
approach
- Uses prices and other relevant information generated by market transactions involving identical or comparable assets
or liabilities.
B.
Income
approach
- Uses valuation techniques to convert future amounts to a single present amount based on current market expectations
about those future amounts, including present value techniques, option-pricing models and excess earnings method.
C.
Cost
approach
- Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Advertising Costs
Advertising costs are expensed in the period
when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $4,450
at December 31, 2017 and $18,055 at June 30, 2017. Advertising expense for the three months ended December 31, 2017 and 2016 was
$126,540 and $123,660 , respectively. Advertising expense for the six months ended December 31, 2017 and 2016 was $219,183 and
$205,669, respectively.
Research and Development
Research and development expenses for new products
are expensed as they are incurred. Expenses for new product development totaled $36,154 and $38,812 for the three months ended
December 31, 2017 and 2016, respectively. Expenses for new product development totaled $72,789 and $90,741 for the six months ended
December 31, 2017 and 2016, respectively. Research and development costs are included in general and administrative expense.
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
that 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.
9
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability
using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360,
Property, Plant, and Equipment. The Company has determined that there was no impairment at December 31, 2017.
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 December 31, 2017, the Company has completed
$96,120 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 six months ended December 31, 2017 and 2016 was $176,239 and $176,239, respectively.
The Company also leases certain equipment under
operating leases, as more fully described in Note 15 -
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 retailers and distributors,
and purchased products sold to retailers and mass merchants. 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. For the three and six months ending December 31, 2017, sales to and
through Amazon accounted for 31% and 36% of our net sales, respectively.
The following is a summary of sales results
for the Direct, Wholesale, and Other channels (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
(unaudited)
|
|
Six Months Ended
(unaudited)
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
December 31,
2017
|
|
December 31,
2016
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,595
|
|
|
$
|
1,608
|
|
|
$
|
2,708
|
|
|
$
|
2,882
|
|
Wholesale
|
|
|
2,936
|
|
|
|
3,400
|
|
|
|
5,322
|
|
|
|
6,144
|
|
Other
|
|
|
104
|
|
|
|
126
|
|
|
|
228
|
|
|
|
213
|
|
Total Net Sales
|
|
$
|
4,635
|
|
|
$
|
5,134
|
|
|
$
|
8,258
|
|
|
$
|
9,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
734
|
|
|
$
|
830
|
|
|
$
|
1,248
|
|
|
$
|
1,443
|
|
Wholesale
|
|
|
803
|
|
|
|
877
|
|
|
|
1,396
|
|
|
|
1,378
|
|
Other
|
|
|
(179
|
)
|
|
|
(166
|
)
|
|
|
(307
|
)
|
|
|
(303
|
)
|
Total Gross Margin
|
|
$
|
1,358
|
|
|
$
|
1,541
|
|
|
$
|
2,337
|
|
|
$
|
2,518
|
|
10
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
Recent Accounting Pronouncements
In
February 2016, the
Financial Accounting Standards Board (“FASB”)
issued
ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize (i) a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were
made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing
the provisions of this ASU to determine of there will be any impact on our results of operations, cash flows or financial condition.
In April 2016, the FASB issued ASU 2016–10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. The amendments in
this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following
two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related
principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services
in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with
either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the
entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed
implementation guidance with the expectation to reduce the degree of judgment necessary to comply with Topic 606. We are currently
reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial
condition.
In May 2017, the FASB issued an Accounting Standards
Update (“ASU”) 2017-09,
Compensation - Stock Compensation (Topic718) Clarifying share-based payment modification
guidance
. The amendments in this update clarify when to account for a change to the terms or conditions of a share-based payment
award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions,
or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance
is effective for interim and annual periods beginning after December 15, 2017 and should be applied prospectively on or after the
effective date, with early adoption permitted. We are currently reviewing the provisions of this ASU to determine if there will
be any impact on our results of operations, cash flows or financial condition.
All other newly issued accounting pronouncements,
but not yet effective, have been deemed either immaterial or not applicable.
Net Income (Loss) Per Share
Basic net income (loss)
per common share was determined by dividing net income (loss) applicable to common stockholders by the weighted average common
shares outstanding during the period, and diluted net income per share was determined by dividing net income applicable to common
stockholders by the weighted average common shares outstanding during the period plus the effect of stock options using the treasury
stock method. As of December 31, 2017 and 2016, the common stock equivalents did not have any effect on net income per share.
|
|
December 31,
|
|
|
2017
|
|
2016
|
Common stock options – 2009 Plan
|
|
|
1,469,000
|
|
|
|
2,876,000
|
|
Common stock options – 2015 Plan
|
|
|
4,775,000
|
|
|
|
2,550,000
|
|
Convertible preferred stock
|
|
|
4,300,000
|
|
|
|
4,300,000
|
|
Total
|
|
|
10,544,000
|
|
|
|
9,726,000
|
|
11
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
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.
Stock Based Compensation
We account for stock-based compensation to employees
in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and restricted
stock award at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required
to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial
statements over the respective vesting period.
Stock Issued for Services to other than Employees
Common stock, stock options and common stock
warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by FASB ASC 505,
which is measured as of the date required by FASB ASC 505, “Equity – Based Payments to Non-Employees”. In accordance
with FASB ASC 505, the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis
of the market price of the underlying common stock on the “valuation date”, which for options and warrants related
to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is
the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period
over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense
is computed under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the
end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date
is reflected in the expense recorded in the subsequent period in which that change occurs.
NOTE 4. IMPAIRMENT OF LONG-LIVED ASSETS
We follow Financial Accounting Standards Board
Accounting Standards Codification (“FASB ASC”) 360, Property, Plant, and Equipment, regarding impairment of our other
long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the
fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable.
An impairment loss is recognized only
if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair
value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use of 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 December
31, 2017 or June 30, 2017.
12
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 5. INVENTORIES, NET
Inventories are stated at the lower of cost
(which approximates first-in, first-out) or market. Market is defined as sales price less cost to dispose and a normal profit margin.
Inventories consisted of the following:
|
|
December 31, 2017
|
|
June 30, 2017
|
|
|
(in thousands)
|
Raw materials
|
|
$
|
728
|
|
|
$
|
723
|
|
Work in process
|
|
|
182
|
|
|
|
208
|
|
Finished goods
|
|
|
715
|
|
|
|
704
|
|
Total inventories
|
|
|
1,625
|
|
|
|
1,635
|
|
Allowance for inventory reserves
|
|
|
(58
|
)
|
|
|
(90
|
)
|
Total inventories, net of allowance
|
|
$
|
1,567
|
|
|
$
|
1,545
|
|
NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated
at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment
and furniture and fixtures, or the shorter of the remaining lease term or estimated useful lives for leasehold improvements. Equipment
and leasehold improvements consisted of the following:
|
|
December 31,
2017
|
|
June 30, 2017
|
|
Estimated
Useful Life
|
|
|
(in thousands)
|
|
|
Factory equipment
|
|
$
|
2,457
|
|
|
$
|
2,405
|
|
|
2-10 years
|
Computer equipment and software
|
|
|
1,048
|
|
|
|
1,047
|
|
|
5-7 years
|
Office equipment and furniture
|
|
|
205
|
|
|
|
187
|
|
|
5-7 years
|
Leasehold improvements
|
|
|
440
|
|
|
|
422
|
|
|
10 years
|
Subtotal
|
|
|
4,150
|
|
|
|
4,061
|
|
|
|
Accumulated depreciation
|
|
|
( 3,299
|
)
|
|
|
(3,192
|
)
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
851
|
|
|
$
|
869
|
|
|
|
Management reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability
of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be
generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized
to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred
during the six months ended December 31, 2017.
NOTE 7. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31,
2017 and June 30, 2017:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Accrued compensation
|
|
$
|
346
|
|
$
|
352
|
|
Accrued expenses and interest
|
|
111
|
|
144
|
|
Current portion of deferred rent payable
|
|
45
|
|
39
|
|
Other accrued liabilities
|
|
$
|
502
|
|
$
|
535
|
|
13
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY
Current and long-term debt at December 31,
2017 and June 30, 2017 consisted of the following:
|
|
December 31,
2017
|
|
June 30,
2017
|
Current debt:
|
|
(in thousands)
|
Unsecured lines of credit (Note 14)
|
|
$
|
39
|
|
|
$
|
15
|
|
Line of credit (Note 13)
|
|
|
690
|
|
|
|
634
|
|
Short-term unsecured notes payable (Note 9)
|
|
|
524
|
|
|
|
538
|
|
Current portion of term note payable – shareholder (Note 11)
|
|
|
171
|
|
|
|
156
|
|
Current portion of equipment notes payable (Note 15)
|
|
|
100
|
|
|
|
82
|
|
Current portion of leases payable (Note 15)
|
|
|
34
|
|
|
|
40
|
|
Credit card advance (net of discount) (Note 12)
|
|
|
192
|
|
|
|
534
|
|
Notes payable – related party (Note 10)
|
|
|
116
|
|
|
|
116
|
|
Total current debt
|
|
|
1,866
|
|
|
|
2,115
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Leases payable (Note 15)
|
|
|
21
|
|
|
|
36
|
|
Unsecured notes payable (Note 9)
|
|
|
700
|
|
|
|
600
|
|
Equipment note payable (Note 15)
|
|
|
229
|
|
|
|
223
|
|
Term note payable – shareholder (Note 11)
|
|
|
146
|
|
|
|
235
|
|
Total long-term debt
|
|
$
|
1,096
|
|
|
$
|
1,094
|
|
14
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 9. UNSECURED NOTES
PAYABLE
Unsecured notes payable at December 31, 2017
and June 30, 2017 consisted of the following:
|
|
December 31,
2017
|
|
June 30,
2017
|
Current debt:
|
|
(in thousands)
|
20% Unsecured note, bi-weekly principal and interest, due April 20, 2018
(1)
|
|
$
|
99
|
|
|
$
|
246
|
|
20% Unsecured note, interest only, due October 31, 2017
(2)
|
|
|
̶
|
|
|
|
100
|
|
20% Unsecured note, bi-weekly principal and interest, due September 7, 2018
(3)
|
|
|
178
|
|
|
|
̶
|
|
20% Unsecured note, bi-weekly principal and interest, due October 26, 2018
(4)
|
|
|
247
|
|
|
|
192
|
|
Total current debt
|
|
|
524
|
|
|
|
538
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
20% Unsecured note, interest only, due October 31, 2019
(2)
|
|
|
100
|
|
|
|
100
|
|
20% Unsecured note, interest only, due July 31, 2019
(5)
|
|
|
100
|
|
|
|
̶
|
|
20% Unsecured note, interest only, due January 2, 2019
(6)
|
|
|
300
|
|
|
|
300
|
|
20% Unsecured note, interest only, due May 1, 2019
(7)
|
|
|
200
|
|
|
|
200
|
|
Total long-term debt
|
|
|
700
|
|
|
|
600
|
|
Total unsecured notes payable
|
|
$
|
1,234
|
|
|
$
|
1,138
|
|
(1) Unsecured note payable for $300,000 to two individual shareholders
with interest at 20%, principal and interest paid bi-weekly, maturing April 20, 2018. $75,125 of the proceeds from this note
was used to retire the balance of the unsecured note issued on June 29, 2016. 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, 2015. Subsequent to September
30, 2015, the due date on this note was extended by the holder to October 31, 2017. On October 20, 2017, the due date on this note
was extended by the holder to October 31, 2019 with interest payable monthly and principal due on maturity. Personally guaranteed
by principal stockholder.
(3) Unsecured note payable for $250,000 to two individual shareholders
with interest at 20%, principal and interest paid bi-weekly, maturing September 7, 2018. Personally guaranteed by principal
stockholder.
(4) Unsecured note payable for $300,000 to two individual shareholders
with interest at 20%, principal and interest paid bi-weekly, maturing October 26, 2018. $98,750 from the proceeds of this unsecured
note payable was used to retire the balance of the unsecured note maturing on February 9, 2018. Personally guaranteed by principal
stockholder.
(5) Unsecured note payable for $100,000 to an individual, with interest
at 20% payable monthly; principal due in full on July 31, 2013. On July 31, 2017, the due date on this note was extended by
the holder to July 31, 2019. Personally guaranteed by principal stockholder.
(6) Unsecured note payable for $300,000 to an individual, with interest
at 20%, principal and interest originally due in full on January 3, 2013; extended to January 4, 2016 with interest
payable monthly and principal due on maturity. Subsequent to June 30, 2017, the due date on the note was extended by the holder
to January 2, 2019. Personally guaranteed by principal stockholder.
(7) Unsecured note payable for $200,000 to an individual, with interest
payable monthly at 20%, the principal was due in full on May 1, 2013; extended to May 1, 2015, then further extended by the holder
to May 1, 2017. Subsequent to May 1, 2017, the due date on this note was extended by the holder to May 1, 2019. Personally guaranteed
by principal stockholder.
15
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 10. NOTES PAYABLE - RELATED PARTY
Related party notes payable at December 31,
2017 and June 30, 2017 consisted of the following:
|
|
December 31,
2017
|
|
June 30,
2017
|
|
|
(in thousands)
|
|
|
|
Unsecured note payable to an officer, with interest at 4.25%, due on demand
|
|
$
|
40
|
|
|
$
|
40
|
|
Unsecured note payable to an officer, with interest at 4.25%, due on demand
|
|
|
76
|
|
|
|
76
|
|
Total unsecured notes payable
|
|
|
116
|
|
|
|
116
|
|
Less: current portion
|
|
|
(116
|
)
|
|
|
(116
|
)
|
Long-term unsecured notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
16
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 11. TERM NOTES PAYABLE - SHAREHOLDER
On September 5, 2014, the Company
amended and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to
Hope Capital, Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible
Note in the original principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September
2009 Note”), the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to
provide for a 3% unsecured promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due
on or before August 31, 2019 and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall
be made on a monthly basis, starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly
payments. The first 12 payments are $9,405.60 each and increase 15% each year, with 12 payments of $16,450.45 during year five.
In the event the Company fails to make a monthly payment under the Note or the Company is subject to 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 December 31, 2017 the principal balance under this Note was $317,066.
The principal payments required at maturity
under the Company’s outstanding short term notes, secured line of credit, unsecured line of credit, credit card loans, short
term related party notes and term note payable at December 31, 2017 are as follows:
Fiscal Years Ending June 30,
|
|
(in thousands)
|
2018 (six months)
|
|
$
|
1,808
|
|
2019
|
|
|
473
|
|
2020
|
|
|
349
|
|
Total
|
|
$
|
2,630
|
|
NOTE 12. CREDIT CARD ADVANCES
On June 1, 2017, the Company entered into
an agreement with Power Up Lending Group, Ltd. (“Power Up”) whereby Power Up agreed to loan OneUp and Foam Labs a total
of $150,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. The loan calls
for a repayment of $168,000, which includes a one-time finance charge of $18,000, approximately ten months after the funding date.
This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis
S. Friedman (see Note 16).
On June 29, 2017, the Company borrowed an
additional amount of $400,000 from Power Up. The loan calls for a repayment of $452,000, which includes a one-time finance charge
of $52,000, approximately ten months after the funding date. The balance of the September 22, 2016 credit card loan was deducted
from this loan and the Company received net proceeds of approximately $374,173. This loan is guaranteed by the Company and is personally
guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 16).
As of December 31, 2017, the principle amount
of the credit card advances totaled $191,835, net of a discount of $26,200.
17
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
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 December 31, 2017, the interest rate was 7.5%) and the Monthly Service Fee was changed to .5% per
month.
On December 9, 2015, the credit agreement
with Advance Financial Corporation was amended to increase the asset based line of credit to $1,200,000 to include an Inventory
Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible
accounts receivable loan. All other terms of the credit facility remain the same.
The Company’s CEO, Louis Friedman, has
personally guaranteed the repayment of the facility. In addition, Luvu Brands has provided its corporate guarantee of
the credit facility (see Note 16). On December 31, 2017, the balance owed under this line of credit was $690,461. As
of December 31, 2017, 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 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 $38,587 at December 31, 2017 and $14,690 at June 30, 2017.
18
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 15. COMMITMENTS AND CONTINGENCIES
Operating Leases
On July 23, 2014, the Company entered into an
agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December
31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment was effective August 1, 2014 and included
a four month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company agreed to make improvements
to the facility totaling $123,505 within six months of August 1, 2014. As of December 31, 2017, the Company has completed $96,120
of the leasehold improvements. In addition, the monthly rent on the facility decreased from the current rent of $33,139 to $29,415
per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating schedule with the final
year of the lease at $35,123 per month. The rent expense under this lease for the six months ended December 31, 2017 and 2016 was
$176,239 and $176,239, respectively.
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 December 31, 2017 are as follows:
Years ending June 30,
|
|
(in thousands)
|
2018 (six months)
|
|
$
|
199
|
|
2019
|
|
|
404
|
|
2020
|
|
|
417
|
|
2021
|
|
|
212
|
|
Thereafter through 2022
|
|
|
2
|
|
Total minimum lease payments
|
|
$
|
1,234
|
|
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 $175,267. These assets are included in the fixed assets listed
in Note 6 -
Equipment and Leasehold Improvements
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 capital lease payments subsequent to December 31, 2017:
Years ending June 30,
|
|
(in thousands)
|
2018 (six months)
|
|
$
|
22
|
|
2019
|
|
|
29
|
|
2020
|
|
|
8
|
|
Future Minimum Lease Payments
|
|
|
59
|
|
Less Amount Representing Interest
|
|
|
(4
|
)
|
Present Value of Minimum Lease Payments
|
|
|
55
|
|
Less Current Portion
|
|
|
(34
|
)
|
Long-Term Obligations under Leases Payable
|
|
$
|
21
|
|
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 $490,754. 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 8.9% to 11.3%.
19
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
The following is an analysis of the minimum
future equipment note payable payments subsequent to December 31, 2017:
Years ending June 30,
|
|
(in thousands)
|
2018 (six months)
|
|
|
64
|
|
2019
|
|
|
126
|
|
2020
|
|
|
115
|
|
2021
|
|
|
61
|
|
2022
|
|
|
20
|
|
Future Minimum Note Payable Payments
|
|
$
|
386
|
|
Less Amount Representing Interest
|
|
|
(57
|
)
|
Present Value of Minimum Note Payable Payments
|
|
|
329
|
|
Less Current Portion
|
|
|
(100
|
)
|
Long-Term Obligations under Equipment Notes Payable
|
|
$
|
229
|
|
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 Quarterly Report, there
are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to
our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse
to us or which have a material interest adverse to us.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company has a subordinated note payable
to the wife of the Company’s CEO (Louis Friedman) and majority shareholder in the amount of $76,000. Interest on the note
during the six months ended December 31, 2017 was accrued by the Company at the prevailing prime rate (which is currently 4.5%)
and totaled $1,637. The accrued interest on the note as of December 31, 2017 was $22,033. 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 six months ended December 31, 2017 was accrued by the Company at the prevailing
prime rate (which is currently 4.5%) and totaled $862. The accrued interest on the note as of December 31, 2017 was $5,651. This
note is subordinate to all other credit facilities currently in place.
On January 3, 2011, an individual loaned the
Company $300,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on January
3, 2012; extended to January 3, 2013; then extended to January 3, 2016; then extended to January 2, 2017; then extended to January
2, 2019 with the principle due on maturity (see Note 9). 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 December 31, 2017, the balance
owed under this line of credit was $690,461.
20
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 16. RELATED PARTY TRANSACTIONS (continued)
On July 20, 2011, the Company issued an unsecured
promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal
to interest at 20% per annum), with the principal amount due in full on July 31, 2012. On July 31, 2012, the note was extended
to July 31, 2013 under the same terms. Prior to June 30, 2013, the note was extended to July 31, 2016 under the same terms. Subsequent
to June 30, 2016, the note was extended to July 31, 2017 under the same terms. On July 31, 2017, the due date on this note was
extended by the holder to July 31, 2019 under the same terms (see Note 9). Repayment of the promissory note is personally guaranteed
by the Company’s CEO and controlling shareholder, Louis S. Friedman.
On October 31, 2013, the Company issued an unsecured
promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal
to interest at 20% per annum) beginning on November 30, 2013, with the principal amount due in full on or before October 31, 2014.
Prior to October 31, 2014, the note was extended to October 31, 2016 under the same terms. Prior to October 31, 2016, the note
was extended to October 31, 2017 under the same terms. On October 20, 2017, the due date on this note was extended by the holder
to October 31, 2019 with interest payable monthly and principal due on maturity (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, 2016; then extended to May 1, 2017; then extended to May 1, 2019
with the principle due on maturity (see Note 9). Mr. Friedman personally guaranteed the repayment of the loan obligation.
The loans from Power Up Lending Group, Ltd.
(see Note 12) are guaranteed by the Company (including OneUp and Foam Labs) and are personally guaranteed by the Company’s
CEO and majority shareholder, Louis S. Friedman. Power Up Lending Group, Ltd. is controlled by Curt Kramer, who also controls HCI.
As last reported to us, HCI, Inc. owns 7.5% of our common stock.
On April 21, 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 April 20, 2018. A portion of the note proceeds were used to satisfy the balance due on the June 29, 2016
note payable and the remaining proceeds of $224,875 are for working capital purposes. At December 31, 2017, the principal balance
of this note was $98,750.This note payable is personally guaranteed by the Company’s CEO and majority shareholder, Louis
S. Friedman.
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. The balance due on the $150,000 unsecured note payable due December 14, 2017 was paid
in full and the Company received net proceeds of $227,049 after the repayment of the December 12, 2016 loan. At December 31, 2017,
the principal balance of this note was $178,311. The loan is 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. A portion of the note proceeds were used to satisfy the balance due on the February 14,
2017 note payable and the remaining proceeds of $201,250 are for working capital purposes. At December 31, 2017, the principal
balance of this note was $246,852. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis
S. Friedman.
The Company has drawn a cash advance on one
unsecured lines of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit
calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit
was $38,587 at December 31, 2017 and $14,690 at June 30, 2017. The loan is personally guaranteed by the Company’s CEO and
majority shareholder, Louis S. Friedman.
21
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
NOTE 16. RELATED PARTY TRANSACTIONS (continued)
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. At December 31, 2017, the principal balance under the Note
was $317,066.
NOTE 17. STOCKHOLDERS’ EQUITY
Options
At December 31, 2017, the Company had the 2009
and 2015 Stock Option Plans (the “Plans”), which are shareholder-approved and under which 2,790,000 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 December 31, 2017, the number of shares available for issuance under
the 2015 Plan was 225,000. There are no shares available for issuance under the 2009 Plan, other than the 1,469,000 stock options
that have already been granted.
The following table summarizes the Company’s
stock option activities during the six months ended December 31, 2017:
|
|
Number of Shares
Underlying
Outstanding
Options
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Intrinsic
Value
|
Options outstanding as of June 30, 2017
|
|
|
6,975,000
|
|
|
|
2.7
|
|
|
$
|
.03
|
|
|
$
|
—
|
|
Granted
|
|
|
1,000,000
|
|
|
|
4.9
|
|
|
$
|
.03
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forfeited or expired
|
|
|
(1,731,000
|
)
|
|
|
(.6
|
)
|
|
$
|
.04
|
|
|
$
|
—
|
|
Options outstanding as of December 31, 2017
|
|
|
6,244,000
|
|
|
|
3.1
|
|
|
$
|
.03
|
|
|
$
|
—
|
|
Options exercisable as of December 31, 2017
|
|
|
2,456,500
|
|
|
|
1.9
|
|
|
$
|
.03
|
|
|
$
|
33,091
|
|
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
$.04 for such day.
There were 1,000,000 stock options granted during
the six months ended December 31, 2017 and 250,000 stock options granted during the six months ended December 31, 2016. The value
assumptions related to options granted during the six months ended December 31, 2017 and 2016, were as follows:
22
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
|
|
Six Months
Ended December 31, 2017
|
|
Six Months
Ended December 31, 2016
|
Exercise Price:
|
|
$.03
|
|
$.02
|
Volatility:
|
|
409%
|
|
236%
|
Risk Free Rate:
|
|
2.06%
|
|
1.05%
|
Vesting Period:
|
|
4 years
|
|
4 years
|
Forfeiture Rate:
|
|
0%
|
|
0%
|
Expected Life
|
|
4.1 years
|
|
4.1 years
|
Dividend Rate
|
|
0%
|
|
0%
|
The following table
summarizes the weighted average characteristics of outstanding stock options as of
December 31, 2017:
|
|
Outstanding Options
|
|
Exercisable Options
|
Exercise Prices
|
|
Number
of Shares
|
|
Remaining
Life
(Years)
|
|
Weighted
Average
Price
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
$.01 to 03
|
|
|
|
5,175,000
|
|
|
|
3.6
|
|
|
$
|
.02
|
|
|
|
1,387,500
|
|
|
$.02
|
$.05 to 09
|
|
|
|
1,069,000
|
|
|
|
.6
|
|
|
$
|
.05
|
|
|
|
1,069,000
|
|
|
$.05
|
Total stock options
|
|
|
|
|
|
|
6,244,000
|
|
|
|
3.1
|
|
|
$
|
.03
|
|
|
|
2,456,500
|
|
|
$.03
|
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 at its fair
value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service
in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over
the respective vesting period.
Stock option-based compensation expense recognized
in the condensed consolidated statements of operations for the three and six month periods ended December 31, 2017 and 2016 are
based on awards ultimately expected to vest, and is reduced for estimated forfeitures.
The following table summarizes stock option-based
compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans:
|
|
Three Months
Ended December 31,
|
|
Six Months
Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Cost of Goods Sold
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Other Selling and Marketing
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
General and Administrative
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
|
|
8
|
|
Total Stock-based Compensation Expense
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
14
|
|
As of December 31, 2017, the Company’s
total unrecognized compensation cost was $78,189 which will be recognized over the weighted average vesting period of three years.
Share Purchase Warrants
As of December 31, 2017 and 2016, there were
no share purchase warrants outstanding.
23
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31,
2017 AND DECEMBER 31, 2016 (UNAUDITED)
Common Stock
The Company’s authorized common stock
was 175,000,000 shares at December 31, 2017 and June 30, 2017. Common shareholders are entitled to dividends if and
when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At December 31, 2017,
the Company had reserved the following shares of common stock for issuance:
|
|
December 31,
|
|
|
2017
|
Shares of common stock reserved for issuance under the 2009 Stock Option Plan
|
|
|
1,469,000
|
|
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
|
|
|
10,769,000
|
|
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.
NOTE 18. SUBSEQUENT EVENTS
None.
24