NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
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.
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, 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. In March, 2020, the Company began producing
personal face masks under the Avana brand in response to the COVID-19 pandemic with shipments beginning in April. In April, 2020,
the Company also began producing and selling isolation gowns.
Sales are generated through internet and print
advertisements and social marketing. 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.
The accompanying unaudited condensed consolidated
financial statements of the Company and all of its wholly-owned subsidiaries 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 three months ended September 30, 2020 are not necessarily indicative of the results to be expected
for the entire fiscal 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, 2020 as
filed with the Securities and Exchange Commission (the “SEC”) on October 1, 2020 (the “2020 10-K”).
NOTE 2. GOING CONCERN
The accompanying condensed consolidated financial
statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. As of
September 30, 2020 the Company has an accumulated deficit of approximately $7.8 million and a working capital deficit of approximately
$1.3 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.
8
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 2. GOING CONCERN (continued)
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.
Although we have three separate
brands with diverse channels of distribution, the continued COVID-19 pandemic may negatively impact our business operations and
the operations of our suppliers and customers as a result of quarantines, facility closures and travel and logistics restrictions.
There is substantial uncertainty regarding the duration and degree of COVID-19’s continued effects over time. The extent
to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict,
including the duration and scope of the pandemic or recurrence thereof, timing of development and deployment of an effective vaccine,
governmental, business and individuals' actions in response to the pandemic and the impact on economic activity including the possibility
of recession or financial market instability.
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 GAAP 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 2020 10-K.
Use of Estimates
The
preparation of the consolidated financial statements in conformity with GAAP 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 record revenue based on the five-step model
which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3)
determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue
when the performance obligations are satisfied. Substantially all of our revenue is generated by fulfilling orders for the purchase
of manufactured products and product purchased for resale to retailers, wholesalers, or direct to consumers via online channels,
with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone
orders, e-mail orders or orders received online. Shipping and handling activities for which we are responsible under the terms
and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are
required to fulfill our promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy
election is insignificant as it aligns with our current practice.
9
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue is measured as the net amount of consideration
expected to be received in exchange for fulfilling a performance obligation. We have elected to exclude sales, use and similar
taxes from the measurement of the transaction price. The impact of this policy election is insignificant, as it aligns
with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable
consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates
are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We
review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period
the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider
the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in
the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control
of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred
to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution
centers by the customer.
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, 2020 was
$14,898 and was included in “Other accrued liabilities” on our consolidated balance sheets. The deferred revenue balance
as of September 30, 2020 was $15,204.
Cost of Goods Sold
Cost of goods sold includes raw materials, labor,
manufacturing overhead, and royalty expense.
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
We maintain an allowance for doubtful accounts
to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts
is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history
of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance
under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment
of their ability to make payments, could materially change these expectations and an additional allowance may be required.
The following is a summary of Accounts Receivable
as of September 30, 2020 and June 30, 2020.
|
|
September 30,
2020
|
|
June 30,
2020
|
|
|
(unaudited)
|
|
|
(in thousands)
|
Accounts receivable
|
|
$
|
1,050
|
|
|
$
|
1,135
|
|
Allowance for doubtful accounts
|
|
|
(1
|
)
|
|
|
—
|
|
Allowance for discounts and returns
|
|
|
(10
|
)
|
|
|
—
|
|
Total accounts receivable, net
|
|
$
|
1,039
|
|
|
$
|
1,135
|
|
10
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 bank balances on deposit at September 30,
2020 that exceeded the balance insured by the FDIC by $681,658. Accounts receivable are typically unsecured and
are derived from revenue earned from customers primarily located in North America and Europe.
During the three month ended September 30, 2020,
we purchased 32% of total inventory purchases from one vendor.
During the fiscal year ended June 30, 2020,
we purchased 33 % of total inventory purchases from one vendor.
As of September 30, 2020 two of the Company’s
customers represent 43% and 15% of the total accounts receivables compared to 38%, 16% and 16% of the total accounts receivable,
respectively, as of June 30, 2020. Sales to (and through) Amazon accounted for 28% of our net sales during the three months ended
September 30, 2020 and 33% of our net sales during the three months ended September 30, 2019.
Fair Value of Financial Instruments
At September 30, 2020 and June 30, 2020,
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 Accounting Standards Codification (“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.
11
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The valuation techniques that may be used to
measure fair value are as follows:
A. Market
approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets
or liabilities.
B. Income
approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations
about those future amounts, including present value techniques, option-pricing models and excess earnings method.
C. Cost
approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Advertising Costs
Advertising costs are expensed in the period
when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $5,000
at September 30, 2020 and $5,000 at June 30, 2020. Advertising expense for the three months ended September 30, 2020 and 2019 was
$68,530 and $79,868, respectively.
Research and Development
Research and development expenses for new products
are expensed as they are incurred. Expenses for new product development totaled $29,225 and $28,673 for the three months ended
September 30, 2020 and 2019, 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.
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 Financial Accounting
Standards Board (“FASB”) ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined
that there was no impairment at September 30, 2020.
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 rent expense under this lease for the three months
ended September 30, 2020 and 2019 was $88,120 and $88,120, respectively. Subsequent to September 30, 2020, the Company entered
into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes
two months of rent abatement totaling $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations
of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee.
(See Note 19, Subsequent Events).
12
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Under ASC 842, which was
adopted July 1, 2019, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances
present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities
and, if applicable, long-term lease liabilities. The Company elected not to recognize leases with a term less than one year on
its balance sheet. Operating lease right-of-use (ROU) assets and their corresponding lease liabilities are recorded based on the
present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically
not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow
on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.
In accordance with the
guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g. land, building, etc.),
non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.)
Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based
on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required,
the Company elected the practical expedient to not separate lease and non-lease components. The lease component results in an operating
right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense. See Note 16
for details.
Under prior guidance ASC
840, rent expense and lease incentives from operating leases were recognized on a straight-line basis over the lease term. The
difference between rent expense recognized and rental payments was recorded as deferred rent in the accompanying consolidated balance
sheets.
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.
|
|
Three Months Ended
September 30, 2020
|
|
Three Months Ended
September 30, 2019
|
|
%
Change
|
|
|
(in thousands)
|
|
|
Net Sales by Channel:
|
|
|
|
|
|
|
Direct
|
|
$
|
1,458
|
|
|
$
|
1,144
|
|
|
|
27
|
%
|
Wholesale
|
|
$
|
3,783
|
|
|
$
|
2,871
|
|
|
|
32
|
%
|
Other
|
|
$
|
126
|
|
|
$
|
79
|
|
|
|
59
|
%
|
Total Net Sales
|
|
$
|
5,367
|
|
|
$
|
4,094
|
|
|
|
31
|
%
|
|
|
Three Months Ended
|
|
Margin
|
|
Three Months Ended
|
|
Margin
|
|
%
|
|
|
September 30, 2020
|
|
%
|
|
September 30, 2019
|
|
%
|
|
Change
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
Gross Profit by Channel:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
760
|
|
|
|
52
|
%
|
|
$
|
540
|
|
|
47%
|
|
|
41
|
%
|
Wholesale
|
|
$
|
982
|
|
|
|
26
|
%
|
|
$
|
808
|
|
|
28%
|
|
|
22
|
%
|
Other
|
|
$
|
(254
|
)
|
|
|
(202
|
)%
|
|
$
|
(211
|
)
|
|
(267)%
|
|
|
(20
|
)%
|
Total Gross Profit
|
|
$
|
1,488
|
|
|
|
28
|
%
|
|
$
|
1,137
|
|
|
28%
|
|
|
31
|
%
|
13
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent accounting pronouncements
From time to time, new accounting pronouncements
are issued by FASB or other standard setting bodies that are adopted by the Company as of the specified effective date.
Recently adopted
In June 2016, the FASB
issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04
and ASU 2019-05 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial
assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use
of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for fiscal years
beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted for certain amendments. Topic
326 must be adopted by applying a cumulative effect adjustment to retained earnings. We adopted ASU 2016-13 and ASU 2019-11 effective
July 1, 2020. The impact of adoption of these standards on our condensed consolidated financial statements was not material.
In August 2018, the FASB
issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness
of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair
value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted.
We adopted ASU 2018-13 effective July 1, 2020. The impact of adoption of this standard on our condensed consolidated financial
statements was not material.
Not yet adopted
In December 2019, the FASB issued
ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The standard simplifies
the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred
taxes for investments, performing intra-period allocations and calculating taxes in interim periods. ASU 2019-12 also improves
consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce
complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated
group. The standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company plans
to adopt the standard as of July 1, 2021 and is currently evaluating this guidance to determine the impact it may have on its consolidated
financial statements.
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 ASC
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 plus the effect of stock options using the treasury stock
method. Common equivalent shares outstanding as of September 30, 2019, which consists of options and convertible preferred
stock, have been excluded from the diluted net loss per common share calculation for the three months ended September 30,
2019 because they are anti-dilutive.
14
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Net Income (Loss) Per Share (continued)
The total potential dilutive
securities as of September 30, 2020 and 2019 are as follows:
|
|
2020
|
|
2019
|
Convertible Preferred Stock
|
|
|
4,300,000
|
|
|
|
4,300,000
|
|
Stock options
|
|
|
4,400,000
|
|
|
|
4,200,000
|
|
Total
|
|
|
8,700,000
|
|
|
|
8,500,000
|
|
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.
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.
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 September
30, 2020 or June 30, 2020.
15
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 5. INVENTORIES, NET
Inventories are stated at the lower of cost
(which approximates first-in, first-out) or net realizable value. Net realizable value is defined as sales price less cost to dispose
and a normal profit margin. Inventories consisted of the following:
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
(in thousands)
|
Raw materials
|
|
$
|
1,085
|
|
|
$
|
992
|
|
Work in process
|
|
|
270
|
|
|
|
234
|
|
Finished goods
|
|
|
972
|
|
|
|
900
|
|
Total inventories
|
|
|
2,327
|
|
|
|
2,126
|
|
Allowance for inventory reserves
|
|
|
(141
|
)
|
|
|
(141
|
)
|
Total inventories, net of allowance
|
|
$
|
2,186
|
|
|
$
|
1,985
|
|
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:
|
|
September 30, 2020
|
|
June 30, 2020
|
|
Estimated Useful Life
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Factory equipment
|
|
$
|
2,657
|
|
|
$
|
2,646
|
|
|
2-10 years
|
Computer equipment and software
|
|
|
1,099
|
|
|
|
1,087
|
|
|
5-7 years
|
Office equipment and furniture
|
|
|
205
|
|
|
|
205
|
|
|
5-7 years
|
Leasehold improvements
|
|
|
463
|
|
|
|
463
|
|
|
10 years
|
Project in process
|
|
|
8
|
|
|
|
3
|
|
|
|
Subtotal
|
|
|
4,432
|
|
|
|
4,404
|
|
|
|
Accumulated depreciation
|
|
|
(3,518
|
)
|
|
|
(3,466
|
)
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
914
|
|
|
$
|
938
|
|
|
|
Depreciation expense was $52,452 and $40,139
for the three months ended September 30, 2020 and 2019, respectively.
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 three months ended September 30, 2020.
16
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 7. OTHER ACCRUED LIABILITIES
Other accrued liabilities at September 30,
2020 and June 30, 2020:
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
(in thousands)
|
Accrued compensation
|
|
$
|
377
|
|
|
$
|
468
|
|
Accrued expenses and interest
|
|
|
161
|
|
|
|
155
|
|
Other accrued liabilities
|
|
$
|
538
|
|
|
$
|
623
|
|
NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY
Current and long-term debt at September 30,
2020 and June 30, 2020 consisted of the following:
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
Current debt:
|
|
(in thousands)
|
Unsecured lines of credit (Note 13)
|
|
$
|
45
|
|
|
$
|
48
|
|
Line of credit (Note 12)
|
|
|
1,050
|
|
|
|
1,005
|
|
Short-term unsecured notes payable (Note 9)
|
|
|
434
|
|
|
|
489
|
|
Current portion of equipment notes payable (Note 16)
|
|
|
95
|
|
|
|
102
|
|
Current portion secured notes payable (Note 14)
|
|
|
66
|
|
|
|
191
|
|
Current portion of leases payable (Note 16)
|
|
|
8
|
|
|
|
—
|
|
Credit card advance (net of discount) (Note 11)
|
|
|
—
|
|
|
|
56
|
|
Notes payable – related party (Note 10)
|
|
|
116
|
|
|
|
116
|
|
Total current debt
|
|
|
1,814
|
|
|
|
2,007
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Unsecured notes payable (Note 9)
|
|
|
100
|
|
|
|
200
|
|
Equipment lease payable
|
|
|
25
|
|
|
|
—
|
|
Equipment note payable (Note 16)
|
|
|
139
|
|
|
|
161
|
|
Total long-term debt
|
|
$
|
264
|
|
|
$
|
361
|
|
NOTE 9. UNSECURED NOTES PAYABLE
Unsecured notes payable at September 30, 2020
and June 30, 2020 consisted of the following:
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
Current debt:
|
|
(in thousands)
|
20% Unsecured note, bi-weekly principal and interest, due September 18, 2020 (1)
|
|
$
|
—
|
|
|
$
|
75
|
|
20% Unsecured note, bi-weekly principal and interest, due February 19, 2021 (2)
|
|
|
134
|
|
|
|
214
|
|
20% Unsecured note, interest only, due May 1, 2021 (3)
|
|
|
200
|
|
|
|
200
|
|
20% Unsecured note, interest only, due July 31, 2021 (5)
|
|
|
100
|
|
|
|
—
|
|
Total current debt
|
|
|
434
|
|
|
|
489
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
20% Unsecured note, interest only, due October 31, 2021 (4)
|
|
|
100
|
|
|
|
100
|
|
20% Unsecured note, interest only, due July 31, 2021 (5)
|
|
|
—
|
|
|
|
100
|
|
Total long-term debt
|
|
|
100
|
|
|
|
200
|
|
Total unsecured notes payable
|
|
$
|
534
|
|
|
$
|
689
|
|
17
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
(1) Unsecured note payable for $300,000 to two individual shareholders
with interest at 20%, principal and interest paid bi-weekly, maturing September 18, 2020. This note was repaid in full on September
18, 2020. Personally guaranteed by principal stockholder.
(2) Unsecured note payable for $300,000 to two individual shareholders
with interest at 20%, principal and interest paid bi-weekly, maturing February 19, 2021. $12,678 from the proceeds of this unsecured
note payable was used to retire the balance of the unsecured note maturing on February 28, 2020. Personally guaranteed by principal
stockholder.
(3) Unsecured note payable for $200,000 to an individual with interest
payable monthly at 20%, principal originally due in full on May 1, 2013, extended to May 1, 2019, then extended to May 1, 2021.
Personally guaranteed by principal stockholder.
(4) Unsecured note payable for $100,000 to an individual with interest
payable monthly at 20%, 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.
(5) 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.
NOTE 10. NOTES PAYABLE - RELATED PARTY
Related party notes payable at September 30,
2020 and June 30, 2020 consisted of the following:
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
(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
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 11. CREDIT CARD ADVANCES
On October 12, 2018, OneUp 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 $250,000
from Power Up. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. 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 was guaranteed by the Company and was 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 was repaid in full on June 16, 2020. This loan was guaranteed
by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).
On August 28, 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 was repaid in full on September 16, 2020. This loan
was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).
18
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 12. 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 September 30, 2020, the interest rate was 6.25%) 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, the Company has provided its corporate guarantee of
the credit facility (see Note 18). On September 30, 2020, the balance owed under this line of credit was $1,050,490. As
of September 30, 2020, 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 13. 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 $44,972 at September 30, 2020 and $47,619 at June 30, 2020.
NOTE 14. SECURED NOTE PAYABLE
On June 11, 2019, the Company entered into an
agreement with a secured lender, whereby the lender agreed to loan OneUp a total of $150,000. After partial repayment of this loan,
in November, 2019 the Company borrowed an additional $33,000. Repayment of this note is by 78 weekly payments of $2,298, beginning
November 13, 2019. On September 30, 2020, the balance owed under this note payable was $65,839. 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.com, Inc. (“Amazon”), whereby Amazon agreed to loan OneUp a total of $302,000. Repayment of this
note is by 12 monthly payments of $26,301, which includes interest at 8.22%. This loan was repaid in full on August 3, 2020. The
Company had granted Amazon a security interest in certain assets of the Company.
19
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 15. PPP LOAN
On April 26, 2020, the Company entered into
a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1,096,200 made to the Company under
the Payroll Protection Plan ("PPP"). The PPP is a liquidity facility program established by the U.S. government as part
of the CARES Act in response to the negative economic impact of the COVID-19 outbreak. The PPP Loan to the Company is being administered
by Ameris Bank. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest
payments are deferred for six months. Beginning November 26, 2020, seven months from the date of the PPP Note, the Company is required
to make monthly payments of principal and interest in the amount of $61,691.
The PPP Loan is a forgivable loan to the extent
proceeds are used to cover qualified documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement
period (as amended) following loan funding. For the loan to be forgiven, the Company is required to formally apply for forgiveness,
and potentially, required to pass an audit that it met the eligibility qualifications of the loan. Within 150 days from the application,
the Company will be notified whether or not the loan is forgiven.
In accounting for the terms of the PPP Loan,
the Company is guided by ASC 470 Debt, and ASC 450-30 Gain contingency. Accordingly, the Company recorded the proceeds
of the PPP Loan of $1,096,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness
is reasonably certain. The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and
therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e. all conditions for forgiveness
are met).
Future minimum 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 PPP loan at September 30, 2020 are as follows:
Fiscal Years Ending June 30,
|
|
(in thousands)
|
|
2021
(nine months)
|
|
|
|
2,377
|
|
|
2022
|
|
|
|
530
|
|
|
Total
|
|
|
$
|
2,907
|
|
20
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 16. COMMITMENTS AND CONTINGENCIES
Operating Leases
The
Company leases it facilities under non-cancelable operating leases expiring at the end of 2020. Right-of-use assets represent the
right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising
from the lease. Right-of-use assets and liabilities were recognized at July 1, 2019 based on the present value of lease payments
over the lease term, using the Company’s incremental borrowing rate based on the information available. At September 30,
2020, the weighted average remaining lease term is 1.3 years and the weighted average discount rate is 20%. Supplemental balance
sheet information related to leases at September 30, 2020 is as follows:
Operating leases
|
|
Balance Sheet Classification
|
|
(in thousands)
|
Right-of-use assets
|
|
Operating lease right-of-use assets, net
|
|
$
|
85
|
|
Current lease liabilities
|
|
Operating lease obligations
|
|
$
|
102
|
|
Non-current lease liabilities
|
|
Long-term operating lease obligations
|
|
|
—
|
|
Total lease liabilities
|
|
|
|
$
|
102
|
|
Maturities of lease liabilities at September
30, 2020 are as follows:
Payments
|
|
(in thousands)
|
2021 (nine months)
|
|
$
|
105
|
|
Total undiscounted lease payments
|
|
|
105
|
|
Less: present value discount
|
|
|
(3
|
)
|
Total lease liability balance
|
|
$
|
102
|
|
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 $530,682. 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%.
The following is an analysis of the minimum
future equipment note payable payments subsequent to September 30, 2020:
Years ending June 30,
|
|
(in thousands)
|
2021 (nine months)
|
|
|
88
|
|
2022
|
|
|
82
|
|
2023
|
|
|
60
|
|
2024
|
|
|
39
|
|
2025
|
|
|
2
|
|
Future Minimum Note Payable Payments
|
|
$
|
271
|
|
Less Amount Representing Interest
|
|
|
(37
|
)
|
Present Value of Minimum Note Payable Payments
|
|
|
234
|
|
Less Current Portion
|
|
|
(95
|
)
|
Long-Term Obligations under Equipment Notes Payable
|
|
$
|
139
|
|
21
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 16. COMMITMENTS AND CONTINGENCIES (continued)
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 17. 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 three months ended September 30, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%)
and totaled $623. The accrued interest on the note as of September 30, 2020 was $32,051. 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 three months ended September 30, 2020 was accrued by the Company at the prevailing
prime rate (which is currently 3.25%) and totaled $328. The accrued interest on the note as of September 30, 2020 was $11,418.
This note is subordinate to all other credit facilities currently in place.
The Company’s CEO, Louis Friedman, has
personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 12 – Line of Credit). In
addition, Luvu Brands has provided its corporate guarantees of the credit facility. On September 30, 2020, the balance
owed under this line of credit was $1,050,490.
22
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 17. 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; 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 (see Note 12) to OneUp
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 is controlled by Curt Kramer, who also controls Hope Capital, Inc.(“HCI”).
As last reported to us, HCI owns 7.5% of our common stock.
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 $44,972 at September 30, 2020 and $47,619 at June 30, 2020. 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. This loan was repaid in full on February 19, 2020 (see Note 9). The loan was 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. This loan was repaid in full on April 26,
2020 (see Note 9). The loan was 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 a total of $150,000. After partial repayment of this loan,
in November, 2019 the Company borrowed an additional $33,000. Repayment of this note is by 78 weekly payments of $2,298, beginning
November 13, 2019. On September 30, 2020, the balance owed under this note payable was $65,839. 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 23, 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. This loan was repaid in full September 18, 2020. The loan was personally guaranteed
by the Company’s CEO and majority shareholder, Louis S. Friedman.
23
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 17. RELATED PARTY TRANSACTIONS (continued)
On November 27, 2019 the Company entered into
an agreement with OnDeck, whereby OnDeck agreed to loan OneUp a total of $200,000. Terms for this loan calls for a repayment of
$234,000 which includes a one-time finance charge of $34,000, approximately nine months after the funding date. A 1% loan origination
fee was deducted, and the Company received net proceeds of $198,000. This note payable was fully paid in August 2020. This loan
is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder.
On February 21, 2020, 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 February 19, 2021. The lenders deducted an original issue discount of 2% and the balance due on the March
1, 2019 note payable of $12,677 and the remaining proceeds of $281,323 are for working capital purposes. On September 30, 2020,
the balance owed under this note payable was $134,249 (see Note 9). The loan is personally guaranteed by the Company’s CEO
and majority shareholder, Louis S. Friedman.
NOTE 18. STOCKHOLDERS’ EQUITY
Options
At September 30, 2020, the Company had the 2015
Stock Option Plan (the “2015 Plan”), which is a shareholder-approved and under which 5,000,000 shares are reserved
for issuance under the 2015 Plan until such Plan terminates on August 31, 2025.
Under the 2015 Plan, eligible employees and
certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable
under the 2015 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 September 30, 2020, the number of shares available for issuance
under the 2015 Plan was 600,000.
The following table summarizes the Company’s
stock option activities during the three months ended September 30, 2020:
|
|
Number of Shares
Underlying
Outstanding
Options
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Intrinsic
Value
|
Options outstanding as of June 30, 2020
|
|
|
4,250,000
|
|
|
|
1.7 years
|
|
|
$
|
.02
|
|
|
$
|
624,700
|
|
Granted
|
|
|
150,000
|
|
|
|
4.8 years
|
|
|
|
.16
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options outstanding as of September 30, 2020
|
|
|
4,400,000
|
|
|
|
1.6 years
|
|
|
|
.03
|
|
|
$
|
584,200
|
|
Options exercisable as of September 30, 2020
|
|
|
3,050,000
|
|
|
|
.9 years
|
|
|
|
.02
|
|
|
$
|
427,100
|
|
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
$0.16 for such day.
24
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 18. STOCKHOLDERS’ EQUITY (continued)
There were 150,000 stock options granted during
the three months ended September 30, 2020 and 200,000 stock options granted during the three months ended September 30, 2019. The
value assumptions related to options granted during the three months ended September 30, 2020, were as follows:
|
|
Three Months
Ended September 30, 2020
|
|
Three Months
Ended September 30, 2019
|
Exercise Price:
|
|
|
$.15 - $.17
|
|
|
$
|
.03
|
|
Volatility:
|
|
|
469% - 470%
|
|
|
|
407
|
%
|
Risk Free Rate:
|
|
|
.25
|
%
|
|
|
1.81
|
%
|
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 September 30, 2020:
|
|
Outstanding Options
|
|
Exercisable Options
|
Exercise Prices
|
|
Number
of Shares
|
|
Remaining
Life
(Years)
|
|
Weighted
Average
Price
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
|
$
|
.01 to .03
|
|
|
|
4,050,000
|
|
|
|
1.4
|
|
|
$
|
.02
|
|
|
|
2,950,000
|
|
|
$
|
.02
|
|
|
$
|
.034 to .05
|
|
|
|
200,000
|
|
|
|
2.8
|
|
|
$
|
.05
|
|
|
|
100,000
|
|
|
$
|
.05
|
|
|
$
|
.15 to .17
|
|
|
|
150,000
|
|
|
|
4.8
|
|
|
$
|
.15
|
|
|
|
-
|
|
|
$
|
-
|
Total stock options
|
|
|
|
4,400,000
|
|
|
|
1.6
|
|
|
$
|
.03
|
|
|
|
3,050,000
|
|
|
$
|
.02
|
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 month periods ended September 30, 2020 and 2019 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:
As of September 30, 2020, the Company’s
total unrecognized compensation cost was $47,081 which will be recognized over the weighted average vesting period of two years.
|
|
Three Months
Ended September 30,
|
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
Other Selling and Marketing
|
|
$
|
1
|
|
|
$
|
1
|
General and Administrative
|
|
|
5
|
|
|
|
4
|
Total
|
|
$
|
6
|
|
|
$
|
5
|
25
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2020 (UNAUDITED)
NOTE 18. STOCKHOLDERS’ EQUITY (continued)
Share Purchase Warrants
As of September 30, 2020 and 2019, there were
no share purchase warrants outstanding.
Common Stock
The Company’s authorized common stock
was 175,000,000 shares at September 30, 2020 and June 30, 2020. Common shareholders are entitled to dividends if and
when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At September 30, 2020,
the Company had reserved the following shares of common stock for issuance:
|
|
September 30,
|
|
|
2020
|
Shares of common stock reserved for issuance under the 2015 Plan
|
|
|
5,000,000
|
|
Shares of common stock issuable upon conversion of the Preferred Stock
|
|
|
4,300,000
|
|
Total shares of common stock equivalents
|
|
|
9,300,000
|
|
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 19. – SUBSEQUENT EVENTS
On November 2, 2020, the Company entered into
an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two
months of rent abatement totaling $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations
of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee.
Under the new facilities lease, the estimated operating lease asset and operating lease liability on the commencement date will
total $2,580,611 and $2,683,841, respectively.
On October 15, 2020, the Company entered into
an equipment finance agreement for the purchase of a new CNC foam contouring system from a European supplier. At a total cost of
$325,000, the equipment finance agreement calls for 60 payments of $6,266 to the finance company.
Subsequent to September 3, 2020, 200,000 stock
options granted to an employee were exercised in exchange for a cash payment of $2,500.
26