UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 
   
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

 

 

OR

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

 

Commission File Number 000-53314

 

Luvu Brands, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

2745 Bankers Industrial Drive, Atlanta, GA   30360
(Address of principal executive offices)   (Zip code)

 

(770) 246-6400

(Registrant’s telephone number, including area code)

 

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

 

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   ü  No___

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   ü  No____

 

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

 

 

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer x Smaller reporting company x
    Emerging growth company o

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No   ü

 

As of November 12, 2020, there were 73,652,596 shares of common stock outstanding. 


 

 

LUVU BRANDS, INC.

TABLE OF CONTENTS

     
  PART I – FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements Page Number 
     
  Condensed Consolidated Balance Sheets – 4
  At September 30, 2020 (unaudited) and June 30, 2020  
     
  Condensed Consolidated Statements of Operations – 5
  For the Three Months Ended September 30, 2020 and September 30, 2019 (unaudited)                    
     
 

Condensed Consolidated Statements of Stockholders’ Deficit –

For the Three Months Ended September 30, 2020 and September 30, 2019 (unaudited)

6
     
  Condensed Consolidated Statements of Cash Flows – 7
  For the Three Months Ended September 30, 2020 and September 30, 2019 (unaudited)  
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 30
     
ITEM 4. Controls and Procedures 30
     
  PART II – OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 31
     
ITEM 1A. Risk Factors 31
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
ITEM 3. Defaults Upon Senior Securities 31
     
ITEM 4. Mine Safety Disclosures 31
     
ITEM 5. Other Information 31
     
ITEM 6. Exhibits 32
     
SIGNATURES   33

 

 

 

2


 
 

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

 

Unless specifically set forth to the contrary, the information that appears on our websites or our various social media platforms is not part of this report. 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

 This report may contain forward-looking statements, which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning the Company, the performance of the industry in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.  You should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

 

 

 

3


 
 

 

PART I   FINANCIAL INFORMATION

  

ITEM 1.                        FINANCIAL STATEMENTS

 

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets 

    September 30,    
    2020   June 30,
    (unaudited)   2020
Assets:   (in thousands, except share data)
Current assets:                
Cash and cash equivalents   $ 932     $ 1,152  
Accounts receivable, net     1,039       1,135  
Inventories, net     2,186       1,985  
Prepaid expenses     90       55  
Total current assets     4,247       4,327  
                 
Equipment, property and leasehold improvements, net     914       938  
Finance lease assets     34       —    
Operating lease assets     85       165  
Other assets     17       17  
Total assets   $ 5,297     $ 5,447  
                 
Liabilities and stockholders’ deficit:                
Current liabilities:                
Accounts payable   $ 2,422     $ 2,435  
Current debt     1,814       2,007  
Current portion of PPP loan     666       482  
Other accrued liabilities     538       623  
Operating lease liability     102       199  
Total current liabilities     5,542       5,746  
                 
Noncurrent liabilities:                
Long-term debt     264       361  
PPP loan     430       614  
Total noncurrent liabilities     694       975  
Total liabilities     6,236       6,721  
 Commitments and contingencies (See Note 16)     —         —    
 Stockholders’ deficit:                
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding     —         —    
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000 at September 30, 2020 and June 30, 2020     —         —    
Common stock, $0.01 par value, 175,000,000 shares authorized, 73,452,596 shares issued and outstanding at September 30, 2020 and June 30, 2020     735       735  
Additional paid-in capital     6,153       6,147  
Accumulated deficit     (7,827 )     (8,156 )
Total stockholders’ deficit     (939 )     (1,274 )
Total liabilities and stockholders’ deficit   $ 5,297     $ 5,447  

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

4


 
 

 

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 (unaudited)

    Three Months Ended
September 30,
    2020   2019
    (in thousands, except share data)
     
Net Sales   $ 5,367     $ 4,094  
Cost of goods sold     3,879       2,957  
Gross profit     1,488       1,137  
Operating expenses:                
Advertising and promotion     69       80  
Other selling and marketing     267       318  
General and administrative     664       586  
Depreciation and amortization     52       40  
Total operating expenses     1,052       1,024  
Operating income     436       113  
Other expense:                
Interest expense and financing costs     (107 )     (158 )
Total other expense     (107 )     (158 )
Income (loss) from operations before income taxes     329       (45 )
Provision for income taxes     —         —    
Net income (loss)   $ 329     $ (45 )
  Net income (loss) per share:                
Basic   $ 0.00     $ (0.00 )
Diluted   $ 0.00     $ (0.00 )
  Shares used in calculation of net income (loss) per share:                
Basic     73,452,596       73,452,596  
Diluted     76,034,134       73,452,596  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 
 

 

Luvu Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

For the Three Months ended September 30, 2019 and September 30, 2020

 

                     
    Series A Preferred       Additional       Total
    Stock   Common Stock   Paid-in   Accumulated   Stockholders’
    Shares   Amount   Shares   Amount   Capital   Deficit   Deficit
    (in thousands, except share data)
                             
Balance, June 30, 2019     4,300,000     $ —         73,452,596     $ 735     $ 6,126     $ (9,016 )   $ (2,155 )
                                                         
Stock-based compensation expense     —         —         —         —         5       —         5  
Net loss     —         —         —         —         —         (45 )     (45 )
Three Months Ended September 30, 2019 (unaudited)     4,300,000     $ —         73,452,596     $ 735     $ 6,131     $ (9,061 )   $ (2,195 )
                                                         
                                                         
Balance, June 30, 2020     4,300,000     $ —         73,452,596     $ 735     $ 6,147     $ (8,156 )   $ (1,274 )
                                                         
Stock-based compensation expense     —         —         —         —         6       —         6  
Net income     —         —         —         —         —         329       329  
Three Months Ended, September 30, 2020 (unaudited)     4,300,000     $ —         73,452,596     $ 735     $ 6,153     $ (7,827 )   $ (939 )

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

    Three Months Ended
    September 30,
    2020   2019
    (in thousands)
OPERATING ACTIVITIES:                
Net income (loss)   $ 329     $ (45 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization     52       40  
Stock based compensation expense     6       5  
Provision for bad debt     (1 )     —    
Amortization of operating lease asset     80       72  
Changes in operating assets and liabilities:                
Accounts receivable     97       72  
Inventories     (201 )     (202 )
Prepaid expenses and other assets     (35 )     9  
Accounts payable     (13 )     108  
Accrued compensation     (93 )     (64 )
Accrued expenses and interest     6       (4 )
Operating lease liability     (97 )     (86 )
Net cash provided by (used in) operating activities     130       (95 )
                 
INVESTING ACTIVITIES:                
             Investment in equipment and leasehold improvements     (27 )     (8 )
Net cash used in investing activities     (27 )     (8 )
                 
FINANCING ACTIVITIES:                
Repayment of term note-shareholder     —         (49 )
Repayment of unsecured note payable     (154 )     (209 )
Proceeds from unsecured note payable     —         300  
Net cash provided by line of credit     45       1  
Borrowings of credit card advance     —         250  
Repayment of credit card advance     (56 )     (152 )
Repayments of secured notes payable     (125 )     (70 )
Repayment of unsecured line of credit     (3 )     (3 )
Payments on equipment notes     (28 )     (32 )
Principal payments on capital leases     (2 )     (6 )
Net cash (used in) provided by financing activities     (323 )     30  
Net decrease in cash and cash equivalents     (220 )     (73 )
Cash and cash equivalents at beginning of period     1,152       649  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 932     $ 576  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                 
Non cash item:                
Purchases of equipment with equipment notes   $ 35     $ —    
Operating lease asset obtained in exchange for operating lease liability   $ —       $ 448  
Cash paid during the period for:                
Interest   $ 106     $ 157  
Income taxes   $ —       $ —    

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

7


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

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


 
 

 

ITEM 2.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

 

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

 

    Three Months Ended
    (unaudited)
    September 30, 2020   September 30, 2019
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold     72.3 %     72.2 %
Gross Margin     27.7 %     27.8 %
Selling, General and Administrative Expenses     19.6 %     25 %
Income from operations     8.1 %     2.8 %

 

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

                 
   

 Three Months Ended

(unaudited)

(Dollars in thousands)   September 30, 2020   September 30, 2019
Net Sales:                                
Liberator   $ 2,013       38 %   $ 1,512       37 %
Jaxx     1,713       32 %     1,135       28 %
Avana     960       18 %     843       21 %
Products purchased for resale     337       6 %     382       9 %
Other     344       6 %     222       5 %
             Total Net Sales   $ 5,367       100 %   $ 4,094       100 %

 

 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

Net sales. Sales for the three months ended September 30, 2020 were $5,367,306, a 31% increase from the comparable prior year period.  The major components of net sales, by product, are as follows:

 

  · Liberator sales - Sales of Liberator branded products increased $501,000, or 33%, during the quarter from the comparable prior year period, due primarily to higher sales through the Company’s e-commerce site, Liberator.com and higher sales through Amazon, partially offset by lower sales through brick-and-mortar retail customers.

 

  · Jaxx sales – Jaxx product sales increased 51% from the prior year first quarter, primarily due to an expanded product offering of outdoor products and greater sales through e-merchants, including Amazon and Wayfair;

 

  · Avana sales – Net sales of Avana products increased 14% during the quarter from the comparable prior year quarter. This line of top-of-bed comfort products continues to sell well through e-merchant channels with broad consumer reach including Amazon, Overstock and others; and

 

  · Products purchased for resale – This product category decreased by $45,000 from the prior year first quarter due to lower sales of certain products through our e-commerce website, Liberator.com.

 

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs, royalties and depreciation.  Despite labor cost increases in all production areas and raw material cost increases, gross profit increased to $1,487,814 for the three months ended September 30, 2020 from $1,137,393 in the comparable prior year period, and the gross margin, as a percentage of sales, remained constant with the prior year period at 28%.

 

27


 
 

 

Operating expenses. Total operating expenses for the three months ended September 30, 2020 were approximately 20% of net sales, or approximately $1,052,000, compared to 25% of net sales, or approximately $1,024,000, for the same period in the prior year.  Of the $28,000 increase, approximately $78,000 was due to higher general and administrative expenses (higher computer software expense, higher salaries and healthcare costs) and $12,000 in higher depreciation expense, offset in part by $62,000 in lower advertising and other selling and marketing expenses (lower salaries, travel and trade show costs.) 

 

Other expense. Other expense during the first quarter decreased from approximately ($158,000) in fiscal 2019 to approximately ($107,000) during the first quarter of fiscal 2020. The decrease was primarily due to lower average borrowing balances and reduced interest expense on those lower balances.

 

Variability of Results

 

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

 

Liquidity and Capital Resources

 

The following table summarizes our cash flows:        
    Three Months Ended
    September 30,
(Dollars in thousands)   2020   2019
    (Unaudited)
Cash flow data:                
Cash provided by (used in) operating activities   $ 130     $ (95 )
Cash used in investing activities   $ (27 )   $ (8 )
Cash (used in) provided by financing activities   $ (323 )   $ 30  

    

As of September 30, 2020, our cash and cash equivalents totaled $931,741, compared to $576,051 in cash and cash equivalents as of September 30, 2019.

 

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. Our principal sources of liquidity are our cash flow that we generate from our operations, availability of borrowings under our line of credit and cash raised through equity and debt financings.

 

Operating Activities

 

Net cash provided by operating activities was $130,567 in the three months ended September 30, 2020 compared to $95,461 net cash used in operating activities in the three months ended September 30, 2019.  The primary components of the cash provided by operating activities in the current year is the net income of $328,681 and a decrease in accounts receivable of $96,942, offset in part by an increase in inventory of $201,242 and an increase in accrued compensation of $92,042.

 

28


 
 

 

Investing Activities

 

Cash used in investing activities in the three months ended September 30, 2020 was $27,500 and related to the purchase and installation of certain production equipment and computer software during the first quarter.

 

Financing Activities

 

Cash provided used in financing activities during the three months ended September 30, 2020 of $323,253 was primarily attributable to the repayment of the unsecured notes payable, secured notes payable and the credit card advance, offset in part by net borrowings under the revolving line of credit.

Cash provided by financing activities during the three months ended September 30, 2019 of $30,166 was primarily attributable to the proceeds from the unsecured notes payable and borrowings from the credit card advance, offset in part by the repayment of the unsecured notes payable and credit card advance.

Inflation

 

During fiscal 2019 and 2020, we experienced increases in various raw material costs and increases in labor costs and government mandated employee benefits. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2021, although there is no assurance this will occur. Inflation and import tariffs can harm our margins and profitability if we are unable to increase prices or improve productivity enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease. 

 

Sufficiency of Liquidity

 

The accompanying consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. We recorded net income of approximately $329,000 for the three months ended September 30, 2020 and net income of approximately $860,000 for the year ended June 30, 2020. As of September 30, 2020, we have an accumulated deficit of approximately $7,827,000 and a working capital deficit of approximately $1,295,000. 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 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.

 

29


 
 

 

Non-GAAP Financial Measures

 

Reconciliation of net income (loss) to Adjusted EBITDA for the three months ended September 30, 2020 and 2019: 

 

 (Dollars in thousands)   Three months ended September 30,
    2020   2019
      (Unaudited)
Net income (loss)   $ 329     $ (45 )
Plus interest expense, net     107       158  
Plus depreciation and amortization expense     52       40  
Plus stock-based compensation     6       5  
Adjusted EBITDA   $ 494     $ 158  

 

 

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

 

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

 

ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.

 

ITEM 4.                        CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to the management, including CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

30


 
 

 

PART II                        OTHER INFORMATION

 

ITEM 1.                        LEGAL PROCEEDINGS

 

We are not currently subject to any material legal proceedings, nor, to our knowledge, is there any legal proceeding threatened against us. However, from time to time, we may become a party to certain legal proceedings in the ordinary course of business.

 

ITEM 1A.                    RISK FACTORS

 

This item is not required for a smaller reporting company.

 

ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES

 

None.

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                        MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.                        OTHER INFORMATION

 

 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. The foregoing summary of the terms and conditions of this agreement is qualified in its entirety by reference to the agreement, a copy of which is filed as Exhibit 10.1 to this report.

 

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.

 

31


 
 

 

ITEM 6.                        EXHIBITS

 

        Incorporated by Reference  

Filed

or Furnished

No.   Exhibit Description   Form   Date Filed   Number   Herewith
2.1   Merger and Capitalization Agreement   8-K   10/22/09   2.1    
2.2   Stock Purchase and Recapitalization Agreement   8-K/A   3/24/10   2.2    
3.1   Amended and Restated Articles of Incorporation   SB-2   3/2/07   3(i)    
3.2   Articles of Amendment to the Amended and Restated Articles of Incorporation   8-K   2/23/11   3.1    
3.3   Articles of Amendment to the Amended and Restated Articles of Incorporation   8-K   3/3/11   3.1    
3.4   Articles of Amendment to the Amended and Restated Articles of Incorporation   8-K   11/5/15   3.5    
3.5   Bylaws   SB-2   3/2/07   3(ii)    
10.1   Lease Agreement between Goodson Land Partners, LLC And One Up Innovations, Inc., dated November 2, 2020               Filed
31.1   Section 302 Certification by the Corporation’s Principal Executive Officer               Filed
31.2   Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer               Filed
32.1   Section 906 Certification by the Corporation’s Principal Executive Officer               Filed
32.2   Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer               Filed
101.INS   XBRL Instance Document               Filed
101.SCH   XBRL Taxonomy Extension Schema Document               Filed
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document               Filed
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document               Filed
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document               Filed
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document               Filed

 

32


 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      LUVU BRANDS, INC.
      (Registrant)
       
       
November 12, 2020   By:   /s/ Louis S. Friedman
(Date)     Louis S. Friedman
     

President and Chief Executive Officer

(Principal Executive Officer)

       
       
November 12, 2020   By:   /s/ Ronald P. Scott
(Date)     Ronald P. Scott
     

Chief Financial Officer and Secretary

(Principal Financial & Accounting Officer)

       

 

 

 

 

 

 

 

 

 

33

 

 

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