Luvu Brands, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - SECTION 906 CERTIFICATION BY THE CORPORATION'S PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - Luvu Brands, Inc.	exhibit_32-2.htm
EX-31.1 - SECTION 302 CERTIFICATION BY THE CORPORATION'S PRINCIPAL EXECUTIVE OFFICER - Luvu Brands, Inc.	exhibit_31-1.htm
EX-32.1 - SECTION 906 CERTIFICATION BY THE CORPORATION'S PRINCIPAL EXECUTIVE OFFICER - Luvu Brands, Inc.	exhibit_32-1.htm
EX-31.2 - SECTION 302 CERTIFICATION BY THE CORPORATION'S PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - Luvu Brands, Inc.	exhibit_31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended March 31, 2016

Commission File Number: 000-53314

Luvu Brands, Inc.

(Exact name of registrant as specified in this charter)

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

2745 Bankers Industrial Drive, Atlanta, Georgia 30360

(Address of principal executive offices and zip code)

Company's telephone number: (770) 246-6400

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

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

As of May 13, 2016 there were 71,452,596 shares of the registrant’s common stock outstanding.

LUVU BRANDS, INC.

TABLE OF CONTENTS

		Page Number
	PART I – FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets –
	At March 31, 2016 (unaudited) and June 30, 2015	3

	Condensed Consolidated Statements of Operations –
	For the Three and Nine Months Ended March 31, 2016 and 2015 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows –
	For the Nine Months Ended March 31, 2016 and 2015 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	26

ITEM 4.	Controls and Procedures	26

	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	27

ITEM 1A.	Risk Factors	27

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

ITEM 3.	Defaults Upon Senior Securities	27

ITEM 4.	Mine Safety Disclosures	27

ITEM 5.	Other Information	27

ITEM 6.	Exhibits	27

SIGNATURES		28

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	March 31, 2016 (unaudited)			June 30, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	432,504		$	492,448
Accounts receivable, net		903,346			747,904
Inventories, net		1,450,489			1,302,654
Prepaid expenses		77,229			98,204
Total current assets		2,863,568			2,641,210
Equipment and leasehold improvements, net		901,424			627,840
Other assets		2,996			2,996
Total assets	$	3,767,988		$	3,272,046

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,303,834		$	2,094,152
Current debt		2,103,307			1,854,677
Other accrued liabilities		433,513			456,425
Total current liabilities		4,840,654			4,405,254
Noncurrent liabilities:
Long-term debt		1,111,593			976,687
Deferred rent payable		195,446			214,753
Total noncurrent liabilities		1,307,039			1,191,440
Total liabilities		6,147,693			5,596,694

Commitments and contingencies (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 $1,000,000 as of March 31, 2016 and June 30, 2015		430			430
Common stock of $0.01 par value, 175,000,000 shares authorized; 71,452,596 and 70,702,596 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively		714,526			707,026
Additional paid-in capital		5,960,174			5,865,383
Accumulated deficit		(9,054,835	)		(8,897,487	)
Total stockholders’ deficit		(2,379,705	)		(2,324,648	)
Total liabilities and stockholders’ deficit	$	3,767,988		$	3,272,046

See accompanying notes to unaudited condensed consolidated financial statements.

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2016			2015			2016			2015

Net Sales	$	4,301,680		$	4,270,871		$	12,906,868		$	12,146,134
Cost of goods sold		3,264,595			3,350,413			9,630,728			9,062,653
Gross profit		1,037,085			920,458			3,276,140			3,083,481
Operating expenses
Advertising and promotion		89,800			95,164			270,698			303,736
Other selling and marketing		314,525			322,545			963,907			938,271
General and administrative		618,147			506,970			1,685,103			1,419,718
Depreciation and amortization		52,858			47,745			174,565			161,689
Total operating expenses		1,075,330			972,433			3,094,273			2,823,414
Income (loss) from operations		(38,245	)		(51,975	)		181,867			260,067
Other Income (Expense):
Interest income		130			80			241			317
Loss on disposal of assets		—			(8,910	)		—			(8,910	)
Interest expense and financing costs		(121,390	)		(105,378	)		(339,456	)		(304,355	)
Total Other (Expense)		(121,260	)		(114,208	)		(339,215	)		(312,948	)
Loss before income taxes		(159,505	)		(166,183	)		(157,348	)		(52,881	)
Provision for income taxes		—			—			—			—
Net loss	$	(159,505	)	$	(166,183	)	$	(157,348	)	$	(52,881	)
Net loss per share
Basic	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)
Diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)

Shares used in computing net loss per share
Basic		71,452,596			70,702,596			71,103,505			70,702,596
Diluted		71,452,596			70,702,596			71,103,505			70,702,596

See accompanying notes to unaudited condensed consolidated financial statements.

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended
	March 31,
	2016			2015
OPERATING ACTIVITIES:
Net loss	$	(157,348	)	$	(52,881	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		174,565			161,689
Loss on disposal of assets		—			8,910
Stock based compensation expense		27,291			31,888
Provision for bad debt		(3,672	)		8,103
Deferred rent payable		(11,045	)		108,517
Changes in operating assets and liabilities:
Accounts receivable		(151,770	)		(254,084	)
Inventories		(147,835	)		54,153
Prepaid expenses and other assets		20,975			(4,917	)
Accounts payable		209,681			295,419
Accrued compensation		11,694			139,577
Accrued expenses and interest		(42,868	)		(9,828	)
Net cash (used in) provided by operating activities		(70,332	)		486,546

INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(192,792	)		(43,675	)
Net cash used in investing activities		(192,792	)		(43,675	)

FINANCING ACTIVITIES:
Sale of common stock		75,000			—
Repayment of term note-shareholder		(79,694	)		(46,222	)
Proceeds from unsecured notes payable		350,000			—
Net cash provided by line of credit		107,463			116,455
Merchant cash advance		500,000			—
Net repayment of merchant cash advance		(427,367	)		(365,542	)
Repayment of unsecured line of credit		(10,245	)		(1,002	)
Payments on equipment notes		(33,367	)		—
Repayment of short-term unsecured notes payable		(231,227	)		(209,466	)
Principal payments on capital leases		(47,383	)		(36,323	)
Net cash provided by (used in) financing activities		203,180			(542,100	)

Net decrease in cash and cash equivalents		(59,944	)		(99,229	)
Cash and cash equivalents at beginning of period		492,448			592,501
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	432,504		$	493,272

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non cash item:
Purchases of equipment with equipment notes	$	255,357		$	137,285
Cash paid during the period for:
Interest	$	323,199		$	318,050
Income taxes	$	—		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016 AND MARCH 31, 2015 (UNAUDITED)

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS

Luvu Brands, Inc. (the “Company” or “Luvu Brands”, formerly known as Liberator, Inc.) 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”). Effective November 5, 2015, the Company changed its corporate name from Liberator, Inc. to Luvu Brands, Inc.

The Company is a vertically integrated US-based manufacturer that has built several brands in the wellness, lifestyle and casual seating categories. Many of our products are offered in innovative vacuum eco-compressed packaging for retail stores, mass merchants, drug and internet retailers worldwide. All of the Company’s brands are headquartered in Atlanta, Georgia in a 140,000 square foot manufacturing facility that employs over 150 people. Sales are generated through internet and print advertisements. We have a diversified customer base with no particular concentration of credit risk in one economic sector. For the three months and nine months ending March 31, 2016, sales to and through Amazon accounted for 29% and 28% of our net sales, respectively. 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 quarters.

The accompanying unaudited condensed consolidated financial statements of Luvu Brands, Inc. and all of its wholly-owned subsidiaries (collectively, the "Company" “we” or "Luvu Brands") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the nine months ended March 31, 2016 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Going Concern - The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. As of March 31, 2016, the Company has an accumulated deficit of $9,054,835 and a working capital deficit of $1,977,086. 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 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 gross profit margins through improved production controls and reporting. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation for the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic Direct sales. We estimate that the operational growth plans we have identified will require approximately $200,000 of funding. We expect to invest approximately $100,000 on sales and marketing programs, primarily sexual wellness advertising in magazines, on the internet and on cable television. We will also be exploring the opportunity to acquire other compatible businesses.

We plan to finance the required $200,000 with a combination of anticipated cash flows from operations over the next twelve months as well as cash on hand and cash we will seek to obtain through equity and debt financings.

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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp Innovations, Inc. and Foam Labs, Inc. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s report on Form 10-K for the year ended June 30, 2015 filed on October 13, 2015.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the period reported. Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: asset impairment; income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.

Revenue Recognition

We recognize revenues as goods are shipped to customers and title is transferred. The criteria for recognition of revenue are when persuasive evidence that an arrangement exists and both title and risk of loss have passed to the customer, the price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are estimated and recorded as a reduction to sales in the period in which sales are recorded.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company includes shipping and handling costs in cost of product sales.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management's best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. The Company reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

The following is a summary of Accounts Receivable as of March 31, 2016 and June 30, 2015.

	March 31, 2016 (unaudited)	June 30, 2015
Accounts receivable	$936,120	$782,832
Allowance for doubtful accounts	(18,108)	(21,780)
Allowance for discounts and returns	(14,666)	(13,148)
Total accounts receivable, net	$903,346	$747,904

Inventories and Inventory Reserves

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor, depreciation and overhead. The company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or market may be adjusted in response to changing conditions.

Concentration of Credit Risk

The Company maintains its cash accounts with banks located in Georgia. The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank. The Company had bank balances on deposit at March 31, 2016 that exceeded the balance insured by the FDIC by $167,295. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During the nine months ended March 31, 2016, we purchased 22% and 15% of total inventory purchases from two vendors.

During the nine months ended March 31, 2015, we purchased 33% and 18% of total inventory purchases from two vendors.

As of March 31, 2016 and June 30, 2015, one of the Company’s customers (Amazon) represents 39% and 32% of the total accounts receivables, respectively.

Fair Value of Financial and Derivative Instruments

At March 31, 2016, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other debt.

The fair values of these financial instruments approximated their carrying values based on either their short maturity or current terms for similar instruments.

The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

The valuation techniques that may be used to measure fair value are as follows:

A. Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method.

C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

Advertising Costs

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $21,079 at March 31, 2016 and $25,937 at June 30, 2015. Advertising expense for the three months ended March 31, 2016 and 2015 was $89,800 and $95,164, respectively. Advertising expense for the nine months ended March 31, 2016 and 2015 was $270,698 and $303,736, respectively.

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $42,198 and $27,543 for the three months ended March 31, 2016 and 2015, respectively. Expenses for new product development totaled $120,591 and $85,118 for the nine months ended March 31, 2016 and 2015, 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 FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at March 31, 2016.

Operating Leases

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment was effective August 1, 2014 and included four month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company agreed to make improvements to the facility totaling $123,505 within six months of August 1, 2014. As of March 31, 2016, the Company has completed $60,473 of the leasehold improvements. In addition, the monthly rent on the facility decreases from the current rent of $33,139 to $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating schedule with the final year of the lease at $35,123 per month. The rent expense under this lease for the nine months ended March 31, 2016 and 2015 was $264,359 and $261,963, respectively.

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

Segment Information

We have identified three reportable sales channels: Direct, Wholesale and Other. Direct includes product sales through our four e-commerce sites and our single retail store. Wholesale includes Liberator branded products sold to distributors and retailers, non-Liberator products (purchased products, Jaxx and Avana 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. For the three months and nine months ending March 31, 2016, sales to and through Amazon accounted for 29% and 28% of our net sales, respectively.

The following is a summary of sales results for the Direct, Wholesale, and Other channels.


	Three Months Ended (unaudited)						Nine Months Ended (unaudited)
	March 31, 2016			March 31, 2015			March 31, 2016			March 31, 2015

Net Sales:
Direct	$	1,290,135		$	1,538,539		$	3,852,867		$	4,230,960
Wholesale		2,871,754			2,586,521			8,678,706			7,539,586
Other		139,791			145,811			375,295			375,587
Total Net Sales	$	4,301,680		$	4,270,871		$	12,906,868		$	12,146,134

Gross Margin:
Direct	$	625,068		$	723,042		$	1,843,028		$	1,974,465
Wholesale		538,894			345,996			1,808,516			1,443,066
Other		(126,877	)		(148,580	)		(375,404	)		(334,050	)
Total Gross Margin	$	1,037,085		$	920,458		$	3,276,140		$	3,083,481

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In April 2016, the FASB issued ASU 2016–10 Revenue from Contract with Customers (Topic 606):Identifying Performance Obligations and Licensing . The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

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

Net Loss Per Share

In accordance with FASB Accounting Standards Codification No. 260 (“FASB ASC 260”), “Earnings Per Share”, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares outstanding as of March 31, 2016 and 2015, which consist of options and convertible preferred stock, have been excluded from the diluted net loss per common share calculations because they are anti-dilutive.

The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect:

	March 31,
	2016		2015
Common stock options – 2009 Plan		4,196,000		4,074,500
Common stock options – 2015 Plan		2,700,000		—
Convertible preferred stock		4,300,000		4,300,000
Total		11,196,000		8,374,500

Income Taxes

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

Stock Based Compensation

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

Stock Issued for Services to other than Employees

Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by FASB ASC 505, which is measured as of the date required by FASB ASC 505, “Equity – Based Payments to Non-Employees”. In accordance with FASB ASC 505, the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying common stock on the “valuation date”, which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.

NOTE 3. STOCK-BASED COMPENSATION

Options

At March 31, 2016, the Company had the 2009 and 2015 Stock Option Plans (the “Plans”), which are shareholder-approved and under which 4,196,000 shares are reserved for issuance under the 2009 Plan until that Plan terminates on October 20, 2019 and 5,000,000 shares are reserved for issuance under the 2015 Plan until that Plan terminates on August 31, 2025.

Under the Plans, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of March 31, 2016, the number of shares available for issuance under the 2015 Plan was 2,300,000. There are no shares available for issuance under the 2009 Plan, other than the 4,196,000 stock options that have already been granted.

The following table summarizes the Company’s stock option activities during the nine months ended March 31, 2016:

	Number of Shares Underlying Outstanding Options			Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Intrinsic Value
Options outstanding as of June 30, 2015		4,160,500			2.2	$	.07	$	—
Granted		3,700,000			4.7	$	.02	$	—
Exercised		—			—	$	—	$	—
Forfeited or expired		(964,500	)		2.1	$	.08	$	—
Options outstanding as of March 31, 2016		6,896,000			3.3	$	.04	$	—
Options exercisable as of March 31, 2016		2,394,750			1.6	$	.08	$	—

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 $.03 for such day.

There were 3,700,000 stock options granted during the nine months ended March 31, 2016 and 250,000 stock options granted during the nine months ended March 31, 2015. The value assumptions related to options granted during the nine months ended March 31, 2016 and 2015, respectively, were as follows:

	Nine Months Ended March 31, 2016	Nine Months Ended March 31, 2015
Exercise Price:	$.01 - $.03	$.03
Volatility:	259% - 320%	259%
Risk Free Rate:	1.23% - 1.60%	1.09% - 1.11%
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

March 31, 2016:

		Outstanding Options			Exercisable Options
Exercise Prices		Number of Shares	Remaining Life (Years)	Weighted Average Price	Number of Shares	Weighted Average Price
$	.02 to .03	3,700,000	4.6	$.02	50,000	$.03
$	.05 to .09	2,661,000	1.9	$.06	1,809,750	$.06
$	.16 to .16	535,000	.7	$.16	535,000	$.16
Total stock options		6,896,000	3.3	$.04	2,394,750	$.08

Stock-based compensation

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

Stock option-based compensation expense recognized in the condensed consolidated statements of operations for the three and nine month periods ended March 31, 2016 and 2015 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures.

The following table summarizes stock option-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2016		2015		2016		2015
Cost of Goods Sold	$	1,227	$	2,615	$	5,857	$	8,946
Other Selling and Marketing		1,973		1,535		5,633		4,510
General and Administrative		4,942		5,592		15,801		18,432
Total Stock-based Compensation Expense	$	8,142	$	9,742	$	27,291	$	31,888

As of March 31, 2016, the Company’s total unrecognized compensation cost was $70,591 which will be recognized over the weighted average vesting period of 2.2 years.

NOTE 4. INVENTORIES, NET

Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. Market is defined as sales price less cost to dispose and a normal profit margin. Inventories consisted of the following:

	March 31, 2016			June 30, 2015
Raw materials	$	690,392		$	554,108
Work in process		194,745			159,717
Finished goods		591,702			615,179
Total inventories		1,476,839			1,329,004
Allowance for inventory reserves		(26,350	)		(26,350	)
Inventories, net	$	1,450,489		$	1,302,654

NOTE 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

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:

	March 31, 2016			June 30, 2015			Estimated Useful Life
Factory Equipment	$	2,216,341		$	1,909,890		2-10 years
Computer Equipment and Software		1,049,141			908,630		5-7 years
Office Equipment and Furniture		166,996			166,996		5-7 years
Leasehold Improvements		403,593			402,407		10 years
Subtotal		3,836,071			3,387,923
Accumulated Depreciation		(2,934,647	)		(2,760,083	)
Total equipment and leasehold improvements, net	$	901,424		$	627,840

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 nine months ended March 31, 2016.

NOTE 6. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

	March 31, 2016		June 30, 2015
Accrued compensation	$	277,321	$	265,627
Accrued expenses and interest		131,386		174,254
Current portion of deferred rent payable		24,806		16,544
Other accrued liabilities	$	433,513	$	456,425

NOTE 7. CURRENT AND LONG-TERM DEBT SUMMARY

	March 31, 2016		June 30, 2015
Current debt:
Unsecured lines of credit (Note 15)	$	30,486	$	40,731
Line of credit (Note 10)		827,476		720,013
Short-term unsecured notes payable (Note 8)		502,007		483,235
Current portion of term note payable – shareholder (Note 12)		124,642		108,083
Current portion of equipment notes payable (Note 16)		50,854		—
Current portion of leases payable (Note 16)		62,943		70,349
Merchant cash advance (net of discount) (Note 11)		388,899		316,266
Notes payable – related party (Note 9)		116,000		116,000
Total current debt		2,103,307		1,854,677
Long-term debt:
Leases payable (Note 16)		86,985		154,363
Unsecured notes payable (Note 8)		400,000		300,000
Equipment note payable (Note 16)		198,537		—
Term note payable – shareholder (Note 12)		426,071		522,324
Total long-term debt	$	1,111,593	$	976,687

NOTE 8. UNSECURED NOTES PAYABLE

Notes payable consisted of the following:

	March 31, 2016			June 30, 2015
Unsecured note payable for $400,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing August 28, 2015. Personally guaranteed by principal stockholder.	$	—		$	83,235
Unsecured note payable for $200,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing August 30, 2016.		89,499			—
Unsecured note payable for $150,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing December 12, 2016.		112,508			—
Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on October 31, 2014; extended to October 31, 2015. Subsequent to September 30, 2015, the due date on this note was extended by the holder to October 31, 2017 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder.		100,000			100,000
Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2013. Subsequent to June 30, 2013, the due date on this note was extended by the holder to July 31, 2015. Subsequent to June 30, 2015, the due date on this note was extended by the holder to July 31, 2017. Personally guaranteed by principal stockholder.		100,000			100,000
Unsecured note payable for $300,000 to an individual, with interest at 20%, principal and interest originally due in full on January 3, 2013; extended to January 4, 2016 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder. Subsequent to December 31, 2015, the due date on this note was extended by the holder to January 2, 2017.		300,000			300,000
Unsecured note payable for $200,000 to an individual, with interest payable monthly at 20%, the principal was due in full on May 1, 2013; extended to May 1, 2015 by the note holder. Subsequent to May 1, 2015, the due date on this note was extended by the holder to May 1, 2017. Personally guaranteed by principal stockholder.		200,000			200,000
Total unsecured notes payable		902,007			783,235
Less: current portion		(502,007	)		(483,235	)
Long-term unsecured notes payable	$	400,000		$	300,000

NOTE 9. SHORT TERM NOTES PAYABLE-RELATED PARTY

	March 31, 2016			June 30, 2015
Unsecured note payable to an officer, with interest at 3.25%, due on demand	$	40,000		$	40,000
Unsecured note payable to an officer, with interest at 3.25%, due on demand		76,000			76,000
Total related party notes payable		116,000			116,000
Less: current portion		(116,000	)		(116,000	)
Long-term related party notes payable	$	—		$	—

NOTE 10. 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 March 31, 2016, the interest rate was 6.5%) and the Monthly Service Fee was changed to .5% per month.

On December 9, 2015, the credit agreement with Advance Financial Corporation was amended to increase the asset based line of credit to $1,200,000 to include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. All other terms of the credit facility remain the same.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the facility. In addition, Luvu Brands has provided its corporate guarantee of the credit facility (see Note 14). On March 31, 2016, the balance owed under this line of credit was $827,476. As of March 31, 2016, 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 11. MERCHANT CASH ADVANCE

On April 24, 2015, the Company entered into an agreement with Power Up Lending Group, Ltd. (“Power Up”) whereby Power Up agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after the funding date. This will be accomplished by Power Up withholding a fixed amount each business day of $2,074.08 from OneUp’s credit card receipts until full repayment is made. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 14).

On October 1, 2015 the Company borrowed an additional $100,000 from Power Up. Terms for this additional amount call for a repayment of $119,000, which includes a one-time finance charge of $19,000, approximately ten months after the funding date. This will be accomplished by Power Up withholding a fixed amount each business day of $566.67 from OneUp’s credit card receipts until full repayment is made. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 14).

On February 22, 2016 the Company received another loan that calls for a repayment of $448,000, which includes a one-time finance charge of $48,000, approximately ten months after the funding date. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 14).

As of March 31, 2016, the principle amount was $388,899, net of a discount of $50,800.

NOTE 12. TERM NOTES PAYABLE - SHAREHOLDER

On September 5, 2014, the Company amended and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to Hope Capital, Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible Note in the original principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September 2009 Note”), the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to provide for a 3% unsecured promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due on or before August 31, 2019 and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall be made on a monthly basis, starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly payments. The first 12 payments are $9,405.60 each and increase 15% each year, with 12 payments of $16,450.45 during year five. In the event the Company fails to make a monthly payment under the Note or the Company is subject to a bankruptcy event (as defined under the Note), subject to the Company’s ability to cure such default, HCI may convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under the Note into shares of our common stock at a conversion price equal to $0.10 per share. Conversion is subject to HCI not being able to beneficially own more than 9.99% of our outstanding common stock upon any conversion, subject to waiver by HCI. The Company has the right to prepay the Note, in whole or in part, subject to notice to HCI, without penalty. As of March 31, 2016 the principal balance under this term note was $550,713.

NOTE 13. STOCKHOLDERS’ EQUITY

Common Stock- The Company’s authorized common stock was 175,000,000 shares at March 31, 2016 and June 30, 2015. Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At March 31, 2016, the Company had reserved the following shares of common stock for issuance:

	March 31,
	2016
Shares of common stock reserved for issuance under the 2009 Stock Option Plan		4,196,000
Shares of common stock reserved for issuance under the 2015 Stock Option Plan		5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock		4,300,000
Total shares of common stock equivalents		13,496,000

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 14. RELATED PARTIES

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 March 31, 2016 was accrued by the Company at the prevailing prime rate (which as of December 17, 2015 is 3.5%) and totaled $663. The accrued interest on the note as of March 31, 2016 was $16,907. 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 loan is accrued by the Company at the prevailing prime rate (which was 3.5% on December 31, 2015) and totaled $349 for the three months ended March 31, 2016. The accrued interest on the note as of March 31, 2016 was $2,953. This note is subordinate to all other credit facilities currently in place.

On January 3, 2011, an individual loaned the Company $300,000 with an interest rate of 20%. Interest on the loan is being paid monthly, with the principal due in full on January 3, 2012; extended to January 3, 2013; then extended to January 3, 2015; then extended to January 4, 2016; then extended to January 2, 2017 with the principle due on maturity (see Note 8). Mr. Friedman personally guaranteed the repayment of the loan obligation.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 10 – Line of Credit). In addition, Luvu Brands has provided its corporate guarantees of the credit facility. On March 31, 2016, the balance owed under this line of credit was $827,476.

On July 20, 2011, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum), with the principal amount due in full on July 31, 2012. On July 31, 2012, the note was extended to July 31, 2013 under the same terms. Prior to June 30, 2013, the note was extended to July 31, 2015 under the same terms. Subsequent to June 30, 2015, the note was extended to July 31, 2017 under the same terms (see Note 8). Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On October 31, 2013, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum) beginning on November 30, 2013, with the principal amount due in full on or before October 31, 2014. Prior to October 31, 2014, the note was extended to October 31, 2015 under the same terms (see Note 8). Prior to October 31, 2015, the note was extended to October 31, 2017 under the same terms. 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, 2015; then extended to May 1, 2017 with the principle due on maturity (see Note 8). Mr. Friedman personally guaranteed the repayment of the loan obligation.

The loan from Power Up Lending Group, Ltd. (see Note 11) is guaranteed by the Company (including OneUp and Foam Labs) and is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

NOTE 14. RELATED PARTIES (continued)

On August 26, 2014, the Company issued an unsecured promissory note for $400,000 to two individual shareholders. Proceeds from the promissory note were used to retire three other notes held by the two individual shareholders including the $250,000 note dated December 19, 2013 with a balance of $92,228; the $250,000 note dated January 20, 2014 with a balance of $111,874 and the $130,000 note dated April 4, 2014 with a balance of $87,899 (collectively the “Prior Notes”). The remaining balance, after paying the balance on the Prior Notes, of $107,999 was received in cash by the Company. Terms of the $400,000 note are 26 bi-weekly payments of principal and interest of $17,033 (see Note 8). At June 30, 2015, the principal balance of this note was $83,235 and the note was repaid in full on August 28, 2015.

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 $30,486 as of March 31, 2016. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On September 5, 2014, the Company amended and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to Hope Capital, Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible Note in the original principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September 2009 Note”), the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to provide for a 3% unsecured promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due on or before August 31, 2019 and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall be made on a monthly basis, starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly payments. The first 12 payments are $9,405.60 each and increase 15% every year, with 12 payments of $16,450.45 during year five. In the event the Company fails to make a monthly payment under the Note or the Company is subject to a bankruptcy event (as defined under the Note), subject to the Company’s ability to cure such default, HCI may convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under the Note into shares of our common stock at a conversion price equal to $0.10 per share. Conversion is subject to HCI not being able to beneficially own more than 9.99% of our outstanding common stock upon any conversion, subject to waiver by HCI. The Company has the right to prepay the Note, in whole or in part, subject to notice to HCI, without penalty. At March 31, 2016, the principal balance under the Note was $550,713.

NOTE 15. UNSECURED LINES OF CREDIT

NOTE 16. COMMITMENTS AND CONTINGENCIES

Operating Leases

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment is effective August 1, 2014 and includes a four month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company has agreed to make improvements to the facility totaling $123,505 within six months of August 1, 2014. As of March 31, 2016, the Company has completed $60,473 of the leasehold improvements. In addition, the monthly rent on the facility decreases from the current rent of $33,139 to $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating schedule with the final year of the lease at $35,123 per month. The rent expense under this lease for the nine months ended March 31, 2016 and 2015 was $264,359 and $261,963, respectively.

The Company also leases certain postage equipment under an operating lease. The monthly lease is $104 per month and expires January 2017.

Future minimum lease payments under non-cancelable operating leases at March 31, 2016 are as follows:

Year ending June 30,
	2016 (three months)	$	98,736
	2017		384,335
	2018		391,496
	2019		403,241
	2020		415,339
	Thereafter through 2020		210,738
	Total minimum lease payments	$	1,903,886

Capital Leases

The Company has acquired equipment under the provisions of long-term leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The leased properties under these capital leases have a total cost of $287,104. These assets are included in the fixed assets listed in Note 5 - Equipment and Leasehold Improvements and include computers, software, furniture, and equipment. The capital leases have stated or imputed interest rates ranging from 7% to 21%.

The following is an analysis of the minimum future lease payments subsequent to March 31, 2016:

Year ending June 30,
	2016 (three months)	$	20,429
	2017		67,538
	2018		45,337
	2019		29,391
	2020		7,978
	Future Minimum Lease Payments	$	170,673
	Less Amount Representing Interest		20,745
	Present Value of Minimum Lease Payments		149,928
	Less Current Portion		62,943
	Long-Term Obligations under Leases Payable	$	86,985

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 $283,218. These assets are included in the fixed assets listed in Note 5 - Equipment and Leasehold Improvements and include production equipment. The equipment notes have stated or imputed interest rates ranging from 10.5% to 11.3%.

The following is an analysis of the minimum future equipment note payable payments subsequent to March 31, 2016:

Year ending June 30,
	2016 (three months)	$	18,677
	2017		74,709
	2018		74,709
	2019		72,462
	2020		61,211
	2021		7,615
	Future Minimum Note Payable Payments	$	309,383
	Less Amount Representing Interest		59,992
	Present Value of Minimum Note Payable Payments		249,391
	Less Current Portion		50,854
	Long-Term Obligations under Equipment Notes Payable	$	198,537

Legal Proceedings

As of the date of this Quarterly Report on Form 10-Q, 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. SUBSEQUENT EVENTS

Subsequent to March 31, 2016, 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 7, 2017. The balance due on the $200,000 unsecured note payable due August 30, 2016 was paid in full and the Company received net proceeds of $218,329.

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)
	March 31, 2016			March 31, 2015
Net Sales		100.0	%		100.0	%
Cost Of Goods Sold		75.9	%		78.4	%
Gross Margin		24.1	%		21.6	%
Selling, General and Administrative Expenses		25.0	%		22.7	%
Loss From Operations		(0.9	)%		(1.1	)%

		Nine Months Ended (unaudited)
	March 31, 2016			March 31, 2015
Net Sales		100.0	%		100.0	%
Cost Of Goods Sold		74.6	%		74.6	%
Gross Margin		25.4	%		25.4	%
Selling, General and Administrative Expenses		24.0	%		23.2	%
Income From Operations		1.4	%		2.2	%

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

	Three Months Ended (unaudited)						Nine Months Ended (unaudited)
	March 31, 2016			March 31, 2015			March 31, 2016			March 31, 2015
Net Sales:
Liberator		53	%		51	%		50	%		47	%
Jaxx / Avana		15	%		13	%		17	%		15	%
Resale		29	%		33	%		30	%		34	%
Other		3	%		3	%		3	%		4	%
Total Net Sales		100	%		100	%		100	%		100	%

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Net sales. The Company achieved record sales for the three months ended March 31, 2016 of $4,301,680, a slight increase from the comparable prior year period by $30,809, or .7%. The slight increase in net sales was primarily due to higher sales through the Wholesale channel and was almost completely offset by lower net sales through the Direct channel. The Wholesale channel includes Liberator branded products sold to retailers, e-merchants (including Amazon and Brookstone and others), non-Liberator products sold to retailers and e-merchants (also including Amazon, Brookstone and others), and private label items sold to other resellers. Sales through the Wholesale channel increased by 11% during the three months ended March 31, 2016 from the same three month period in the prior year. The increase is due primarily to higher sales of Avana and Liberator products through (and to) e-merchant customers. Sales through the Direct channel (which includes product sales through our four e-commerce sites and our single retail store) decreased approximately 16% during the three months ended March 31, 2016 from the comparable prior year period. We believe that the decrease in Direct sales is due to our greater product offering on Amazon and other e-merchants web sites, as total sales of branded Liberator products increased during the quarter. Total sales of Liberator products through all channels during the three months ended March 31, 2016 increased 5% from the comparable prior year period. As more mass merchants and e-merchants become comfortable selling Liberator products to their customers, we expect to see a continued decrease in net sales through our Direct channel and a corresponding increase in Liberator sales through the Wholesale channel. As a result, we expect to see total net sales increase as a result of our products having greater exposure to the mass market consumer. The Other sales channel consists principally of shipping and handling fees derived from our Direct sales channel. The Other sales channel revenue decreased 4% to $139,791 in the three months ended March 31, 2016, primarily as a result of lower sales through the Direct channel and lower shipping and handling fees.

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 and depreciation. Gross profit increased 13% to $1,037,085 for the three months ended March 31, 2016 from $920,458 in the comparable prior year period and primarily resulted from lower production costs. The lower production costs are a result of the production equipment that was acquired earlier in the current fiscal year.

Operating expenses. Total operating expenses for the three months ended March 31, 2016 were 25% of net sales, or $1,075,330, compared to 23% of net sales, or $972,433for the same period in the prior year. The slight increase in operating expenses during the period was primarily the result of higher business insurance expense, and costs related to providing employee health care benefits mandated by the Affordable Care Act.

Other income (expense). Other income (expense) during our third quarter increased slightly from expense of ($114,208) in our third quarter of fiscal 2015 to expense of ($121,260) during our third quarter of fiscal 2016. The increase was primarily due to higher interest expense on higher average loan balances.

Nine Months Ended March 31, 2016 Compared to Nine Months Ended March 31, 2015

Net sales. Net sales for the nine months ended March 31, 2016 increased from the comparable prior year period by $760,734, or 6%. The increase in net sales was primarily due to higher sales through the Wholesale channel, offset by lower sales through the Direct channel. Net sales through the Direct channel decreased by 9%, or $378,093 during the nine months ended March 31, 2016, from the comparable year earlier period. Net sales through the Wholesale channel (which consists principally of e-merchants, retailers and distributors) increased by 15%, or $1,139,120, compared to the prior year. The increased sales through the Wholesale channel was due to greater sales of Liberator, Jaxx, and Avana products to e-merchants including Amazon and Brookstone.

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 and depreciation. Total gross profit for the nine months ended March 31, 2016 increased to $3,276,140 from $3,083,481 (an increase of approximately 6%) in the comparable prior year period. Gross profit as a percentage of net sales was unchanged at 25.4% for the nine months ended March 31, 2016 from the comparable prior year period.

Operating expenses. Total operating expenses for the nine months ended March 31, 2016 were 24.0% of net sales, or $3,094,273, compared to 23.2% of net sales, or $2,823,414, for the same period in the prior year and represents an increase of 9.6%. The increase in operating expenses during the period was primarily the result of higher business insurance expense, and costs related to providing employee health care benefits mandated by the Affordable Care Act, offset in part by lower advertising and promotion costs.

Other income (expense). Other income (expense) increased approximately 8% from an expense of ($312,948) in fiscal 2015 to an expense of ($339,215) in fiscal 2016. The increase was primarily due to higher interest expense on higher average loan 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:
	Nine Months Ended
	March 31,
	2016			2015
	(Unaudited)
Cash flow data:
Cash (used in) provided by operating activities	$	(70,332	)	$	486,546
Cash used in investing activities	$	(192,792	)	$	(43,675	)
Cash provided by (used in) financing activities	$	203,180		$	(542,100	)

As of March 31, 2016, our cash and cash equivalents totaled $ 432,504 compared to $493,272 in cash and cash equivalents as of March 31, 2015.

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 from continuing operations primarily consists of net income adjusted for certain non-cash items, including depreciation, stock-based compensation, and the effect of changes in working capital. Net cash used in operating activities was ($70,332) in the nine months ended March 31, 2016 compared to cash provided by operations of $486,546 in the nine months ended March 31, 2015. The primary reason for the decrease in cash provided by operating activities is the larger loss for the period, a decrease in deferred rent payable and an increase in inventory.

Investing Activities

Cash used in investing activities in the nine months ended March 31, 2016 was $192,792 and related to the purchase and installation of new production equipment during the first nine months of fiscal 2016.

Financing Activities

Cash provided by financing activities during the nine months ended March 31, 2016 of $203,180 was primarily attributable to the proceeds of the $350,000 in unsecured notes payable and the borrowings from the merchant cash advance and increased borrowing under the line of credit, offset in part by repayments of the merchant cash advance and higher payments on the short-term unsecured notes payable.

Cash used in financing activities during the nine months ended March 31, 2015 of $542,100 was primarily attributable to the repayment of the merchant cash advance and short-term unsecured notes payable offset in part by increase in net borrowings under the line of credit.

Inflation

We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and other employee costs. We attempt to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs.

Sufficiency of Liquidity

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We incurred a net loss of $473,746 for the year ended June 30, 2015. As of March 31, 2016, we have an accumulated deficit of $9,054,835 and a working capital deficit of $1,977,086. This raises substantial doubt about our ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to meet our financing requirements, and the success of our future operations. Management believes that actions presently being taken to revise our 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 continue to make improvements to our e-commerce sites with the goal of increasing sales through the higher margin Direct channel. We also installed new equipment during fiscal 2015 to increase the efficiency and capacity of our foam repurposing operation. At the end of fiscal 2015 we ordered new equipment to increase our fabric cutting capacity; this equipment was delivered and installed during the first quarter of fiscal 2016. These actions have yielded lower costs in those operations. 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 will require approximately $200,000 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.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements. Those statements include, but may not be limited to, all statements regarding management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as believe,” anticipate,” expect,” will,” may,” should,” intend,” plan,” estimate,” predict,” potential,” continue,” likely” and similar expressions are intended to identify forward-looking statements.

In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Non-GAAP Financial Measures

Reconciliation of net loss to Adjusted EBITDA income for the nine months ended March 31, 2016 and 2015:

	Nine months ended March 31,
	2016			2015
Net loss	$	(157,348	)	$	(52,881	)
Less interest income		(241	)		(317	)
Plus interest expense		339,456			304,355
Plus depreciation and amortization expense		174,565			161,689
Plus stock-based compensation		27,291			31,888
Adjusted EBITDA income	$	383,723		$	444,734

As used herein, Adjusted EBITDA represents net income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation expense. We have excluded the non-cash expense, stock-based compensation, as it does 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 (Generally Accepted Accounting Principles). 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 loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for amortization of debt issuance costs and 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 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.

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

No events occurred during the quarter covered by this report that would require a response to this item.

ITEM 6. EXHIBITS

The following exhibits are furnished with this report:

Exh. No.		Description

31.1		Section 302 Certification by the Corporation’s Principal Executive Officer
31.2		Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer
32.1		Section 906 Certification by the Corporation’s Principal Executive Officer
32.2		Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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)


May 13, 2016	By:	/s/ Louis S. Friedman
(Date)		Louis S. Friedman
		President and Chief Executive Officer (Principal Executive Officer)


May 13, 2016	By:	/s/ Ronald P. Scott
(Date)		Ronald P. Scott
		Chief Financial Officer and Secretary (Principal Financial & Accounting Officer)

Luvu Brands, Inc. - FORM 10-Q - May 13, 2016

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Luvu Brands, Inc. Reports