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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

X  

 

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

 

For the quarterly period ended March 31, 2017

 

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

 

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

 

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)   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 X

 

As of May 12, 2017 there were 73,452,596 shares of the registrant’s common stock outstanding.


 
 

LUVU BRANDS, INC.

TABLE OF CONTENTS

     
  PART I – FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements Page Number 
     
  Condensed Consolidated Balance Sheets –  
  At March 31, 2017 (unaudited) and June 30, 2016 3
     
  Condensed Consolidated Statements of Operations –  
  For the Three and Nine Months Ended March 31, 2017 and March 31, 2016 (unaudited)                   4
     
  Condensed Consolidated Statements of Cash Flows –  
  For the Nine Months Ended March 31, 2017 and 2016 (unaudited) 5
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 6
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 28
     
ITEM 4. Controls and Procedures 28
     
  PART II – OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 29
     
ITEM 1A. Risk Factors 29
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
ITEM 3. Defaults Upon Senior Securities 29
     
ITEM 4. Mine Safety Disclosures 29
     
ITEM 5. Other Information 29
     
ITEM 6. Exhibits 29
     
SIGNATURES   30

 

 

 

2


 
 

PART I   FINANCIAL INFORMATION

 

ITEM 1.                        FINANCIAL STATEMENTS

 

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

    March 31,
2017
(unaudited)
  June 30,
2016
    (in thousands, except share data)
ASSETS  
Current assets:        
   Cash and cash equivalents   $ 345     $ 545  
   Accounts receivable, net     639       794  
   Inventories, net     1,621       1,444  
   Prepaid expenses     69       96  
                 
       Total current assets     2,674       2,879  
                 
Equipment and leasehold improvements, net     911       870  
Other assets     9       3  
                 
Total assets   $ 3,594     $ 3,752  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT  
Current liabilities:                
   Accounts payable   $ 2,224     $ 2,363  
   Current debt     2,104       2,397  
   Other accrued liabilities     423       477  
                 
       Total current liabilities     4,751       5,237  
Long-term liabilities:                
   Long-term debt     755       853  
   Deferred rent payable     159       188  
Total noncurrent liabilities     914       1,041  
                 
Total liabilities     5,665       6,278  
                 
Commitments and contingencies (note 15)     —         —    
                 
                 
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, 2017 and June 30, 2016     —         —    
Common stock of $0.01 par value, 175,000,000 shares authorized; 73,452,596 shares issued and outstanding at March 31, 2017 and 71,452,596 at June 30, 2016     735       715  
   Additional paid-in capital     6,069       5,968  
   Accumulated deficit     (8,875 )     (9,209 )
       Total stockholders’ deficit     (2,071 )     (2,526 )
                 
                 
       Total liabilities and stockholders’ deficit   $ 3,594     $ 3,752  
                 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 
 

 

 

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended
March 31,
  Nine Months Ended
March 31,
   2017  2016  2017  2016
   (in thousands, except share data)
Net Sales  $4,026   $4,302   $13,265   $12,907 
Cost of goods sold   2,678    3,265    9,399    9,631 
Gross profit   1,348    1,037    3,866    3,276 
Operating expenses                    
Advertising and promotion   95    90    300    271 
Other selling and marketing   311    314    876    964 
General and administrative   648    618    1,796    1,685 
Depreciation and amortization   54    53    157    174 
Total operating expenses   1,108    1,075    3,129    3,094 
Income (loss) from operations   240    (38)   737    182 
 
Other Income (Expense):
                    
Loss on disposal of assets   —      —      (1)   —   
Interest income   —      —      —      —   
 Interest expense and financing costs   (129)   (121)   (402)   (339)
Total Other (Expense)   (129)   (121)   (403)   (339)
Income (loss) before income taxes   111    (159)   334    (157)
Provision for income taxes   —      —      —        
Net income (loss)  $111   $(159)  $334   $(157)
Net income (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 income (loss) per share                    
         Basic   73,452,596    71,452,596    72,459,895    71,103,505 
         Diluted   73,907,315    71,452,596    72,814,459    71,103,505 
                     

See accompanying notes to unaudited condensed consolidated financial statements.

4

 

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

   Nine Months Ended
   March 31,
   2017  2016
   (in thousands)
OPERATING ACTIVITIES:      
Net income (loss)  $334   $(157)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
     
Depreciation and amortization   157    174 
Stock based compensation expense   21    27 
Loss on disposal of assets   1    —   
Provision for bad debt   4    (4)
Provision for inventory reserves   30    —   
Deferred rent payable   (19)   (11)
Changes in operating assets and liabilities:          
Accounts receivable   151    (152)
Inventories   (207)   (148)
Prepaid expenses and other assets   21    22 
Accounts payable   (139)   210 
Accrued compensation   (58)   12 
Accrued expenses and interest   (4)   (43)
Net cash provided by (used in) operating activities   292    (70)
           
INVESTING ACTIVITIES:          
             Investment in equipment and leasehold improvements   (61)   (193)
Net cash used in investing activities   (61)   (193)
           
FINANCING ACTIVITIES:          
Sale of common stock   100    75 
Repayment of term note-shareholder   (96)   (80)
Proceeds from unsecured note payable   300    350 
Net cash (repaid to) provided by line of credit   (77)   107 
Proceeds from credit card advance   550    500 
Repayment of credit card advance   (611)   (427)
Repayment of unsecured line of credit   (9)   (10)
Payments on equipment notes   (51)   (33)
Repayment of short-term unsecured notes payable   (492)   (231)
Principal payments on capital leases   (45)   (48)
Net cash (used in) provided by financing activities   (431)   203 
           
Net decrease in cash and cash equivalents   (200)   (60)
Cash and cash equivalents at beginning of period   545    492 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $345   $432 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Non cash item:          
Purchases of equipment with equipment notes  $138   $255 
Cash paid during the period for:          
Interest  $399   $323 
Income taxes  $—     $—   

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (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”).

 

The Company is primarily a manufacturer, designer and online retailer of various specialty brands for the sexual wellness, fashion seating and top-of-bed comfort products markets. All of the Company’s operations are located in the same facility in Atlanta, Georgia, including product development, sales, manufacturing and administration.  Sales are generated through internet and print advertisements.  We have a diversified customer base with only one customer accounting for 10% or more of consolidated net sales in the current and prior fiscal year and no particular concentration of credit risk in one economic sector.  Foreign operations and foreign net sales are not material. Our business is seasonal and as a result we experience higher sales in the second and third fiscal quarters.

 

The accompanying unaudited condensed consolidated financial statements of Luvu Brands, Inc. and all of its wholly-owned subsidiaries (collectively, the "Company" “we” or "Luvu Brands") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the three and nine months ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

 

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, 2017, the Company has an accumulated deficit of approximately $8,875,000 and a working capital deficit of approximately $2,077,000. This raises substantial doubt about our ability to continue as a going concern.

 

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations.  Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern.

 

These actions include an ongoing initiative to increase sales, gross profits and our gross profit margin. To that end, we continued to make improvements to our e-commerce sites during 2016. 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. At the end of fiscal 2016, we evaluated various options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2017, we purchased new equipment for installation during the second quarter of fiscal 2017. This equipment was delivered during the first week of January, 2017 and is now fully operational. These actions should yield higher sales at a lower cost of goods sold. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. We estimate that the operational and strategic growth plans we have identified will require approximately $200,000 of funding over the next twelve months, of which we anticipate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.  However, management cannot provide any assurances that the Company will be successful in accomplishing these plans.  The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

6


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiary, OneUp Innovations, 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, 2016 filed on September 27, 2016.

 

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

 

Use of Estimates

 

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

 

Revenue Recognition   

 

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

 

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

 

Cash and Cash Equivalents

 

For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less.

 

7


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

Allowance for Doubtful Accounts

 

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

 

The following is a summary of Accounts Receivable as of March 31, 2017 and June 30, 2016.

 

   March 31,
2017
  June 30,
2016
   (in thousands)
    
Accounts receivable  $666   $842 
Allowance for doubtful accounts   (9)   (24)
Allowance for discounts and returns   (18)   (24)
Total accounts receivable, net  $639   $794 

 

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, 2017 that exceeded the balance insured by the FDIC by $82,543.  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, 2017, we purchased 13% and 12% of total inventory purchases from two vendors, the largest of which was Tenga product purchases. As previously disclosed, we will no longer purchase and distribute Tenga products, effective with the third quarter of fiscal 2017.

 

During the fiscal year ended June 30, 2016, we purchased 21% and 15% of total inventory purchases from two vendors.

 

As of March 31, 2017 one of the Company’s customers (Amazon) represents 37% of the total accounts receivables compared to 32% as of June 2016.

 

Fair Value of Financial and Derivative Instruments

 

At March 31, 2017, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other debt.

 

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

 

8


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Advertising Costs

 

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $18,553 at March 31, 2017 and $19,946 at June 30, 2016. Advertising expense for the three months ended March 31, 2017 and 2016 was $94,574 and $89,800, respectively. Advertising expense for the nine months ended March 31, 2017 and 2016 was $300,242 and $270,698, respectively.

 

Research and Development

 

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $40,958 and $42,198 for the three months ended March 31, 2017 and 2016, respectively. Expenses for new product development totaled $131,699 and $120,591 for the nine months ended March 31, 2017 and 2016, respectively. Research and development costs are included in general and administrative expense.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated service lives for financial reporting purposes of 2-10 years.

 

9


 
 

 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

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, 2017.

 

Operating Leases

 

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment was effective August 1, 2014 and included a four-month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company agreed to make improvements to the facility totaling $123,505 within nine months of August 1, 2014. As of March 31, 2017, the Company has completed $78,080 of the leasehold improvements. In addition, the monthly rent on the facility decreased from the current rent of $33,139 to $29,415 per month, beginning on December 1, 2014. Beginning January 1, 2015, the monthly rent is on an escalating schedule with the final year of the lease at $35,123 per month. The rent expense under this lease for the nine months ended March 31, 2017 and 2016 was $264,359 and $264,359, respectively.

 

The Company also leases certain equipment under operating leases, as more fully described in Note 15 - Commitments and Contingencies.

 

Segment Information

 

We have identified three reportable sales channels:  Direct, Wholesale and Other.  Direct includes product sales through our five e-commerce sites and our single retail store. Wholesale includes Liberator, Jaxx and Avana branded products sold to distributors and retailers, distributed brands 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 and nine months ending March 31, 2017, sales to and through Amazon accounted for 30% and 30% of our net sales, respectively.

 

The following is a summary of sales results for the Direct, Wholesale, and Other channels (dollars in thousands).

             
   Three Months Ended
(unaudited)
  Nine Months Ended
(unaudited)
   March 31,
2017
  March 31,
2016
  March 31,
2017
  March 31,
2016
    
Net Sales:                    
Direct  $1,459   $1,290   $4,341   $3,853 
Wholesale   2,429    2,872    8,573    8,679 
Other   138    140    351    375 
Total Net Sales  $4,026   $4,302   $13,265   $12,907 
                     
Gross Margin:                    
Direct  $779   $625   $2,222   $1,843 
Wholesale   732    539    2,110    1,808 
Other   (163)   (127)   (466)   (375)
Total Gross Margin  $1,348   $1,037   $3,866   $3,276 

 

10


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

Recent Accounting Pronouncements

 

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

 

Net Income Per Share

 

Basic net income per common share was determined by dividing net income applicable to common stockholders by the weighted average common shares outstanding during the period, and diluted net income per share was determined by dividing net income applicable to common stockholders by the weighted average common shares outstanding during the period plus the effect of stock options using the treasury stock method.  As of March 31, 2017 and 2016, the common stock equivalents did not have any effect on net income per share.

 

   March 31,
   2017  2016
Common stock options – 2009 Plan   2,837,000    4,196,000 
Common stock options – 2015 Plan   4,225,000    2,700,000 
Convertible preferred stock   4,300,000    4,300,000 
Total   11,362,000    11,196,000 

 

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.

 

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.

 

11


 
 

 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

NOTE 3. STOCK-BASED COMPENSATION

 

Options

 

At March 31, 2017, the Company had the 2009 and 2015 Stock Option Plans (the “Plans”), which are shareholder-approved and under which 3,862,000 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, 2017, the number of shares available for issuance under the 2015 Plan was 775,000. There are no shares available for issuance under the 2009 Plan, other than the 2,837,000 stock options that have already been granted.

 

The following table summarizes the Company’s stock option activities during the nine months ended March 31, 2017:

 

   Number of Shares
Underlying
Outstanding
Options
  Weighted
Average
Remaining
Contractual
Life (Years)
  Weighted
Average
Exercise
Price
  Intrinsic
Value
Options outstanding as of June 30, 2016   6,870,000    3.0   $.04   $—   
Granted   1,925,000    4.7   $.03   $—   
Exercised   —      —     $—     $—   
Forfeited or expired   (1,733,000)   2.1   $.07   $—   
Options outstanding as of March 31, 2017   7,062,000    3.0   $.03   $—   
Options exercisable as of March 31, 2017   2,962,250    1.6   $.05   $—   

 

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 were1,925,000 stock options granted during the nine months ended March 31, 2017 and 3,700,000 stock options granted during the nine months ended March 31, 2016. The value assumptions related to options granted during the nine months ended March 31, 2017 and 2016, respectively, were as follows:

  

   Nine Months 
Ended March 31, 2017
  Nine Months 
Ended March 31, 2016
Exercise Price:  $.02 - $.04  $.01 - $.03
Volatility:  205% - 291%  259% - 320%
Risk Free Rate:  1.05% - 1.73%  1.23% - 1.60%
Vesting Period:  4 years  4 years
Forfeiture Rate:  0%  0%
Expected Life  4.1 years  4.1 years
Dividend Rate  0%  0%

 

 

12


 

 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

NOTE 3. STOCK-BASED COMPENSATION (Continued)

 

 

 The following table summarizes the weighted average characteristics of outstanding stock options as of

March 31, 2017:

 

    Outstanding Options   Exercisable Options
Exercise Prices   Number
of Shares
  Remaining
Life 
(Years)
  Weighted
Average 
Price
  Number of
Shares
  Weighted
Average
 Price
$     .02 to .04       4,625,000       4.1     $ .02       750,000     $.02
$     .05 to .09       2,437,000       0.9     $ .06       2,212,250     $.06
  Total stock options       7,062,000       3.0     $ .03       2,962,250     $.05
                                             

 

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, 2017 and 2016 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures.

 

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

 

 

   Three Months 
Ended March 31,
  Nine Months 
Ended March 31,
   2017  2016  2017  2016
   (in thousands)
Cost of Goods Sold  $1   $1   $3   $6 
Other Selling and Marketing   2    2    6    5 
General and Administrative   4    5    12    16 
Total Stock-based Compensation Expense $7   $8   $21   $27 

 

 

As of March 31, 2017, the Company’s total unrecognized compensation cost was $37,682 which will be recognized over the weighted average vesting period of three years.

 


13



 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

 

NOTE 4. IMPAIRMENT OF LONG-LIVED ASSETS

 

We follow Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, Property, Plant, and Equipment, regarding impairment of our other long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

 

An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of 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 March 31, 2017 or June 30, 2016.

 

NOTE 5. INVENTORIES, NET

 

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

 

   March 31, 2017  June 30, 2016
   (in thousands)
Raw materials  $734   $659 
Work in process   196    182 
Finished goods   781    663 
 Total inventories   1,711    1,504 
Allowance for inventory reserves   (90)   (60)
Total inventories, net of allowance  $1,621   $1,444 

 

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:

   March 31, 2017  June 30, 2016  Estimated
Useful Life
   (in thousands)   
Factory equipment  $2,415   $2,231   2-10 years
Computer equipment and software   1,049    1,049   5-7 years
Office equipment and furniture   167    167   5-7 years
Leasehold improvements   421    408   10 years
Subtotal   4,052    3,855    
Accumulated depreciation   (3,141)   (2,985)   
 Equipment and leasehold improvements, net  $911   $870    

 

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, 2017.

 

14


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

NOTE 7. OTHER ACCRUED LIABILITIES

 

Other accrued liabilities at March 31, 2017 and June 30, 2016:

 

   March 31, 2017  June 30, 2016
   (in thousands)
Accrued compensation  $256   $314 
Accrued expenses and interest   131    135 
Current portion of deferred rent payable   36    28 
 Other accrued liabilities  $423   $477 

 

.

NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY

 

Current and long-term debt at March 31, 2017 and June 30, 2016 consisted of the following:

 

    March 31, 2017   June 30, 2016
Current debt:   (in thousands)
Unsecured lines of credit (Note 14)   $ 18     $ 27  
Line of credit (Note 13)     661       737  
Short-term unsecured notes payable  (Note  9)     855       1,047  
Current portion of term note payable – shareholder (Note 11)     161       130  
Current portion of equipment notes payable (Note 15)     80       52  
Current portion of leases payable (Note 15)     43       57  
Credit card advance (net of discount) (Note 12)     170       231  
Notes payable – related party (Note 10)     116       116  
Total current debt     2,104       2,397  
Long-term debt:                
Leases payable (Note 15)     46       76  
Unsecured notes payable (Note 9)     200       200  
Equipment note payable (Note 15)     244       185  
Term note payable – shareholder (Note 11)     265       392  
 Total long-term debt   $ 755     $ 853  
                 

 

 

15


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

 

NOTE 9. UNSECURED NOTES PAYABLE 

 

Unsecured notes payable at March 31, 2017 and June 30, 2016 consisted of the following:

 

   March 31, 2017  June 30, 2016
   (in thousands)
Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing June 30, 2017. $72,951 of the proceeds from this note was used to retire the balance of the unsecured note issued on December 12, 2015. Subsequent to March 31, 2017, the balance on this note was repaid from the proceeds of another note for $300,000 (see Note 18 - Subsequent Events). Personally guaranteed by principal stockholder.  $87   $300 
Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing April 7 2017. $81,671 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note issued on September 1, 2015.   Personally guaranteed by principal stockholder.   —      247 
Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing February 23, 2018. $63,016 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note maturing on April 7, 2017 and the Company received additional net proceeds of $236,984 used for working capital purposes.  Personally guaranteed by principal stockholder.   268    —   
Unsecured note payable for $100,000 to an individual with interest at 20% payable monthly; principal originally due in full on October 31, 2014; extended to October 31, 2015. Subsequent to September 30, 2015, the due date on this note was extended by the holder to October 31, 2017 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder.   100    100 
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    100 
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 March 31, 2017, the due date on this note was extended by the holder to January 2, 2018.   300    300 
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, then further extended by the holder to May 1, 2017. Subsequent to May 1, 2017, the due date was extended by the note holder to May 1, 2019 with interest payable monthly and principal due on maturity. Personally guaranteed by principal stockholder.   200    200 
           
Total unsecured notes payable  $1,055   $1,247 
Less: current portion   (855)   (1,047)
Long-term unsecured notes payable  $200   $200 

 

 

 

16


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

 

 

NOTE 10. NOTES PAYABLE-RELATED PARTY

 

Related party notes payable at March 31, 2017 and June 30, 2016 consisted of the following:

 

   March 31, 2017  June 30, 2016
   (in thousands)
Unsecured note payable to an officer, with interest at 3.25%, due on demand  $40   $40 
Unsecured note payable to an officer, with interest at 3.25%, due on demand   76    76 
Total unsecured notes payable   116    116 
Less: current portion   (116)   (116)
Long-term unsecured notes payable  $—     $—   

 

NOTE 11. TERM NOTES PAYABLE - SHAREHOLDER

 

On September 5, 2014, the Company amended and restated its outstanding 3% Convertible Note in the original principal amount of $375,000 issued by the Company to Hope Capital, Inc. (“HCI”) on June 24, 2009, as amended (the “June 2009 Note”), and the 3% Convertible Note in the original principal amount of $250,000 issued by the Company to HCI on September 2, 2009, as amended (the “September 2009 Note”), the June 2009 Note and September 2009 Note collectively referred to as the “Original Notes”, to provide for a 3% unsecured promissory note in the principal amount of $700,000 (the “Note”) to HCI. The Note is due on or before August 31, 2019 and bears interest at the rate of 3% per annum. Principal and interest payments under the Note shall be made on a monthly basis, starting on October 1, 2014 and continuing on the first day of each month thereafter for 60 monthly payments. The first 12 payments are $9,405.60 each and increase 15% each year, with 12 payments of $16,450.45 during year five. In the event the Company fails to make a monthly payment under the Note or the Company is subject to a bankruptcy event (as defined under the Note), subject to the Company’s ability to cure such default, HCI may convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under the Note into shares of our common stock at a conversion price equal to $0.10 per share. Conversion is subject to HCI not being able to beneficially own more than 9.99% of our outstanding common stock upon any conversion, subject to waiver by HCI. The Company has the right to prepay the Note, in whole or in part, subject to notice to HCI, without penalty. As of March 31, 2017 the principal balance under this Note was $426,071

 

The principal payments required at maturity under the Company’s outstanding short term notes, secured line of credit, unsecured line of credit, credit cards loans, short term related party notes and term note payable at March 31, 2017 are as follows:

 

Fiscal Years Ending June 30, 

 (in thousands)

 2017 (three months)   $1,855 
 2018    356 
 2019    186 
 2020    49 
 Total   $2,446 

 

 

NOTE 12. CREDIT CARD ADVANCES

 

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 was secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan called for a repayment of $448,000, which included a one-time finance charge of $48,000, approximately ten months after the funding date. This loan was repaid in full on February 18, 2016 and was guaranteed by the Company and personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17). Power Up is controlled by Curt Kramer, who also controls HCI.

 

17


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

 

NOTE 12. CREDIT CARD ADVANCES (continued)

 

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 included a one-time finance charge of $19,000, approximately ten months after the funding date. This was accomplished by Power Up withholding a fixed amount each business day of $566.67 from OneUp’s credit card receipts until full repayment was made. This loan was repaid in full on July 29, 2016 and was guaranteed by the Company and personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17).

 

On February 22, 2016 the Company received another loan that calls for a repayment of $448,000, which included a one-time finance charge of $48,000, approximately ten months after the funding date. This loan was repaid in full on September 22, 2016 and was guaranteed by the Company and personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17).

 

On August 4, 2016, the Company borrowed an additional amount of $150,000 from Power Up. The loan calls for a repayment of $168,000, which includes a one-time finance charge of $18,000, approximately ten months after the funding date. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17).

 

On September 22, 2016 the Company borrowed an additional amount of $400,000 from Power Up. The loan calls for a repayment of $452,000, which includes a one-time finance charge of $52,000, approximately ten months after the funding date. The balance of the February 22, 2016 loan was deducted from this loan and the Company received net proceeds of approximately $270,000. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman (see Note 17).

 

As of March 31, 2017, the principle amount of the credit card advances totaled $169,380, net of a discount of $23,245.

 

NOTE 13. LINE OF CREDIT

 

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital.  The term of the agreement was one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility was secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement were charged interest at a rate of 2.5% over the lenders Index Rate.  In addition there was a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month.  

 

On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,200,000 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. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% (as of March 31, 2017, the interest rate was 7%) and the Monthly Service Fee was changed to .5% per month.

 

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 12).  On March 31, 2017, the balance owed under this line of credit was $660,868.  On March 31, 2017, we were current and in compliance with all terms and conditions of this line of credit.

 

Management believes cash flows generated from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may be required.

 

18


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

NOTE 14. UNSECURED LINES OF CREDIT

 

The Company has drawn a cash advance on one unsecured line of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit was $17,895 at March 31, 2017 and $27,188 at June 30, 2016.

 

NOTE 15. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amends the lease to expire on December 31, 2020. The lease amendment 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 nine months of August 1, 2014. As of March 31, 2017, the Company has completed $78,080 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, 2017 and 2015 was $264,359 and $264,359, respectively.

 

The Company also leased certain postage equipment under an operating lease.  The monthly lease was $104 per month and expired January 2017.

 

Future minimum lease payments under non-cancelable operating leases at March 31, 2017 are as follows:

 

Year ending June 30,  (in thousands)
 2017 (three months)   $97 
 2018    392 
 2019    403 
 2020    415 
 2021    211 
 Total minimum lease payments   $1,518 

 

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 6 - Equipment and Leasehold Improvements and include computers, software, furniture, and equipment. The capital leases have stated or imputed interest rates ranging from 7% to 21%.

 

The following is an analysis of the minimum future capital lease payments subsequent to March 31, 2017: 

 

Years ending June 30,  (in thousands)
2017 (three months)  $16 
2018   45 
2019   29 
2020   8 
Future Minimum Lease Payments  $98 
Less Amount Representing Interest   (9)
Present Value of Minimum Lease Payments   89 
Less Current Portion   (43)
Long-Term Obligations under Leases Payable  $46 

 

19


 
 

 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

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 $421,083. These assets are included in the fixed assets listed in Note 6 - Equipment and Leasehold Improvements and include production equipment. The equipment notes have stated or imputed interest rates ranging from 10.5% to 11.3%.

 

The following is an analysis of the minimum future equipment note payable payments subsequent to March 31, 2017: 

 

Year ending June 30,  (in thousands)
 2017 (three months)   $28 
 2018    111 
 2019    108 
 2020    97 
 2021    43 
 2022    6 
 Future Minimum Note Payable Payments   $393 
 Less Amount Representing Interest    (69)
 Present Value of Minimum Note Payable Payments    324 
 Less Current Portion    (80)
 Long-Term Obligations under Equipment Notes Payable   $244 

 

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.

 

20


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

 

NOTE 16. STOCKHOLDERS’ EQUITY

 

Common Stock- The Company’s authorized common stock was 175,000,000 shares at March 31, 2017 and June 30, 2016.  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, 2017, the Company had reserved the following shares of common stock for issuance:

    
   March 31, 2017
Shares of common stock reserved for issuance under the 2009 Stock Option Plan   2,837,000 
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   12,137,000 

 

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 17. 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 nine months ended March 31, 2017 was accrued by the Company at the prevailing prime rate (which is currently 3.75%) and totaled $1,591. The accrued interest on the note as of March 31, 2017 was $19,161. This note is due on demand and 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 nine months ended March 31, 2017 was accrued by the Company at the prevailing prime rate (which is currently 3.75%) and totaled $838. The accrued interest on the note as of March 31, 2017 was $4,140. This note is due on demand and 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 2, 2017; then extended to January 2, 2018 with the principle due on maturity (see Notes 9 and 18). Mr. Friedman personally guaranteed the repayment of the loan obligation.

 

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 13 – Line of Credit).  In addition, Luvu Brands has provided its corporate guarantees of the credit facility.  On March 31, 2017, the balance owed under this line of credit was $660,868.

 

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 9). Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

 

21


 
 

 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

NOTE 17. RELATED PARTY TRANSACTIONS (continued)

 

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. Prior to October 31, 2015, the note was extended to October 31, 2017 under the same terms (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, 2015; then extended to May 1, 2017, then extended to May 1, 2019 with the principle due on maturity (see Note 9 and Note 18). Mr. Friedman personally guaranteed the repayment of the loan obligation.

 

The loans from Power Up Lending Group, Ltd. (see Note 12) are guaranteed by the Company (including OneUp and Foam Labs) and are personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman. Power Up Lending Group, Ltd. is controlled by Curt Kramer, who also controls HCI. As last reported to us, HCI owns 7.5% of our common stock.

 

On April 11, 2016, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payment, principal and interest paid bi-weekly with the final payment due 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 after the repayment of the September 1, 2015 loan. This note was repaid in full on February 14, 2017 from the proceeds of the February 14, 2017 loan (described below). The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

 

On June 29, 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 June 30, 2017. The balance due on the $150,000 unsecured note payable due December 14, 2016 was paid in full and the Company received net proceeds of $227,049 after the repayment of the December 12, 2015 loan. At March 31, 2017, the principal balance of this note was $86,735. Subsequent to March 31, 2017, the balance on this loan was repaid from the net proceeds of a new $300,000 loan (see Note 18). The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

 

 

 

 

 

On February 14, 2017, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due February 23, 2018. The balance due on the $300,000 unsecured note payable due April 7, 2017 was paid in full and the Company received net proceeds of $236,984 after the repayment of the April 11, 2016 loan. At March 31, 2017, the principal balance of this note was $268,356. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

 

The Company has drawn a cash advance on one unsecured line of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit was $17,895 at March 31, 2017 and $27,188 at June 30, 2016 (see Note 14). The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

 

22


 
 

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 (UNAUDITED)

 

 

NOTE 17. RELATED PARTY TRANSACTIONS (continued)

 

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 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 an 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, 2017, the principal balance under the Note was $426,071.

 

NOTE 18. SUBSEQUENT EVENTS

 

Subsequent to March 31, 2017, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due April 20, 2018. A portion of the note proceeds were used to satisfy the balance due on the June 29, 2016 note payable and the remaining proceeds of $224,875 are for working capital purposes. This note payable is personally guaranteed by the principal stockholder.

 

Subsequent to March 31, 2017, the 20% unsecured note payable in the principal amount of $200,000, originally due May 1, 2017 was extended until May 1, 2019 under the same terms.

 

 

 

 

 

 

23


 
 

 

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, 2017

   

March 31, 2016

 
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold    

66.5

%    

75.9

%
Gross Margin     33.5 %     24.1 %
Selling, General and Administrative Expenses    

27.5

%    

25.0

%
Income (loss) from operations     6.0 %     (0.9) %

 

    Nine months Ended  
     (unaudited)  
   

March 31, 2017

   

March 31, 2016

 
Net Sales     100.0 %     100.0 %
Cost Of Goods Sold    

70.9

%    

74.6

%
Gross Margin     29.1 %     25.4 %
Selling, General and Administrative Expenses    

23.6

%    

24.0

%
Income from operations     5.5 %     1.4 %

 

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

             
  

 Three Months Ended

(unaudited)

(Dollars in thousands)  March 31,
2017
  March 31,
2016
Net Sales:            
Liberator  $1,912    47%  $2,275    53%
Jaxx / Avana   1,072    27%   637    15%
Distributed brands   750    19%   1,250    29%
Other   292    7%   140    3%
             Total Net Sales  $4,026    100%  $4,302    100%

 

             
  

 Nine months Ended

(unaudited)

(Dollars in thousands)  March 31,
2017
  March 31,
2016
Net Sales:            
Liberator  $5,956    45%  $6,488    50%
Jaxx / Avana   3,230    24%   2,193    17%
Distributed brands   3,346    25%   3,844    30%
Other   733    6%   382    3%
             Total Net Sales  $13,265    100%  $12,907    100%

 

 

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Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

Net sales. Sales for the three months ended March 31, 2017 (our third fiscal quarter) were approximately $4,026,000, a decrease of 6% from $4,302,000 recorded in the comparable prior year period.  The net sales decrease in the third quarter of fiscal 2017 was primarily due to a $510,000 net decrease in Tenga sales revenue, offset in part by an increase in sales of other Distributed brands and manufactured products, primarily Jaxx and Avana. Sales of Distributed brands (other than Tenga) increased 21% during the quarter from the comparable prior year period. Sales of Liberator branded products decreased during the quarter by 9% to approximately $2.1 million. Sales through the Direct channel in the third quarter of fiscal 2017 increased 13% from the same period in the prior year. The Direct sales channel consists of direct to consumer sales through our five e-Commerce sites and, to a lesser extent, our single retail store. Sales through the Wholesale channel decreased 15% during the three months ended March 31, 2017, primarily due to lower Tenga sales revenue, offset in part by higher sales of Jaxx and Avana products. The Wholesale channel includes sales of Liberator branded products to retailers, e-merchants (including Amazon and Brookstone and others), non-Liberator products sold to retailers and e-merchants, and private label items sold to other resellers. The Other channel revenue was essentially unchanged from the prior year third quarter. Revenue in the Other channel consists primarily of shipping and handling charges for shipments through the Direct channel.

 

Gross profit. 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 30% to approximately $1,348,000 for the three months ended March 31, 2017 from $1,037,000 in the comparable prior year period. Gross margin as a percentage of sales increased from 24.1% in the prior year period to 33.5% in the current year, primarily due to better labor utilization and production automation improvements that were put into production at the beginning of the third quarter. The Company purchased compress and roll pack equipment that was installed at the beginning of the third fiscal quarter and implemented with most of our high volume products during the third quarter. This new equipment is expected to further reduce labor costs and increase production capacity as additional manufactured products are packaged with this equipment.

 

Operating expenses. Total operating expenses for the three months ended March 31, 2017 were 27.5% of net sales, or approximately $1,108,000, compared to 25% of net sales, or approximately $1,075,000, for the same period in the prior year.  The primary reason for the increase was a $30,000 (or 5%) increase in General and administrative expense. This was due primarily to higher business insurance expense, and costs related to providing employee health benefits mandated by the Affordable Care Act.

 

Other income (expense). Other income (expense) during the third quarter increased from expense of approximately ($121,000) in fiscal 2016 to expense of approximately ($129,000) during the third quarter of fiscal 2017. The increase was primarily due to higher average borrowing balances and higher interest expense on those larger balances.

 

Nine months Ended March 31, 2017 Compared to Nine months Ended March 31, 2016

Net sales. Net sales for the nine months ended March 31, 2017 increased to a record $13,265,000 from the comparable prior year period by approximately $358,000, or 3%.  The increase in net sales was primarily due to higher sales in the Direct channel, offset in part by slightly lower sales through the Wholesale and Other channels. Net sales through the Direct channel increased by 13% during the nine months ended March 31, 2017, from the comparable year earlier period primarily due to higher sales of Liberator products and Distributed brands (other than Tenga) through Liberator.com. Net sales through the Wholesale channel (which consists principally of e-merchants, retailers and distributors) decreased by 1%, compared to the prior year. The slight decrease in sales through the Wholesale channel was due to lower sales of Tenga product offset by greater sales of Jaxx and Avana products to several large e-merchants, including Amazon and Brookstone.

 

Gross profit. 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, 2017 increased to $3,866,000 from $3,276,000 (an increase of approximately 18%) in the comparable prior year period. Gross profit as a percentage of net sales increased to 29.1% for the nine months ended March 31, 2017 from 25.4% in the comparable prior year period. This increase is a result of the shift in net sales to the higher margin Direct channel from the lower margin Wholesale channel, improved production efficiencies from the installation of the new production equipment at the beginning of the second and third quarters of fiscal 2017, and from lower sales of low margin Tenga products. As previously reported on a Form 8-K filed on January 20, 2017, the Company will concentrate on the manufacture and marketing of their own unique brands and will no longer distribute the male pleasure products and personal massagers from Tenga Co., Ltd., which were typically sold at significantly lower gross margins.

 

25


 
 

Operating expenses. Total operating expenses for the nine months ended March 31, 2017 were 23.6% of net sales, or $3,129,000, compared to 24% of net sales, or $3,094,000, for the same period in the prior year. General and administrative expense increased by 6.5% and was primarily the result of higher business insurance expense, and costs related to providing employee health benefits mandated by the Affordable Care Act. This increase was partially offset by a 9% decrease in other selling and marketing expense, primarily due to lower sales personnel costs.

 

Other income (expense). Other income (expense) increased from an expense of ($339,000) in fiscal 2016 to an expense of ($403,000) in fiscal 2017. 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,
(Dollars in thousands)  2017  2016
   (Unaudited)
Cash flow data:      
Cash provided by (used in) operating activities  $292   $(70)
Cash used in investing activities  $(61)  $(193)
Cash (used in) provided by financing activities  $(431)  $203 

    

As of March 31, 2017, our cash and cash equivalents totaled approximately $345,000, compared to $432,000 in cash and cash equivalents as of March 31, 2016.

 

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 approximately $292,000 in the nine months ended March 31, 2017 compared to approximately $70,000 net cash used in operating activities in the nine months ended March 31, 2016. In the current fiscal year, the major contributors to the cash provided by operations was the net income of $334,000 plus the decrease in accounts receivable of $151,000 and non-cash charge for depreciation of $157,000, offset in part by the increase in inventory of $207,000 and the decrease in accounts payable of $139,000.

 

26


 
 

Investing Activities

 

Cash used in investing activities in the nine months ended March 31, 2017 was $61,000 and related to the purchase and installation of new production equipment during the first, second and third quarters.

 

Financing Activities

 

Cash used in financing activities during the nine months ended March 31, 2017 of $431,000 was primarily attributable to the repayment of the credit card advance and short-term unsecured notes, offset by the proceeds from an unsecured note payable, proceeds from the credit card advance and the sale of common stock.

Cash provided by financing activities during the nine months ended March 31, 2016 of $203,000 was primarily attributable to the borrowing from the credit card advance, the proceeds from the issuance of an unsecured note payable, net borrowing under the line of credit and the sale of common stock, offset in part by the repayment of the credit card advance and the repayment of the unsecured notes payable.

 

Inflation

 

We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and transportation 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 realized a net profit of approximately $334,000 for the nine months ended March 31, 2017 and incurred a net loss of approximately $312,000 for the year ended June 30, 2016. As of March 31, 2017, we have an accumulated deficit of approximately $8,875,000 and a working capital deficit of approximately $2,077,000. This raises substantial doubt about our ability to continue as a going concern.

 

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon 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, at the end of fiscal 2016, we evaluated various options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2017 we purchased new equipment with a planned installation during the second quarter of fiscal 2017; this equipment was installed at the beginning of the third quarter. The conveyor sewing system for Jaxx and Avana products was expanded during October, 2016 and the roll pack equipment for use with the majority of our compressed products was delivered during the first week of January, 2017. These investments in equipment should continue to yield higher gross profit as a result of the lower cost of goods sold. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. Our product development team has also developed several new products that we expect to launch during the fourth quarter of fiscal 2017 and the first quarter of fiscal 2018. We estimate that the operational and strategic growth plans we have identified over the next 12 months will require approximately $200,000 of funding, which we anticipate 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.

 

27


 
 

 

Non-GAAP Financial Measures

 

Reconciliation of net income to Adjusted EBITDA income for the nine months ended March 31, 2017 and 2016: 

 

 (Dollars in thousands)  Nine months ended March 31,
   2017  2016
Net income (loss)  $334   $(157)
Less interest income   —      —   
Plus interest expense, net   402    339 
Plus depreciation and amortization expense   157    174 
Plus stock-based compensation   21    27 
Adjusted EBITDA income  $914   $383 

  

As used herein, Adjusted EBITDA income represents net income 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 (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 income of the Company or net cash provided by 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 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.

 

28


 
 

 

 

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

 

None.

 

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

 

29


 
 

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 12, 2017   By:   /s/ Louis S. Friedman
(Date)     Louis S. Friedman
     

President and Chief Executive Officer

(Principal Executive Officer)

       
       
May 12, 2017   By:   /s/ Ronald P. Scott
(Date)     Ronald P. Scott
     

Chief Financial Officer and Secretary

(Principal Financial & Accounting Officer)

       

 

 

 

 

 

 

30