UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) | |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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FOR THE QUARTERLY PERIOD ENDED
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from______ to ______
Commission File Number
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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| Name of each exchange on which registered |
None |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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| Emerging growth company |
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
As of May 15, 2022, there were
LUVU BRANDS, INC.
TABLE OF CONTENTS
Unless the context otherwise indicates, when used in this report, the terms the “Company,” “LUVU”, “we,” “us, “our” and similar terms refer to LUVU Brands, Inc. and our wholly owned subsidiaries, OneUp Innovations, Inc. (“OneUp”), and Foam Labs, Inc. (“Foam Labs”). Our corporate website is www.LuvuBrands.com. There we make available copies of Luvu Brands documents, news releases and our filings with the U.S. Securities and Exchange Commission including financial statements.
Unless specifically set forth to the contrary, the information that appears on our websites or our various social media platforms is not part of this report.
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| Table of Contents |
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This report may contain forward-looking statements, which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning the Company, the performance of the industry in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. You should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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| Table of Contents |
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUVU BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses |
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Total current assets |
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Equipment and leasehold improvements, net |
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Finance lease assets |
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Operating lease assets |
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Other assets |
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Total assets |
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Liabilities and stockholders’ equity: |
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Current liabilities: |
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Accounts payable |
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Current debt |
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Other accrued liabilities |
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Operating lease liability |
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Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt |
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Long-term operating lease liability |
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Total noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (See Note 15) |
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Stockholders’ equity: |
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Preferred stock, |
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Series A Convertible Preferred stock, |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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See accompanying notes to unaudited condensed consolidated financial statements.
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| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
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| Three Months Ended March 31, |
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Net Sales |
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Cost of goods sold |
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Gross profit |
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Operating expenses |
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Advertising and promotion |
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Other selling and marketing |
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General and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Income from operations |
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Other Income (Expense): |
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Gain on forgiveness of SBA loan |
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Interest expense and financing costs |
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Total Other Income (Expense) |
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Income before income taxes |
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Provision for income taxes |
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Net income |
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Net income per share: |
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Basic |
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Diluted |
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Shares used in computing net income per share: |
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Basic |
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Diluted |
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See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
| Table of Contents |
Luvu Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Nine Months ended March 31, 2022 and March 31, 2021 (unaudited)
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| Series A Preferred |
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| Additional |
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| Total |
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| Shares |
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| Amount |
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Balance, June 30, 2020 |
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Stock-based compensation expense |
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Stock option exercises |
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Net income for the nine months ended March 31, 2021 |
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Balance, March 31, 2021 (unaudited) |
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Balance, June 30, 2021 |
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| $ | 1,323 |
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Stock-based compensation expense |
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Stock option exercises |
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Net income for the nine months ended March 31, 2022 |
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Balance, March 31, 2022 (unaudited) |
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For the Three Months ended March 31, 2022 and March 31, 2021 (unaudited)
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| Additional |
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| Amount |
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Balance, December 31, 2020 (unaudited) |
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Stock-based compensation expense |
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Net income for the three months ended March 31, 2021 |
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Balance, March 31, 2021 (unaudited) |
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Balance, December 31, 2021 (unaudited) |
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Stock-based compensation expense |
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Stock option exercises |
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Net income for the three months ended March 31, 2022 |
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Balance, March 31, 2022 (unaudited) |
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See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
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OPERATING ACTIVITIES: |
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Net income |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Forgiveness of SBA Loan |
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Depreciation and amortization |
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Stock based compensation expense |
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Provision for bad debt |
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Amortization of operating lease asset |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other assets |
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Accounts payable |
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Accrued compensation |
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Accrued expenses and interest |
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Operating lease liability |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES: |
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Investment in equipment and leasehold improvements |
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Net cash used in investing activities |
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FINANCING ACTIVITIES: |
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Proceeds from unsecured notes payable |
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Repayment of unsecured notes payable |
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Proceeds from secured notes payable |
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Net cash provided by (repaid to) line of credit |
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Repayment of credit card advance |
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Repayments of secured notes payable |
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Repayment of unsecured line of credit |
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Proceeds from exercise of stock options |
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Payments on equipment notes |
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Principal payments on leases payable |
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Net cash used in financing activities |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Non cash item: |
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Purchases of equipment with equipment notes |
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Finance lease asset obligation in exchange for lease payable |
| $ |
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| $ |
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Accrued interest converted for exercise of options |
| $ |
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| $ |
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Operating lease asset obtained in exchange for operating lease liability |
| $ |
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| $ |
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Cash paid during the period for: |
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Interest |
| $ |
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Income taxes |
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See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Luvu Brands, Inc. (the “Company” or “Luvu”) was incorporated in the State of Florida on February 25, 1999. References to the Company in these notes include the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. (“OneUp”), and Foam Labs, Inc. (“Foam Labs”). All operations of the Company are currently conducted by OneUp.
The Company is an Atlanta, Georgia based designer, manufacturer and marketer of a portfolio of consumer lifestyle brands including: Liberator®, a brand category of iconic products for enhancing sexual performance; Avana® inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery and chronic pain; and Jaxx®, a diverse range of casual fashion daybeds, sofas and beanbags made from polyurethane foam and repurposed polyurethane foam trim. These products are sold through the Company’s websites, online mass merchants and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce our carbon footprint.
Sales are generated through internet and print advertisements and social marketing. We have a diversified customer base with only one customer accounting for
The accompanying unaudited condensed consolidated financial statements of the Company and all of its wholly-owned subsidiaries included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the nine months ended March 31, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2021 as filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2021 (the “2021 10-K”).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp and Foam Labs. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.
The accompanying consolidated condensed financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s 2021 10-K.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.
| 8 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
We record revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of our revenue is generated by fulfilling orders for the purchase of manufactured products and product purchased for resale to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which we are responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill our promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice.
Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. We have elected to exclude sales, use and similar taxes from the measurement of the transaction price. The impact of this policy election is insignificant, as it aligns with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer.
Deferred revenues
Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. Deferred revenues primarily relate to gift cards purchased, but not used, prior to the end of the fiscal period. Our total deferred revenue as of June 30, 2021 was $
Cost of Goods Sold
Cost of goods sold includes raw materials, labor, manufacturing overhead, and royalty expense.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
| 9 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and an additional allowance may be required.
The following is a summary of Accounts Receivable as of March 31, 2022 and June 30, 2021.
|
| March 31, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
|
|
| |||
|
| (in thousands) |
| |||||
Accounts receivable |
| $ |
|
| $ |
| ||
Allowance for doubtful accounts |
|
| ( | ) |
|
| ( | ) |
Allowance for discounts and returns |
|
| ( | ) |
|
| ( | ) |
Total accounts receivable, net |
| $ |
|
| $ |
| ||
Inventories and Inventory Reserves
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor, depreciation and overhead. The Company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or net realizable value may be adjusted in response to changing conditions.
Concentration of Credit Risk
The Company maintains its cash accounts with banks located in Georgia. The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
During the three and nine months ended March 31, 2022, we purchased
During the fiscal year ended June 30, 2021, we purchased
As of March 31, 2022, two of the Company’s customers represents
Fair Value of Financial Instruments
At March 31, 2022 and June 30, 2021, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, short-term debt, and other long-term debt.
The fair values of these financial instruments approximated their carrying values based on either their short maturity or current terms for similar instruments.
| 10 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company measures the fair value of its assets and liabilities under the guidance of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.
ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and
Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.
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 $
Research and Development
Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $
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
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.
| 11 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by Financial Accounting Standards Board (“FASB”) ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at March 31, 2022.
Operating Leases
On November 2, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months, beginning January 1, 2021. The new lease includes two months of rent abatement totaling $
Under ASC 842, which was adopted July 1, 2019, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company elected not to recognize leases with a term less than one year on its balance sheet. Operating lease right-of-use (ROU) assets and their corresponding lease liabilities are recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.
In accordance with the guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.) Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, the Company elected the practical expedient to not separate lease and non-lease components. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense. See Note 16 for details.
Under prior guidance ASC 840, rent expense and lease incentives from operating leases were recognized on a straight-line basis over the lease term. The difference between rent expense recognized and rental payments was recorded as deferred rent in the accompanying consolidated balance sheets.
| 12 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Segment Information
We have identified three reportable sales channels: Direct, Wholesale and Other. Direct includes product sales through our four e-commerce sites. Wholesale includes Liberator, Jaxx, and Avana branded products sold to distributors and retailers, purchased products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Other consists principally of shipping and handling fees and costs derived from our Direct business.
The following is a summary of sales results for the Direct, Wholesale, and Other channels.
|
| Three Months Ended March 31, 2022 |
|
| Three Months Ended March 31, 2021 |
|
| % Change |
| |||
|
| (in thousands) |
|
|
| |||||||
Net Sales by Channel: |
|
|
|
|
|
|
|
|
| |||
Direct |
| $ |
|
| $ |
|
|
| ( | )% | ||
Wholesale |
| $ |
|
| $ |
|
|
| % | |||
Other |
| $ |
|
| $ |
|
|
| % | |||
Total Net Sales |
| $ |
|
| $ |
|
|
| % | |||
|
| Three Months Ended March 31, 2022 |
|
| Margin % |
|
| Three Months Ended March 31, 2021 |
|
| Margin % |
|
| % Change |
| |||||
|
| (in thousands) |
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
| |||||
Gross Profit by Channel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Direct |
| $ |
|
|
| % |
| $ |
|
|
| % |
|
| ( | )% | ||||
Wholesale |
| $ |
|
|
| % |
| $ |
|
|
| % |
|
| % | |||||
Other |
| $ | ( | ) |
|
| - | % |
| $ | ( | ) |
|
| - | % |
|
| % | |
Total Gross Profit |
| $ |
|
|
| % |
| $ |
|
|
| % |
|
| % | |||||
|
| Nine Months Ended March 31, 2022 |
|
| Nine Months Ended March 31, 2021 |
|
| % Change |
| |||
|
| (in thousands) |
|
|
|
|
|
|
| |||
Net Sales by Channel: |
|
|
|
|
|
|
|
|
| |||
Direct |
| $ |
|
| $ |
|
|
| % | |||
Wholesale |
| $ |
|
| $ |
|
|
| % | |||
Other |
| $ |
|
| $ |
|
|
| % | |||
Total Net Sales |
| $ |
|
| $ |
|
|
| % | |||
|
| Nine Months Ended March 31, 2022 |
|
| Margin % |
|
| Nine Months Ended March 31, 2021 |
|
| Margin % |
|
| % Change |
| |||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
|
|
| ||||||||
Gross Profit by Channel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Direct |
| $ |
|
|
| % |
| $ |
|
|
| % |
|
| ( | )% | ||||
Wholesale |
| $ |
|
|
| % |
| $ |
|
|
| % |
|
| % | |||||
Other |
| $ | ( | ) |
| - | % |
| $ | ( | ) |
| - | % |
|
| ( | )% | ||
Total Gross Profit |
| $ |
|
|
| % |
| $ |
|
|
| % |
|
| % | |||||
| 13 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by FASB or other standard setting bodies that are adopted by the Company as of the specified effective date.
Recently adopted
In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted. We adopted ASU 2018-13 effective July 1, 2020. The impact of adoption of this standard on our condensed consolidated financial statements was not material.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods. ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company adopted the standard as of July 1, 2021. The impact of adoption of this standard on our condensed consolidated financial statements was not material.
All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
Net Income Per Share
In accordance with ASC 260, “Earnings Per Share”, basic net income per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period plus the effect of stock options using the treasury stock method. As of March 31, 2022 and 2021, the common stock equivalents did not have any effect on net income per share.
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Common stock options – 2015 Plan |
|
|
|
|
|
| ||
Convertible preferred stock |
|
|
|
|
|
| ||
Total |
|
|
|
|
|
| ||
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.
| 14 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Based Compensation
We account for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and restricted stock award at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period.
NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS
We follow FASB ASC 360, Property, Plant, and Equipment, regarding impairment of our other long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of a long-lived asset.
Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated. There was no impairment as of March 31, 2022 or June 30, 2021.
NOTE 4. INVENTORIES, NET
Inventories are stated at the lower of cost (which approximates first-in, first-out) or net realizable value. Net realizable value is defined as sales price less cost to dispose and a normal profit margin. Inventories consisted of the following:
|
| March 31, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
| |||||
|
| (in thousands) |
| |||||
Raw materials |
| $ |
|
| $ |
| ||
Work in process |
|
|
|
|
|
| ||
Finished goods |
|
|
|
|
|
| ||
Total inventories |
|
|
|
|
|
| ||
Allowance for inventory reserves |
|
| ( | ) |
|
| ( | ) |
Total inventories, net of allowance |
| $ |
|
| $ |
| ||
| 15 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 5. 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, 2022 |
|
| June 30, 2021 |
|
| Estimated Useful Life | |||
|
| (unaudited) |
|
| |||||||
|
| (in thousands) |
|
| |||||||
Factory equipment |
| $ |
|
| $ |
|
| ||||
Computer equipment and software |
|
|
|
|
|
|
| ||||
Office equipment and furniture |
|
|
|
|
| 205 |
|
| |||
Leasehold improvements |
|
|
|
|
|
|
| ||||
Project in process |
|
|
|
|
|
|
|
| |||
Subtotal |
|
|
|
|
|
|
|
| |||
Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
| |
Equipment and leasehold improvements, net |
| $ |
|
| $ |
|
|
| |||
Depreciation expense was $
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, 2022.
NOTE 6. OTHER ACCRUED LIABILITIES
Other accrued liabilities at March 31, 2022 and June 30, 2021:
|
| March 31, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
|
|
| |||
|
| (in thousands) |
| |||||
|
|
|
|
| ||||
Accrued compensation |
| $ |
|
| $ |
| ||
Accrued expenses and interest |
|
|
|
|
|
| ||
Other accrued liabilities |
| $ |
|
| $ | 694 |
| |
| 16 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 7. CURRENT AND LONG-TERM DEBT SUMMARY
Current and long-term debt at March 31, 2022 and June 30, 2021 consisted of the following:
|
| March 31, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
|
|
| |||
Current debt: |
| (in thousands) |
| |||||
Unsecured lines of credit (Note 12) |
| $ |
|
| $ |
| ||
Line of credit (Note 11) |
|
|
|
|
|
| ||
Short-term unsecured notes payable (Note 8) |
|
| - |
|
|
|
| |
Current portion of equipment notes payable (Note 15) |
|
|
|
|
|
| ||
Current portion secured notes payable (Note 13) |
|
| - |
|
|
|
| |
Current portion of leases payable |
|
|
|
|
|
| ||
Total current debt |
|
|
|
|
|
| ||
Long-term debt: |
|
|
|
|
|
|
|
|
Unsecured notes payable (Note 8) |
|
|
|
|
|
| ||
Leases payable |
|
|
|
|
|
| ||
Equipment notes payable (Note 15) |
|
|
|
|
|
| ||
Notes payable – related party (Note 9) |
|
|
|
|
|
| ||
Total long-term debt |
| $ |
|
| $ |
| ||
NOTE 8. UNSECURED NOTES PAYABLE
Unsecured notes payable at March 31, 2022 and June 30, 2021 consisted of the following:
|
| March 31, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
| |||||
Current unsecured notes payable: |
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
20% Unsecured note, interest only, due |
| $ |
|
| $ |
| ||
Total current unsecured notes payable |
|
|
|
|
|
| ||
Long-term unsecured notes payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
| |||
|
|
|
|
|
| |||
|
|
|
|
|
| |||
Total long-term unsecured notes payable |
|
|
|
|
|
| ||
Total unsecured notes payable |
| $ |
|
| $ |
| ||
(1) | Unsecured note payable for $100,000 to an individual with interest payable monthly at 20%, principal originally due in full on October 31, 2014, extended to October 31, 2019, then extended to October 31, 2021. This note was repaid in full on October 1, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on October 31, 2023. Personally guaranteed by principal stockholder. |
|
|
(2) | Unsecured note payable for $200,000 to an individual with interest payable monthly at 20%, principal originally due in full on May 1, 2013, extended to May 1, 2019, then extended to May 1, 2021. This note was repaid in full on April 30, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on May 1, 2023. Personally guaranteed by principal stockholder. |
|
|
(3) | Unsecured note payable for $100,000 to an individual with interest payable monthly at 20%, principal originally due in full on July 31, 2013, extended to July 31, 2019, then extended to July 31, 2021. This note was repaid in full on July 30, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on July 31, 2023. Personally guaranteed by principal stockholder. |
| 17 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 9. NOTES PAYABLE - RELATED PARTY
Related party notes payable at March 31, 2022 and June 30, 2021 consisted of the following:
|
| March 31, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
| |||||
|
| (in thousands) |
| |||||
|
|
|
|
| ||||
Unsecured note payable to an officer, with interest at 3.25%, due on July 1, 2023 |
| $ |
|
| $ |
| ||
Unsecured note payable to an officer, with interest at 3.25%, due on July 1, 2023 |
|
|
|
|
|
| ||
Total unsecured notes payable |
|
|
|
|
|
| ||
Less: current portion |
|
|
|
|
|
| ||
Long-term unsecured notes payable |
| $ |
|
| $ |
| ||
NOTE 10. CREDIT CARD ADVANCES
On August 28, 2019, the Company borrowed $
NOTE 11. LINE OF CREDIT
The Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs has entered into a credit facility with a finance company, Advance Financial Corporation dated May 24, 2011, as amended, to provide it with an asset based line of credit of up to $
The Company’s President and Chief Executive Officer (CEO), Louis Friedman, has personally guaranteed the repayment of the facility. In addition, the Company has provided its corporate guarantee of the credit facility (see Note 16). On March 31, 2022, the balance owed under this line of credit was $
Management believes cash flows generated from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may be required.
NOTE 12. UNSECURED LINE 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 Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at
NOTE 13. SECURED NOTE PAYABLE
On February 17, 2021, the Company entered into an agreement with Amazon, whereby Amazon agreed to loan OneUp a total of $
| 18 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 14. PPP LOAN
On April 26, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $
The PPP Loan is a forgivable loan to the extent proceeds are used to cover qualified documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement period (as amended) following loan funding.
On December 18, 2020, the Company was informed by Ameris Bank that the PPP Note had been forgiven by the U.S. Small Business Administration.
In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain Contingency. Accordingly, the Company derecognized the PPP Note liability of $
| 19 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 15. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under a non-cancelable operating lease which now expires February 28, 2027. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities for the lease renewal were recognized at the inception date which is November 2, 2020 based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate based on the information available. At March 31, 2022, the weighted average remaining lease term for the lease renewal is
Operating leases |
| Balance Sheet Classification |
| (in thousands) |
| |
Right-of-use assets |
| Operating lease right-of-use assets, net |
| $ |
| |
|
|
|
|
|
|
|
Current lease liabilities |
| Operating lease liabilities |
| $ |
| |
Non-current lease liabilities |
| Long-term operating lease liabilities |
|
|
| |
Total lease liabilities |
|
|
| $ |
| |
Maturities of lease liabilities at March 31, 2022 are as follows:
Payments |
| (in thousands) |
| |
2022 |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 and thereafter |
|
|
| |
Total undiscounted lease payments |
|
|
| |
Less: Present value discount |
|
| ( | ) |
Total lease liability balance |
| $ |
| |
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 $
The following is an analysis of the minimum future equipment note payable payments subsequent to March 31, 2022:
Years ending June 30, |
| (in thousands) |
| |
2022 |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
2027 |
|
|
| |
Future Minimum Note Payable Payments |
|
|
| |
Less Amount Representing Interest |
|
| ( | ) |
Present Value of Minimum Note Payable Payments |
|
|
| |
Less Current Portion |
|
| ( | ) |
Long-Term Obligations under Equipment Notes Payable |
| $ |
| |
| 20 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued)
Employment Agreements
The Company has entered into an employment agreement with Louis Friedman, President and CEO. The agreement provides for an annual base salary of $
Legal Proceedings
As of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to our Company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company has a subordinated note payable to the wife of the Company’s CEO and majority shareholder in the amount of $
On October 30, 2010, the Company’s CEO, loaned the Company $
The Company’s CEO has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 11 – Line of Credit). In addition, the Company has provided its corporate guarantees of the credit facility. On March 31, 2022, the balance owed under this line of credit was $
On July 20, 2011, the Company issued an unsecured promissory note to an individual for $
On October 31, 2013, the Company issued an unsecured promissory note to an individual for $
On May 1, 2012, an individual loaned the Company $
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
| 21 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 17. STOCKHOLDERS’ EQUITY
Options
At March 31, 2022, the Company had the 2015 Stock Option Plan (the “2015 Plan”), which is shareholder-approved and under which
Under the 2015 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2015 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of March 31, 2022, the number of shares available for issuance under the 2015 Plan was 1,000,000.
The following table summarizes the Company’s stock option activities during the nine months ended March 31, 2022:
|
| Number of Shares Underlying Outstanding Options |
|
| Weighted Average Remaining Contractual Life (Years) |
|
| Weighted Average Exercise Price |
|
| Intrinsic Value |
| ||||
Options outstanding as of June 30, 2021 |
|
|
|
|
|
|
| $ |
|
| $ |
| ||||
Granted |
|
|
|
|
|
|
| $ |
|
|
| - |
| |||
Exercised |
|
| ( | ) |
|
|
|
|
| $ |
|
|
| - |
| |
Forfeited or expired |
|
| ( | ) |
|
|
|
| $ |
|
|
| - |
| ||
Options outstanding as of March 31, 2022 |
|
|
|
|
|
|
| $ |
|
| $ |
| ||||
Options exercisable as of March 31, 2022 |
|
|
|
|
|
|
| $ |
|
| $ |
| ||||
The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $0.19 for such day.
There were
There were
|
| Nine Months Ended March 31, 2022 |
|
| Nine Months Ended March 31, 2021 |
| ||
Exercise Price: |
| $ |
|
| $ |
| ||
Volatility: |
|
| % |
| % | |||
Risk Free Rate: |
|
| % |
| % | |||
Vesting Period: |
|
|
|
| ||||
Forfeiture Rate: |
|
| % |
|
| % | ||
Expected Life |
|
|
|
| ||||
Dividend Rate |
|
| % |
|
| % | ||
| 22 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 17. STOCKHOLDERS’ EQUITY (continued)
The following table summarizes the weighted average characteristics of outstanding stock options as of March 31, 2022:
|
|
| Outstanding Options |
|
| Exercisable Options |
| |||||||||||||||
Exercise Prices |
|
| Number of Shares |
|
| Remaining Life (Years) |
|
| Weighted Average Price |
|
| Number of Shares |
|
| Weighted Average Price |
| ||||||
| $ | .028 to $.03 |
|
|
|
|
|
|
|
| $ |
|
|
|
|
| $ |
| |||||
| $ | .05 |
|
|
|
|
|
|
|
| $ |
|
|
| – |
|
| $ | – |
| |||
| $ | .13 to $.17 |
|
|
|
|
|
|
|
| $ |
|
|
|
|
| $ |
| |||||
| $ | .30 |
|
|
|
|
|
|
|
| $ |
|
|
| – |
|
|
| – |
| |||
Total stock options |
|
|
|
|
|
|
|
| $ |
|
|
|
|
| $ |
| ||||||
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, 2022 and 2021 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures.
The following table summarizes stock option-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans:
As of March 31, 2022, the Company’s total unrecognized compensation cost was $
|
| Three Months Ended March 31, |
|
| Nine Months Ended March 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| ($ in thousands) |
| |||||||||||||
Cost of Goods Sold |
| $ |
|
| $ |
|
|
| $ |
|
| $ |
|
| ||
Other Selling and Marketing |
|
|
|
|
|
|
|
|
|
|
|
| ||||
General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Stock-based Compensation Expense |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Warrants
As of March 31, 2022 and 2021, there were no warrants outstanding.
| 23 |
| Table of Contents |
LUVU BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 (UNAUDITED)
NOTE 17. STOCKHOLDERS’ EQUITY (continued)
Common Stock
The Company’s authorized common stock was
|
| March 31, |
| |
|
| 2022 |
| |
Shares of common stock reserved for issuance under the 2015 Plan |
|
|
| |
Shares of common stock issuable upon conversion of the Preferred Stock |
|
|
| |
Total shares of common stock equivalents |
|
|
| |
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
NOTE 18. – SUBSEQUENT EVENTS
On April 26, 2022, the Company appointed Alexander A. Sannikov Chief Financial Officer of the Company effective April 29, 2022. Ronald P. Scott resigned as Company’s Chief Financial Officer and member of the board of directors on April 29, 2022.
On April 26, 2022,
Subsequent to March 31, 2022,
| 24 |
| Table of Contents |
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, 2022 |
|
| March 31, 2021 |
| ||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
Cost Of Goods Sold |
|
| 73.4 | % |
|
| 71.8 | % |
Gross Margin |
|
| 26.6 | % |
|
| 28.2 | % |
Operating Expenses |
|
| 18.7 | % |
|
| 19.1 | % |
Income from operations |
|
| 7.9 | % |
|
| 9.1 | % |
|
| Nine Months Ended |
| |||||
|
| (unaudited) |
| |||||
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
Cost Of Goods Sold |
|
| 75.9 | % |
|
| 72.2 | % |
Gross Margin |
|
| 24.1 | % |
|
| 27.8 | % |
Operating Expenses |
|
| 18.7 | % |
|
| 19.4 | % |
Income from operations |
|
| 5.5 | % |
|
| 8.4 | % |
The following table represents the net sales and percentage of net sales by product type:
|
| Three Months Ended (unaudited) |
| |||||||||||||
(Dollars in thousands) |
| March 31, 2022 |
|
| March 31, 2021 |
| ||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liberator |
| $ | 3,257 |
|
|
| 48 | % |
| $ | 2,830 |
|
|
| 46 | % |
Jaxx |
|
| 1,906 |
|
|
| 28 | % |
|
| 1,476 |
|
|
| 24 | % |
Avana |
|
| 735 |
|
|
| 11 | % |
|
| 1,010 |
|
|
| 16 | % |
Products purchased for resale |
|
| 431 |
|
|
| 7 | % |
|
| 532 |
|
|
| 9 | % |
Other |
|
| 424 |
|
|
| 6 | % |
|
| 333 |
|
|
| 5 | % |
Total Net Sales |
| $ | 6,753 |
|
|
| 100 | % |
| $ | 6,181 |
|
|
| 100 | % |
|
| Nine Months Ended (unaudited) |
| |||||||||||||
(Dollars in thousands) |
| March 31, 2022 | March 31, 2021 |
| ||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
| ||||||
Liberator |
| $ | 9,254 |
|
|
| 46 | % |
| $ | 7,300 |
|
|
| 42 | % |
Jaxx |
|
| 6,132 |
|
|
| 30 | % |
|
| 4,903 |
|
|
| 29 | % |
Avana |
|
| 2,266 |
|
|
| 11 | % |
|
| 2,803 |
|
|
| 16 | % |
Products purchased for resale |
|
| 1,349 |
|
|
| 7 | % |
|
| 1,327 |
|
|
| 8 | % |
Other |
|
| 1,163 |
|
|
| 6 | % |
|
| 929 |
|
|
| 5 | % |
Total Net Sales |
| $ | 20,164 |
|
|
| 100 | % |
| $ | 17,262 |
|
|
| 100 | % |
| 25 |
| Table of Contents |
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Net sales. Sales for the three months ended March 31, 2022 were approximately $6,753,000, a 9% increase from the comparable prior year period. The major components of net sales, by product, are as follows:
| · | Liberator sales - Sales of Liberator branded products increased $427,000, or 15%, during the quarter from the comparable prior year period, due primarily to higher sales through the Company’s e-commerce site, Liberator.com, and higher sales through Amazon, partially offset by lower sales through brick-and-mortar retail customers. |
| · | Jaxx sales – Jaxx product sales increased 29% from the prior year third quarter to $1,906,000, primarily due to an expanded product offering and greater sales through e-merchants, including Amazon and Wayfair. |
| · | Avana sales – Net sales of Avana products decreased 27% during the quarter from the comparable prior year quarter to $735,000. Sales of this product line have been impacted by lower-priced competitive products in the marketplace, production constraints which resulted in longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair. |
| · | Products purchased for resale – This product category decreased by 19%, or $101,000, from the prior year third quarter due to lower sales of certain products through our e-commerce website, Liberator.com. |
Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs, royalties and depreciation. As a result of ongoing labor and raw material cost increases, the gross profit margin, as a percentage of sales, decreased to 27% from 28% in the prior year third quarter. Despite the increased net sales, gross profit increased only slightly to $1,794,000 from $1,746,000 in the prior year third quarter.
Operating expenses. Total operating expenses for the three months ended March 31, 2022 were approximately 19% of net sales, or approximately $1,261,000, compared to 19% of net sales, or approximately $1,183,000, for the same period in the prior year.
Other income (expense). Interest expense during the third quarter decreased slightly from approximately ($94,000) in fiscal 2021 to approximately ($81,000) during the third quarter of fiscal 2022. The decrease was primarily due to lower average borrowing balances and reduced interest expense on those lower balances.
Nine Months Ended March 31, 2022 Compared to Nine Months Ended March 31, 2021
Net sales. Sales for the nine months ended March 31, 2022 were approximately $20,164,000, a 17% increase from the $17,262,000 recorded in the comparable prior year period. The major components of net sales, by product, are as follows:
| · | Liberator sales - Sales of Liberator branded products increased $1,954,000, or 27%, during the nine months from the comparable prior year period, due primarily to greater sales through the company’s Liberator.com website and through Amazon.com. |
| · | Jaxx sales – Jaxx product sales increased $1,229,000 or 25%, from the prior year nine months, primarily due to an expanded product offering of outdoor and indoor products and greater sales through e-merchants, including Amazon and Wayfair. |
| · | Avana sales – Net sales of Avana products decreased $537,000, or (19%), to $2,266,000 during the nine months from the comparable prior year period. Sales of this product line have been impacted by lower-priced competitive products in the marketplace, production constraints which resulted in longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair; and |
| · | Products purchased for resale – This product category increased by $22,000, or 2%, from the prior year first nine months due to greater sales of certain products through our e-commerce website, Liberator.com. |
Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation. As a result of ongoing labor and raw material cost increases, the gross profit margin, as a percentage of sales, decreased to 24% from 28% in the prior year nine months. Despite the increased net sales, gross profit increased only 1% to $4,870,000 from $4,800,000 in the prior year nine months. The Company continues to raise product selling prices, but may not be able to raise prices quickly enough to offset ongoing raw material and labor cost increases.
| 26 |
| Table of Contents |
Operating expenses. Total operating expenses for the nine months ended March 31, 2022 were 19% of net sales, or approximately $3,344,000, compared to 19% of net sales, or approximately $3,763,000, for the same period in the prior year. Of the $419,000 increase, approximately $260,000 was due to higher rent and building occupancy costs, $50,000 was due to higher advertising expense, $70,000 was due to higher depreciation expense.
Other income (expense). Interest expense during the nine months decreased from expense of approximately ($289,000) in fiscal 2021 to expense of approximately ($261,000) during the nine months of fiscal 2022. The decrease was primarily due to lower average borrowing balances and reduced interest expense on those higher balances. The PPP Note forgiveness by the U.S. Small Business Administration resulted in Other Income of approximately $1,096,000 during fiscal 2021.
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) |
| 2022 |
|
| 2021 |
| ||
|
| (Unaudited) |
| |||||
Cash flow data: |
|
|
|
|
|
| ||
Cash provided by operating activities |
| $ | 263 |
|
| $ | 505 |
|
Cash used in investing activities |
| $ | (50 | ) |
| $ | (164 | ) |
Cash used in financing activities |
| $ | (255 | ) |
| $ | (223 | ) |
As of March 31, 2022, our cash and cash equivalents totaled $935,110, compared to $1,269,711 in cash and cash equivalents as of March 31, 2021.
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 $263,000 during the nine months ended March 31, 2022 compared to $505,000 net cash provided by operating activities in the nine months ended March 31, 2021. The primary components of the cash provided by operating activities in the current year is the net income of $846,000, offset in part by an increase in accounts receivable of $218,000, increase in inventory of $417,000, a decrease in accounts payable of $89,000 and an increase in accrued compensation of $90,000.
Investing Activities
Cash used in investing activities in the nine months ended March 31, 2022 was $50,000 and related to the purchase and installation of certain production equipment during the period.
| 27 |
| Table of Contents |
Financing Activities
Cash used by financing activities during the nine months ended March 31, 2022 of $255,000 was primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes.
Inflation
Since fiscal 2020 we continue to experience increases in various raw material costs and increases in labor and transportation costs. These cost pressures have not stabilized and we anticipate they will continue to increase throughout the remainder of fiscal 2022. These inflationary cost increases will harm our profit margins and profitability if we are unable to increase prices or improve productivity enough to offset the effects of such increases in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease.
Non-GAAP Financial Measures
Reconciliation of net income to Adjusted EBITDA for the nine months ended March 31, 2022 and 2021:
(Dollars in thousands) |
| Nine months ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net income |
| $ | 846 |
|
| $ | 2,263 |
|
Plus interest expense, net |
|
| 261 |
|
|
| 289 |
|
Plus depreciation and amortization expense |
|
| 227 |
|
|
| 157 |
|
Plus stock-based compensation |
|
| 14 |
|
|
| 12 |
|
Adjusted EBITDA |
| $ | 1,348 |
|
| $ | 2,721 |
|
As used herein, Adjusted EBITDA represents net income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation expense. We have excluded the non-cash expenses and stock-based compensation, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income 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.
Off-Balance Sheet Arrangements
We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of March 31, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical accounting policies
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, accounts receivable allowances and impairment of long-lived assets. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing in this report.
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Recent accounting pronouncements
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the unaudited condensed consolidated accompanying financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to the management, including CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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.
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ITEM 6. EXHIBITS
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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.
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| LUVU BRANDS, INC. |
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| (Registrant) |
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May 16, 2022 |
| By: | /s/ Louis S. Friedman |
(Date) |
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| Louis S. Friedman |
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| President and Chief Executive Officer (Principal Executive Officer) |
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May 16, 2022 |
| By: | /s/ Alexander A. Sannikov |
(Date) |
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| Alexander A. Sannikov |
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| Chief Financial Officer (Principal Financial Accounting Officer) |
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