Luvu Brands, Inc. - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended June 30, 2021

or

 

☐	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:   000-53314

 

  Luvu Brands, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

 

2745 Bankers Industrial Drive, Atlanta, Georgia	30360
(Address of principal executive offices)	(Zip Code)

 

Registrant’s telephone number, including area code: (770) 246-6400

 

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

 

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

 

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

 

  Common Stock, $.01 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ YES ☑ NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐  YES  ☑ NO

 

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     ☐  NO

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit such files)    ☑YES   ☐   NO

 

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

 

Large accelerated filer  ☐		Accelerated filer  ☐
Non-accelerated filer  ☑		Smaller reporting company  ☑
		Emerging growth company  ☐

 

 

If an emerging growth company, indicate by checkmark 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.  ☐

 

Indicated by check mark whether the registrant has filed a report on or attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐  YES  ☑  NO

 

The aggregate market value of the voting and non-voting common equity held by non−affiliates computed by reference to the price at which the common equity was last sold, or the average of the bid and asked price of such common equity, on December 31, 2020, the last trading day of the registrant’s most recently completed second fiscal quarter, was $5,237,829.

 

The number of shares of Common Stock, $.01 par value, outstanding as of the close of business on September 24, 2021 was 75,037,890. 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None.

 

 

Luvu Brands, Inc.

Index to Annual Report on Form 10-K

 

PART I
ITEM 1.	Business.	1
ITEM 1A.	Risk Factors.	10
ITEM 1B.	Unresolved Staff Comments.	10
ITEM 2.	Properties.	10
ITEM 3.	Legal Proceedings.	10
ITEM 4.	Mine Safety Disclosures.	10
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	11
ITEM 6.	Selected Financial Data.	11
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk.	17
ITEM 8.	Financial Statements and Supplementary Data.	18
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	19
ITEM 9A.	Controls and Procedures.	19
ITEM 9B.	Other Information.	20
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance.	21
ITEM 11.	Executive Compensation.	24
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	26
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence.	28
ITEM 14.	Principal Accounting Fees and Services.	28
PART IV
ITEM 15.	Exhibits, Financial Statement Schedules.	29
ITEM 16.	Form 10-K Summary.	30

 

 

 

 FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Annual Report”) for Luvu Brands, Inc. (“Luvu Brands” the “Company” “we” “our” or “us”) 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, presentation or filing in which they are made. Except to the extent required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this report include, but are not limited to:

 

●         Statements relating to our business strategy;

●         Statements relating to our business objectives; and

●         Expectations concerning future operations, profitability, liquidity and financial resources.

 

 These forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

PART I.

ITEM 1.        Business.

 

General

 

Luvu Brands, Inc. designs, manufactures and markets a portfolio of consumer lifestyle brands through the Company’s websites, online mass / drug merchants and specialty retail stores worldwide. Brands include: Liberator®, a brand category of iconic products for enhancing sensuality and intimacy; Avana®, products and inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery and chronic pain; and Jaxx®, a diverse range of casual fashion daybeds, sofas and beanbags made from virgin and re-purposed polyurethane foam. These products are sold through the Company’s websites, concept factory store, online mass merchants and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce our carbon footprint. In March, 2020, the Company began producing personal face masks under the Avana brand in response to the COVID-19 pandemic with shipments beginning in April. In April, 2020, the Company also began producing and selling medical isolation gowns. During the fourth quarter of fiscal 2020, we filled an emergency request from a local university hospital system for approximately 37,000 reusable isolation gowns.

 

Headquartered in Atlanta, Georgia, the Company occupies a 140,000 square foot vertically-integrated manufacturing facility and employs over 200 people.

 

The Company’s e-commerce websites include:  liberator.com, jaxxliving.com, and avanacomfort.com. 

 

Unless the context requires otherwise, all references in this report to the “Company,” “Luvu Brands,” “we,” “our,” and “us” refers to Luvu Brands, Inc. and its subsidiaries.

 

Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400.  

 

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, the “SEC”, 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 annual report.

 

COVID-19

In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and President Trump declared a national emergency concerning the pandemic. The COVID-19 pandemic has dramatically impacted the global health and economic environment, with millions of confirmed cases, business slowdowns and shutdowns and market volatility.  COVID-19 has caused, and is likely to continue to cause, significant economic disruption and is having widespread, rapidly evolving and unpredictable impacts on global society, financial markets and business practices. Various governments around the world have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home requirements, supply chain logistical changes, and closure of non-essential businesses. During the fourth quarter of fiscal 2020, the COVID-19 pandemic positively impacted our business through higher sales of PPE products and our other consumer brands. Although we have three separate brands with diverse channels of distribution, the continued COVID-19 pandemic may negatively impact our business operations and the operations of our suppliers and customers as a result of quarantines, facility closures and supply chain disruptions. There is substantial uncertainty regarding the duration and degree of COVID-19’s continued effects over time. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic or recurrence thereof, timing of continued development and deployment of an effective vaccine, governmental, business and individuals' actions in response to the pandemic and the impact on economic activity including the possibility of recession or financial market instability. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II, Item 7 of this Form 10-K) for further discussion regarding potential risks to our business from the COVID-19 pandemic.

 

Corporate History

 

The Company was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc., a Nevada corporation (“Old Liberator”).  Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”). On February 28, 2011, the Company name was changed from WES Consulting, Inc. to Liberator, Inc. Effective November 5, 2015, the Company changed its corporate name from Liberator, Inc. to Luvu Brands, Inc. to reflect its broader offering of wellness and lifestyle products designed for mass market channels.

Overview of our Facilities and Operations

 

Since inception we have used a vertically integrated business model, with manufacturing, distribution, product development and marketing performed in-house. We believe this allows us to create new products with reduced lead times at a lower cost while enabling us to quickly respond to market and customer demands for our existing products. For our wholesale accounts, being able to fulfill large orders with shorter turnaround times allows us to capture business during December and February when wholesale customers make just-in-time holiday purchases.

 

Our 140,000 square foot facility on eight acres is located in a suburb of metro Atlanta, Georgia and includes manufacturing and distribution, sales and marketing, product development, customer service and administrative staff. All of the Liberator, Jaxx and Avana branded products are designed, produced and marketed from our facility in Atlanta, Georgia where we currently employ 204 people. As of the date of this report, the Company employs 167 people in Production and Distribution, 2 people in Product Development, 14 people in Sales and Marketing, and 21 people in Administration. The Company’s employment levels may change seasonally based on current and anticipated order levels.

 

Our Atlanta-based manufacturing operation has two CAD controlled fabric cutters, one CAD controlled wood cutter, two CAD controlled foam contouring machines and two state-of-the-art conveyor unit production sewing systems. Our sewing equipment is also highly automated with conveyor-based lines leading into vacuum and roll compression packaging of finished products. We believe that our in-house manufacturing capabilities have enabled us to achieve greater efficiencies and cost savings, as well as strict control over the entire manufacturing cycle including raw material procurement, finished goods production and logistics optimization. In addition to providing us with greater production flexibility, our in-house manufacturing provides us with the opportunity to improve fulfillment response time, reduces the risk of out-of-stock situations, limits finished goods obsolescence and improves overall operating margins.

 

Because fabric cutting, sewing, foam contouring, assembly and vacuum packaging are performed in-house, we believe we can exercise greater control over product quality and respond faster to changing customer demands, which gives us a competitive advantage over companies that utilize only out-sourced sewing services. In addition to our in-house sewing capabilities, we outsource the sewing of certain high-volume products to a contract sewing facility in Mexico which, during fiscal 2021, produced approximately 20% of our sewn product requirements.

 

We source raw materials from multiple domestic and foreign suppliers and we have supply contracts in place to produce our specialty fabrics under specific quality control and performance standards with just-in-time deliveries. We also repurpose approximately 4,000 pounds of polyurethane foam trim each day, primarily for Jaxx beanbags, which gives us a cost and quality competitive advantage.

 

During fiscal 2021, we installed a second, larger roll pack and compression machine used for the majority of our foam-based products. We also acquired and installed a second foam contouring machine which doubled our foam cutting capacity. These actions resulted in increased throughput and lower production costs in these operations, which have been partially offset by increased raw material costs and wages.

 

All business activity of the Company is done through our wholly-owned subsidiary, OneUp Innovations, Inc. (“OneUp”). OneUp was organized in 2000 and began operations in 2002.

 

 

Business Strategy

 

Our goals are to achieve long-term growth and profitability and diversify our sales base. We plan to achieve these goals using the following strategies:

 

 

 

 

 

 

Products, Principal Markets and Methods of Distribution

 

Liberator Products

 

We developed a product category which we call “Liberator Bedroom Adventure Gear”®. Many of the pieces in this product line are designed to elevate, create motion and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting. Liberator Bedroom Adventure Gear combines functional design with sensuous textures that transform ordinary bedrooms into supportive landscapes for intimacy. Liberator products present angles, elevations, curves and motion that help people of all sizes, including those with back injuries and other medical conditions, find comfortable ways to connect intimately while assisting their stamina and performance.

 

 Liberator foam-based products (called “Liberator Shapes”) are manufactured in a variety of heights and widths to accommodate variations in the human body. They consist of differently shaped cushions and props that are available in an assortment of fabric colors to add to the visual excitement. Each of the product profiles of the Liberator Shapes is unique, designed to introduce positions to the sexual experience that were previously difficult to achieve or impossible to achieve with standard pillows or cushions. Liberator Shapes are manufactured from structured polyurethane foam, cut at various angles, platforms and profiles. The foam base is encased in a tight, fluid resistant polyester shell, helping the cushions to maintain their shape.  The original offering of the Liberator Wedge® and Ramp®, sold as a set, continue to be our best-selling items. Many of the Liberator Shapes are also available in our Black Label Series which includes blindfolds and snap-on Velcro cuffs.

 

We have also developed vacuum compressed large profile designs that are commonly referred to as “sex furniture”. Most of the sex furniture pieces are made from contoured urethane foam and covered in a variety of fabrics and colors. These items are marketed as the Esse®, Flip Stage®, Equus Wave® and the Prelude®.  Other larger designs include products based on shredded polyurethane foam encased in a wide range of fabric types and colors and sold under our Zeppelin® product offering. The Liberator larger profile designs can also be used as seating when not being used for relaxed interaction and creative intimacy. Newer designs are also flat packed with wooden bases and feet.

 

We conduct our wholesale business for Liberator sexual wellness products through four primary channels: (1) adult and female friendly retailers, flash sites and specialty boutiques, (2) e-tailers who sell our products through adult, mass market, drug and other sites offering sexual wellness products, (3) mail order catalogers, and (4) wholesale distributors of adult / sexual wellness products. These wholesale accounts have approximately 950 retail locations and/or websites in the United States and Canada. We have a growing number of retailers who have added a dedicated Liberator exhibition concept to their merchandising space. We also sell our products in Europe through a Netherlands-based third-party fulfillment service.

  

All products sold under the Liberator brand provided 42% and 37% of our revenues in each of our fiscal years ended June 30, 2021 and 2020, respectively.

 

Products Purchased for Resale

 

Beginning in 2006, we began importing high-quality pleasure objects from around the world. These resale products provided 8% of our revenues in each of our fiscal years ended June 30, 2021 and 2020.

 

Jaxx Casual Seating

 

The Company sells a line of contemporary casual indoor and outdoor seating under the Jaxx® brand. Jaxx beanbags are an offshoot from Liberator manufacturing as it provides additional revenue from repurposing our polyurethane foam trim into shredded beanbag fill. The Jaxx indoor beanbag collection includes an offering of adult and children size beanbags in a variety of fabrics, faux-furs and vinyl. The Jaxx product line also includes solid foam indoor furniture collections and outdoor furniture collections that use polystyrene bead filling. The Jaxx product line and accessory products are sold through the following wholesale channels: (1) e-tailers, (2) mass marketers, (3) hospitality, (4) interior designers, (5) schools, and (6) retail furniture stores. We also offer Jaxx private label and custom designs for large regional and national furniture chains. The Company also owns and manages a website under the URLs www.JaxxBeanBags.com and www.JaxxLiving.com for direct to consumer sales of Jaxx products. Jaxx products provided 29% and 26% of our revenues in each of our fiscal years ended June 30, 2021 and 2020, respectively.

 

The contemporary seating business is highly competitive. We believe we compete effectively on the basis of product quality, good design, customer service and good price to value. We believe that our primary competitive advantages are consumer recognition of the Jaxx brand, as well as distribution through the multiple sales channels where consumers prefer to purchase.

 

 

Avana® Products

 

The Company sells a unique collection of comfort products that aid in sleep, meditation, and relaxation under the Avana® brand. These products include a diverse offering of top-of-bed support cushions and props, many of which are assistive in relieving medical conditions associated with acid reflux, surgery recovery and chronic pain. The Avana product line is sold through e-merchants (including Amazon.com, Walmart.com, medical product distributors and specialty e-tailers), and through our website under the URL www.AvanaComfort.com. We believe that our Avana Medical products compete effectively on the basis of good design, through offering a wide-range of designer colors and fabrics and supported by thousands of 5-star product reviews.

 

Total Avana products provided 16% and 25% of our revenues in our fiscal years ended June 30, 2021 and 2020, respectively. Sales of all Avana products decreased 21% to approximately $3.7 million in fiscal 2021 from fiscal 2020, as the prior year included approximately $780,000 of Avana PPE products. Sales of PPE products in the current fiscal year 2021 were immaterial.

 

Sales and Distribution

 

Our sales personnel are organized by market channel and by customer type. In North America, we have sales personnel who routinely visit sexual wellness retailers to assist in product training, merchandising and stocking of selling areas. Through our in-house wholesale sales organization, we engage e-merchants and retailers directly and then either ship to them on a wholesale basis or provide fulfillment services by drop-shipping directly to their customers.

 

 In international markets, the Company has a direct sales model with a US-based salesperson. This salesperson is responsible for wholesale sales, marketing operations and customer service in Canada and the European Union and other international markets. For European customers, orders are filled from our third-party warehouse in the Netherlands or directly from our facilities in Atlanta. Total international sales represented approximately 4% of our total net sales in the years ended June 30, 2021 and 2020.

 

As is customary in the sexual wellness and casual furniture industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers or wholesale distributors. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of sexual wellness and casual furniture products, combined with our expertise in marketing and new product introduction.

 

Internet Websites

 

Since 2002, our Liberator website located at www.Liberator.com has allowed our customers to purchase our Liberator merchandise over the Internet.  We design and operate our websites using an in-house technical and creative staff.

 

Our www.Liberator.com website is intended to be an entertainment and educational venue where consumers can watch product demonstration videos, videos on sexual wellness topics and humorous videos on the many facets of human sexuality, including our blog at Liberator.com/unzipped.

Our www.Jaxxbeanbags.com website offers contemporary indoor and outdoor seating, bean bags and foam bags, headboards, and children’s furniture which is particularly appealing to the young adult and children’s market.

 

Our www.AvanaComfort.com website blends rest, relaxation and health products in an offering that appeals to a broad range of consumers.

   

 

Sources and Availability of Raw Materials

 

We obtain all of the raw materials and components used to produce our products from outside sources. A number of components, including certain fabrics and zippers, are sourced from suppliers who currently serve as our sole or primary source of supply for these components. We believe we can obtain these raw materials and components from other sources of supply, although we could experience some short-term disruption in our ability to fulfill orders in the event of an unexpected loss of supply from one of the primary suppliers. We utilize dual sourcing on targeted components when effective.

 

Recent changes in U.S. trade policy, including tariffs on certain goods imported into the United States from China, as well as increased transportation costs, have increased the costs of certain raw materials, parts or components used in our products. Such an increase may materially and adversely affect our sales and our business, as we may increase the selling prices of our products. If any increase in costs of goods cannot be passed on to our customers, our business and gross profit may be materially and adversely affected.

 

Major Customers

 

Our ten largest customers (excluding our own e-commerce sites and retail store) accounted for approximately 51% of net sales for the year ended June 30, 2021 and 49% of net sales for the year ended June 30, 2020. Only one customer accounted for more than 10% of total net sales (Amazon) with 29% of our net sales during the year ended June 30, 2021 and 34% of our sales for the year ended June 30, 2020. The loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.  

 

Competition

 

We compete with other manufacturers, distributors and marketers of wellness, lifestyle and casual seating, both within and outside the U.S. The sexual wellness and furniture industries are highly fragmented and competition for the sale of such products comes from many sources. These products are sold primarily through retailers (independent retailers, drug store chains, and mass market retailers), distributors, and direct sales channels (internet marketing and mail order companies).

 

For Liberator products, we believe that our primary competitive advantage is consumer recognition of our brand. Due to the strength of our brand, we have no direct competition for the majority of our Liberator branded products. In fact, many e-commerce websites refer to Liberator as a product category and not as a discrete product. And since we sell through multiple sales channels, we provide consumers with the ability to shop for Liberator intimacy products in an environment or website that they are most comfortable in. We also believe that we differentiate ourselves from conventional sex toys based on our utility of design and overall customer satisfaction as it relates to enhanced intimacy.

 

For Jaxx and Avana products, we believe our primary competitive advantage is good design and creative presentation, our offering of a wide range of designer colors and fabrics, good price to value, and our positive consumer reviews.

 

For our Products Purchased for Resale, competition among retailers of adult products and web-based marketers is high. Although we compete with retail and internet businesses and now mass and drug retailers that sell sexual wellness products including vibrators, pleasure objects, accessories and similar merchandise, we believe that this opens new channels of distribution for our Liberator products and that we are able to compete favorably as our Liberator products are unique, are couple-centric, and are assistive devices for couples with sexual limitations and issues.

 

For the Liberator e-commerce website, other competitive factors include the effectiveness of our customer mailing lists, maintaining natural search listing, advertising response rates, website design  aesthetics and functionality. The broad range of designs, color choice, fabrics and accessories that we offer helps to differentiate us and allows us to compete favorably against many other adult or sexual wellness websites. Liberator.com also competes against numerous mainstream websites, many of which have a greater volume of web traffic, greater financial strength and marketing resources.

 

 

We believe competition in our industries is based on, among other things, the ability to deliver the right product at the right time, product quality and safety, innovation, customer service and price. We believe we compete favorably with other companies because of our ability to provide a broad product offering for customers, our vertically integrated manufacturing operation which allows us to quickly respond to customer demand, our commitment to quality and safety, and our commitment to minimizing our environmental impact.

 

Our future competitive position will likely depend on, but not be limited to, the following:

 

●         the continued acceptance of our products by our customers and consumers;

  

●        our ability to protect our proprietary rights in our patent and trademarks and the continued validity of such intellectual property;

 

●         our ability to successfully expand our product offerings;

 

●         our ability to maintain adequate inventory levels to meet our customers’ demands;

 

●         our ability to continue to manufacture high quality products at competitive prices;

 

●         our ability to attract and retain qualified personnel;

 

●         the effect of any future governmental regulations on our products and business;

 

●         the continued growth of the global sexual wellness industry; and

 

●         our ability to respond to changes within the industry and consumer demand, financially and otherwise.

 

Government Regulation

 

We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations that regulate the promotion and sale of merchandise and the operation of warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

 

Intellectual Property

 

The Liberator trademark is registered with the United States Patent and Trademark office and with the registries of many foreign countries. In addition, we were issued approximately 20 other product name trademarks and trade names including: “Bedroom Adventure Gear”®, Ramp®, Wedge®, Stage®, Esse®, Zeppelin®, Hipster®, Wing®, Equus®, Jaxx®, Avana®, and Bonbon®. In August 2005, we were issued utility patent number US 6,925,669 “Support Cushion and System of Cushions.” We believe our trademarks and patent have significant value and we intend to continue to vigorously protect them against infringement.

 

 

Human Capital

            Workforce. As of June 30, 2021, we had 204 full-time employees (169 people in Production and Distribution, and 35 in sales, marketing and administration operations). Additional staffing is typically required to support the peak holiday period through Valentine’s Day.

            Our employees in the U.S. are not covered by collective bargaining agreements. We have never experienced a strike or work stoppage.

            Our employees are a key source of competitive advantage and their actions, guided by our Code of Conduct, are critical to the long-term success of our business. We recognize the importance of our employees to our business and believe our relationship with our employees is satisfactory.

 

 Seasonality

 

Our business is seasonal and, as a result, revenues will vary from quarter to quarter. During the past three years, we have realized an average of approximately 26% of our annual revenues in our second quarter, which includes Christmas, and an average of approximately 25% of our revenues in the third quarter, which includes Valentine’s Day.

 

Financial Information about Our Business Sales Channels

 

We conduct our business through two primary sales channels: Direct (consisting of our Internet websites) and Wholesale (consisting of our stocking reseller, drop-ship, contract manufacturing and distributor accounts). Net sales in the Other channel consists primarily of shipping and handling fees derived from our Direct business.  During our last two years, substantially all of our revenue was generated within North America, and all of our long-lived assets are located within the United States. The following is a summary of our revenues:

 

(Dollars in thousands)	Fiscal 2021	Fiscal 2020
Direct	$6,919	$4,887
Wholesale	15,618	13,164
Other	568	325
Total Net Sales	$23,105	$18,376

 

 

Direct

The following is a summary of our Direct business net sales and the percentage relationship to total revenues:

 

(Dollars in thousands)	Fiscal 2021	Fiscal 2020
Direct sales channel net sales	$6,919	$4,887
Direct net sales as a percentage of total revenues	30%	27%

 

 

Wholesale

 

The following is a summary of our net sales to Wholesale customers and the percentage relationship to total revenues:  

(Dollars in thousands)	Fiscal 2021	Fiscal 2020
Wholesale sales channel net sales	$15,618	$13,164
Wholesale net sales as a percentage of total revenues	68%	72%

 

As of June 30, 2021, the Company has over 950 active wholesale accounts, most of which are located in the United States.

 

 

Sales by Product Type

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

 

(Dollars in thousands)	Year Ended June 30, 2021		Year Ended June 30, 2020
Net sales:
Liberator	$9,806	42%	$6,852	37%
Jaxx	6,794	29%	4,787	26%
Avana	3,655	16%	4,616	25%
Products purchased for resale	1,771	8%	1,481	8%
Other	1,079	5%	640	3%
Total Net Sales	$23,105	100%	$18,376	100%

  

Liberator - Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market. Liberator products are sold to e-merchants, retailers and distributors as well as directly through our e-commerce site. Net sales of Liberator products increased 43% during the year ended June 30, 2021, from the comparable year earlier period. This increase is primarily related to higher sales through our e-commerce site, Liberator.com.

 

Jaxx - Jaxx products are contemporary seating products manufactured by us and sold under the Jaxx brand. Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site. Net sales of Jaxx products increased 42% during the year ended June 30, 2020, compared to the prior year. This increase is primarily due to greater sales of Jaxx indoor and outdoor products to (and through) Amazon and other e-merchants including Wayfair and Overstock and our own e-commerce site, JaxxLiving.com.

 

Avana - The Avana product line is a unique collection of comfort products that aid in sleep, and relaxation. In April, 2020, the Avana product line was expanded to include PPE products (personal protection masks and isolation gowns) and during the three months ended June 30, 2020, the Company sold approximately $780,000 of PPE products. During fiscal 2021, sales of PPE products totaled approximately $54,000. Avana products are sold through e-merchants, mail order catalogers and through our e-commerce site. Net sales of Avana products decreased 21% during the year ended June 30, 2021, compared to the prior year. Excluding the PPE sales during fiscal 2020, Avana sales decreased 5% during the year ended June 30, 2021, compared to the prior year. The decrease in sales was due primarily to supply chain shortages and increased competition from lower priced "knock off" products from China and other countries.

 

Products purchased for resale – Products purchased for resale are other pleasure products that we purchase from others at wholesale or distributor prices and resell through Liberator.com. Sales of these products increased 20% during the year ended June 30, 2021 from the prior year, due to higher sales through our e-commerce site, Liberator.com. Sales of these products is increasingly competitive and, as a result, the Company has elected to only offer a more curated selection of products that typically have a higher gross profit and compliment our Liberator products.

 

Other - Other products include sales from contract manufacturing and fulfillment services(shipping and handling fees). Net sales during the year ended June 30, 2021 increased 69% from the prior year.

 

Additional information

 

We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

 

Other information about the Company can be found on our website www.luvubrands.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.

 

 

ITEM 1A. Risk Factors.

 

Not applicable to a smaller reporting company.

 

ITEM 1B. Unresolved Staff Comments.

 

None.

 

ITEM 2. Properties.

 

We are headquartered in Atlanta, Georgia. Our mailing address is 2745 Bankers Industrial Drive, Atlanta, GA 30360. We lease a 140,000 square feet building on eight acres which we believe allows for expansion when needed. Our facility houses manufacturing, distribution and fulfillment, call center, in-house advertising and creative departments, product design group, and administrative offices. 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 $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee. The rent expense under this lease (and the prior lease) for the 12 months ended June 30, 2021 was $501,480. The rent expense under the prior lease for the 12 months ended June 30, 2020 was $352,479.

 

Our facilities are currently adequate for their intended purposes and are adequately maintained.

 

ITEM 3. Legal Proceedings.

 

As of the date of this annual 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.

 

ITEM 4. Mine Safety Disclosures.

 

None.

 

PART II.

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock is quoted on the OTC Markets Group on the OTCQB tier (“OTCQB”) under the symbol “LUVU.”    

 

Stockholders

 

As of September 25, 2021, we had 80 stockholders of record of our common stock. This amount does not reflect persons or entities that hold our securities in nominee or “street” name through various brokerage firms.

 

Dividend Policy

 

We have not paid dividends and we plan to retain all earnings generated by our operations, if any, for use in our business. We do not anticipate paying any cash dividends to our shareholders in the foreseeable future. The payment of future dividends on the common stock and the rate of such dividends, if any, and when not restricted, will be determined by our board of directors in light of our earnings, financial condition, capital requirements, and other factors. Additionally, under the terms of our credit facility, we are precluded from paying a dividend and we may in the future issue preferred stock and/or other securities that provides for preferences over holders of common stock in the payment of dividends.

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. Selected Financial Data.

 

Not applicable to smaller reporting company.

 

 

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Company during the fiscal years ended June 30, 2021 and 2020 and should be read in conjunction with our financial statements and accompanying notes thereto included elsewhere herein. Certain information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.”  Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements.  These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results may differ materially from the results discussed in this section because of various factors, including those set forth elsewhere herein. See “Forward-Looking Statements” included in this report.

 

Results of Operations

 

Overview

 

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

  

	Year Ended June 30, 2021	Year Ended June 30, 2020
Net sales	100%	100%
Cost of goods sold	73 %	70 %
Gross profit	27%	30%
Selling, General and Administrative Expenses	19 %	22 %
Operating income	8%	8%

 

Fiscal Year ended June 30, 2021 Compared to the Fiscal Year Ended June 30, 2020

 

Net sales. The net sales increase of 26% in fiscal 2021 from fiscal 2020 consists of a 43% increase in sales of Liberator products, a 42% increase in Jaxx products, a 20% increase in products purchased for resale, offset, in part, by a 21% decrease in sales of Avana products. Sales of Liberator products increased 43% from the prior year to approximately $9.8 million during fiscal 2021, and sales of Jaxx products increased 42% during fiscal 2021 to approximately $6.8 million. Sales of Avana products decreased 21% to $3.7 million during fiscal 2021. Avana sales in the prior year included approximately $780,000 of PPE (masks and isolation gowns) products; sales of these products in the current year totaled approximately $54,000. Sales of all products through the Wholesale sales channel in fiscal 2021 increased 19% from the prior year while the Direct sales channel increased approximately 42% from the prior year. The Wholesale sales channel includes branded products and resale products sold to brick-and-mortar retailers and e-merchants including, but not limited to, Amazon, Overstock and Wayfair. The Wholesale sales channel 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. The Direct sales channel consists of consumer sales through our three websites. In fiscal 2020 and prior years, the Direct sales channel included sales through our single retail store, which was closed in March, 2020 and has since been converted into a production area for sewn products. The increase in sales through the Direct channel was due to higher sales of products sold through our websites.

 

Gross profit. Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead and depreciation.  Total gross profit as a percentage of sales for the year ended June 30, 2021 decreased to 27% from 30% in the prior year, primarily due to higher labor and raw material costs. Gross profit dollars increased to $6,301,000 from $5,526,000 in the prior year and represented a 14% increase. Price increases that were implemented during the second half of fiscal 2021 partially offset the labor and material cost increases; further selling price increases are being implemented. The Company also continued transitioning the sewing of certain high-volume Jaxx and Avana products to a contract facility in Mexico which, during fiscal 2021, produced approximately 20% of our sewn products and reduced our total cost of production for those products.

 

 

Operating expenses. Excluding depreciation expense, total operating expenses for the year ended June 30, 2021 were 18% of net sales, or $4,239,000, compared to 21% of net sales, or $3,924,000, for the year ended June 30, 2020.  The 8% increase in operating expenses from the prior year was primarily due to higher advertising and promotion expenses which were incurred in an effort to increase sales, higher occupancy costs, and higher personnel related costs.

 

Other income (expense). Other income (expense) increased to income of $721,000 from expense of $(591,000) in the prior fiscal year, primarily due to lower interest expense and the PPP Note forgiveness by the U.S. Small Business Administration of approximately $1,096,000.

 

We had a net income from operations of $2,563,000, or $0.03 per diluted share, for the year ended June 30, 2021 compared with net income from operations of $860,000, or $0.01 per diluted share, for the year ended June 30, 2020.

 

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, the COVID-19 pandemic, 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 raw material costs increases, labor cost increases resulting from the current labor shortage, 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

 

	Year ended
The following table summarizes our cash flows:	June 30,
	2021	2020
	(in thousands)
Cash flow data from continuing operations:
Cash provided by operating activities	$540	$367
Cash used in investing activities	$(210)	$(227)
Cash (used in) provided by financing activities	$(505)	$363

    

As of June 30, 2021, our cash and cash equivalents totaled $976,794 compared to $1,152,091 in cash and cash equivalents as of June 30, 2020.

 

Operating Activities

 

Net cash provided by operating activities primarily consists of the net income adjusted for certain non-cash items, including depreciation, stock-based compensation, PPP loan forgiveness, and the effect of changes in operating assets and liabilities. Net cash provided by operating activities increased from the prior year due to the net income from operations and an increase in accounts payable offset, in part, by an increase in inventory and prepaid expenses and other assets.

 

 

Investing Activities

 

Cash used in investing activities in the year ended June 30, 2021 was primarily for software development work, purchase of production and computer equipment and in the year ended June 30, 2020 was primarily for software development work, purchase of production equipment, leasehold improvements and computer equipment.

 

Financing Activities

 

Cash used in financing activities in the year ended June 30, 2021 was primarily due to repayment of secured and unsecured notes payable and equipment notes payable offset in part by borrowings through secured and unsecured notes payable.

 

Cash provided by financing activities in the year ended June 30, 2020 was primarily due to the receipt of the PPP loan, proceeds from unsecured and secured notes payable, borrowing from the credit card advance and other credit facilities offset, in part, by repayment of the unsecured notes payable, the secured notes payable and the credit card advance.

 

 

Inflation

 

During fiscal 2020 and 2021, we experienced increases in various raw material costs and increases in labor costs. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2022, although there is no assurance this will occur. Inflation can harm our margins and profitability if we are unable to increase prices or improve productivity enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease. 

 

Capital Resources

 

We expect total capital expenditures for fiscal 2022 to be less than $150,000 and to be funded by equipment loans and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit with Advance Financial Corporation. This includes capital expenditures in support of our normal operations.

 

If our business plans and cost estimates are inaccurate and our operations require additional cash or if we deviate from our current plans, we could be required to seek additional debt financing for particular projects or for ongoing operational needs.  This indebtedness could harm our business if we are unable to obtain additional financing on reasonable terms.  In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business.  If we do not comply with such covenants, our lenders could accelerate repayment of our debt or restrict our access to further borrowings, which in turn could restrict our operating flexibility and endanger our ability to continue operations.

 

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 June 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

We have entered into operating leases primarily for certain equipment and our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Future minimum lease payments under our operating leases as of June 30, 2021 are detailed in the section entitled “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements.

 

 

Effect of Recently Issued Accounting Standards and Estimates

We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our consolidated financial position, results of operations, or cash flows.

 

Application of Critical Accounting Policies and Estimates

 

Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with GAAP. Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below.  

 

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. 

 

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.

 

Inventories

 

We value inventory at the lower of cost or net realizable value on an item-by-item basis and establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the net realizable value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or net realizable value, management considers such factors as the amount of inventory on-hand, the estimated time required to sell such inventory, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations.   Finished goods and goods in process include a provision for manufacturing overhead, including depreciation.  

 

Accounting for 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.

 

Impairment of Long-Lived Assets

 

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

 

In fiscal year 2020 and 2021, we did generate positive cash flows from operations. However, if our long-term future results do not continue to yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

 

Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.

 

Non-GAAP Financial Measures

 

Reconciliation of net income to Adjusted EBITDA for the years ended June 30, 2021 and 2020: 

 

	Year ended June 30,
	2021	2020
	(in thousands)
Net income	$2,563	$860
Plus interest expense and financing costs	375	590
Plus depreciation and amortization expense	220	151
Plus stock-based compensation expense	15	21
Adjusted EBITDA	$3,173	$1,622

 

 

As used herein, Adjusted EBITDA represents net income before interest income, interest expense and financing costs, depreciation, and stock-based compensation expense. We have excluded the non-cash expenses and stock-based compensation expense 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 as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for stock-based compensation expense and loss on disposal of assets.

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

  Not applicable for a smaller reporting company.

 

 

ITEM 8. Financial Statements and Supplementary Data.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

	Page
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of June 30, 2021 and 2020	F-2
Consolidated Statements of Operations for the years ended June 30, 2021 and 2020	F-3
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended June 30, 2021 and June 30, 2020	F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2021 and 2020	F-5
Notes to Consolidated Financial Statements	F-6

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Luvu Brands, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Luvu Brands, Inc. (the Company) as of June 30, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended June 30, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of inventories and inventory reserves

As described in Notes 2 and 4 to the consolidated financial statements, the Company has inventories, net totaled to approximately $3.39 million as of June 30, 2021. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. The Company establishes reserves for excess and obsolete inventory for each accounting period and records any potential adjustments needed for the reserves.

Auditing management’s estimates of the net realizable value of inventories, including inventory reserves was highly judgmental due to the degree of subjectivity involved in assessing the inventory reserves which are based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory.

To test the estimates for the net realizable value of inventories, including inventory reserves, we performed audit procedures that included, among others, evaluating the reasonableness of the inputs used in management’s inventory reserve calculation and analyzing the reserve calculations to determine whether management identified any evidence of slow-moving inventory or any obsolescence due to existing and potential changes in marketability which may impact the reserves.

/s/ Liggett & Webb, P.A.

We have served as the Company’s auditor since 2012.

Boynton Beach, Florida

September 28, 2021

 

 

Luvu Brands, Inc. and Subsidiaries

Consolidated Balance Sheets

As of June 30, 2021 and 2020

 

	2021	2020
Assets:	(in thousands, except share data)
Current assets:
Cash and cash equivalents	$977	$1,152
Accounts receivable, net	1,134	1,135
Inventories, net	3,391	1,985
Prepaid expenses	145	55
Total current assets	5,647	4,327
Equipment, property and leasehold improvements, net	1,934	938
Finance lease assets	27	—
Operating lease assets	2,554	165
Other assets	84	17
Total assets	$10,246	$5,447
Liabilities and stockholders’ equity (deficit):
Current liabilities:
Accounts payable	$2,669	$2,435
Current debt	1,599	2,007
Current portion of PPP loan	—	482
Other accrued liabilities	694	623
Operating lease liability	250	199
Total current liabilities	5,212	5,746
Noncurrent liabilities:
Long-term debt	1,288	361
PPP loan	—	614
Long-term operating lease liability	2,423	—
Total noncurrent liabilities	3,711	975
Total liabilities	8,923	6,721
Commitments and contingencies (See Note 15)	—	—
Stockholders’ equity (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 as of June 30, 2021 and 2020	—	—
Common stock, $0.01 par value, 175,000,000 shares authorized, 75,037,890 and 73,452,596 shares issued and outstanding as of June 30, 2021 and 2020, respectively	750	735
Additional paid-in capital	6,166	6,147
Accumulated deficit	(5,593 )	(8,156 )
Total stockholders’ equity (deficit)	1,323	(1,274 )
Total liabilities and stockholders’ equity (deficit)	$10,246	$5,447

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

Luvu Brands, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended June 30, 2021 and 2020

 

	2021	2020
	(in thousands, except share data)
Net Sales	$23,105	$18,376
Cost of goods sold	16,804	12,850
Gross profit	6,301	5,526
Operating expenses:
Advertising and promotion	502	390
Other selling and marketing	1,043	1,167
General and administrative	2,694	2,367
Depreciation	220	151
Total operating expenses	4,459	4,075
Operating income	1,842	1,451
Other income (expense):
Gain on forgiveness of PPP loan	1,096	—
Interest expense and financing costs	(375)	(590)
Loss on disposal of fixed assets	—	(1 )
Total other income (expense)	721	(591 )
Income from operations before income taxes	2,563	860
Provision for income taxes	—	—
Net income	$2,563	$860
Net income per share:
Basic	$0.03	$0.01
Diluted	$0.03	$0.01
Shares used in calculation of net income per share:
Basic	74,296,689	73,452,596
Diluted	75,494,948	75,256,596

 

 

 

 

Luvu Brands, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

For the years ended June 30, 2020 and June 30, 2021

 

	Series A Preferred				Additional		Total
	Stock		Common Stock		Paid-in	Accumulated	Stockholders’
	Shares	Amount	Shares	Amount	Capital	Deficit	Equity (Deficit)
	(in thousands, except share data)
Balance, June 30, 2019	4,300,000	$—	73,452,596	$735	$6,126	$(9,016)	$(2,155)
Stock-based compensation expense	—	—	—	—	21	—	21
Net income	—	—	—	—	—	860	860
Ending balance, June 30, 2020	4,300,000	—	73,452,596	735	6,147	(8,156)	(1,274)
Stock-based compensation expense	—	—	—	—	15	—	15
Stock option exercises	—	—	1,585,294	15	4	—	19
Net income	—	—	—	—	—	2,563	2,563
Ending balance, June 30, 2021	4,300,000	$—	75,037,890	$750	$6,166	$(5,593)	$1,323

 

 

 

 

 

Luvu Brands, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2021 and 2020

 

	2021	2020
	(in thousands)
Net income	$2,563	$860
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on forgiveness of PPP Loan	(1,096)	—
Depreciation and amortization	220	151
Stock-based compensation expense	15	21
Provision for bad debt	1	(2)
Provision for inventory reserve	32	60
Loss on disposal of fixed assets	—	1
Amortization of operating lease asset	295	284
Change in operating assets and liabilities:
Accounts receivable	1	(304)
Inventory	(1,438)	(293)
Prepaid expenses and other assets	(158)	(7)
Accounts payable	234	(126)
Accrued expenses and interest	40	(33)
Operating lease liability	(209)	(346)
Accrued payroll and related	40	101
Net cash provided by operating activities	540	367
INVESTING ACTIVITIES:
Investment in equipment, software development and leasehold improvements	(210 )	(227 )
Net cash used in investing activities	(210)	(227)
FINANCING ACTIVITIES:
Borrowing (repayment) under revolving line of credit	78	52
Borrowing (repayment) of unsecured line of credit	(11)	22
Proceeds from credit card advance	—	450
Repayment of credit card advance	(56)	(574)
Borrowings under secured note payable	200	233
Borrowings under PPP Loan	—	1,096
Repayments under secured note payable	(239)	(491)
Proceeds from unsecured notes payable	200	600
Repayment of unsecured notes payable	(489)	(834)
Repayment of term note – shareholder	—	(49)
Payments on equipment notes	(189)	(134)
Proceeds from exercise of stock options	9	—
Principal payments on capital leases	(8 )	(8 )
Net cash (used in) provided by financing activities	(505 )	363
Net (decrease) increase in cash and cash equivalents	(175)	503
Cash and cash equivalents at beginning of year	1,152	649
Cash and cash equivalents at end of year	$977	1,152
Supplemental Disclosure of Cash Flow Information:
Non cash items:
Purchases of equipment with equipment notes	$998	$72
Finance lease asset obligation in exchange for lease payable	$35	$—
Accrued interest converted for exercise of options	$10	$—
Operating lease asset obtained in exchange for operating lease liability	$2,684	$—
Cash paid during the year for:
Interest	$371	$584
Income taxes	$—	$—

Luvu Brands, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the years ended June 30, 2021 and 2020

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 Innovations, Inc.

 

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.  We have a diversified customer base with only one customer accounting for 10% or more of consolidated net sales in the current and prior fiscal year and no particular concentration of credit risk in one economic sector.  Foreign operations and foreign net sales are not material. Our business is seasonal and as a result we typically experience higher sales in our second and third fiscal quarters.

 

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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

   

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 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 and June 30, 2020 was $16,965 and $14,898, respectively, and was included in “Other accrued liabilities” on our consolidated balance sheets.

 

Cost of Goods Sold

 

Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense.

 

Shipping and Handling Costs

 

We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold.

 

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.

 

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 

 

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 June 30, 2021 and June 30, 2020.

 

	June 30,2021	June 30,2020
	(in thousands)
Accounts receivable	$1,189	$1,135
Allowance for doubtful accounts	(1)	-
Allowance for discounts and returns	(54)	-
Total accounts receivable, net	$1,134	$1,135

 

Inventories and Inventory Reserves

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

Concentration of Credit Risk

 

The Company maintains its cash accounts with banks located in Georgia. The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank. The Company had cash balances on deposit at June 30, 2021 and 2020 that exceeded the balance insured by the FDIC by $807,766 and $960,030, respectively. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

 

During 2021, we purchased 34% of total inventory purchases from one vendor.

 

During 2020, we purchased 33% of total inventory purchases from one vendor.

 

As of June 30, 2021 , two of the Company’s customers represent 40% and 14% of the total accounts receivables, respectively. As of June 30, 2020, three of the Company’s customers represent 38%, 16% and 16% of the total accounts receivable, respectively. Sales to (and through) Amazon accounted for 29% and 34% of our net sales during each of the years ended June 30, 2021 and June 30, 2020, respectively.

 

 

Fair Value of Financial Instruments

 

At June 30, 2021 and 2020, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, short-term debt, and other long-term debt.

 

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

 

The Company measures the fair value of its assets and liabilities under the guidance of 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:

 

 

 

 

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

 

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

 

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

 

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

 

Advertising Costs

 

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $5,000 at June 30, 2021 and $5,000 at June 30, 2020. Advertising expense for the years ended June 30, 2021 and 2020 was $501,711 and $390,108, respectively.

  

 

Research and Development

 

Research and development expenses for new products are expensed as they are incurred.  Expenses for new product development (included in general and administrative expense) totaled $109,024 for the year ended June 30, 2021 and $111,148 for the year ended June 30, 2020.

 

Property and Equipment

 

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

 

Expenditures for major renewals and betterments which 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.

 

Operating Leases

 

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amended the lease to expire on December 31, 2020. The rent expense under this lease for the year ended June 30, 2020 was $352,479.

 

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 $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee. The rent expense for the year ended June 30, 2021 (under the previous lease and the new lease) was $501,480.

 

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. 

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.

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

    

 

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 five e-commerce sites and our single retail store. Wholesale includes Liberator, Jaxx, and Avana branded products sold to distributors and retailers, purchased products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Other consists principally of shipping and handling fees and costs derived from our Direct business and fulfillment service fees.

 

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

 

	Year Ended June 30, 2021	Year Ended June 30, 2020	% change
Net Sales by Channel:	(in thousands)
Direct	$6,919	$4,887	42%
Wholesale	$15,618	$13,164	19%
Other	$568	$325	75%
Total Net Sales	$23,105	$18,376	26%

 

	Year Ended	Year Ended	Margin	%
	June 30, 2021	June 30, 2020	%	Change
	(in thousands)	(in thousands)
Gross Profit by Channel:
Direct	$3,329	$2,392	49%	39%
Wholesale	$4,216	$3,977	30%	6%
Other	$(1,244)	$(843)	(259)%	(48)%
Total Gross Profit	$6,301	$5,526	30%	14%

 

Recent accounting pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date.

 

Adopted during the year ended June 30, 2021

Fair Value Measurement

In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new standard eliminates, adds and modifies certain disclosure requirements for fair value measurement as part of the FASB’s disclosure framework project. Under the new standard, the amount and reason for a transfer between Level 1 and Level 2 of the fair value hierarchy are no longer required to be disclosed, but public companies are required to disclose a range and weighted average of significant unobservable inputs for Level 3 fair value measurements. The Company adopted the new standard on July 1, 2020; however, it did not have a significant impact on the Company’s financial statements.

 

Collaborative Arrangements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer. The new standard also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The guidance amends Topic 808 to refer to the unit-of-account guidance in Topic 606 and requires it to be used only when assessing whether a transaction is in the scope of Topic 606. The Company adopted the new standard on July 1, 2020; however, it did not have a significant impact on the Company’s financial statements.

Adopted effective July 1, 2021

Financial Instruments—Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires that financial assets measured at amortized cost be presented at the net amount expected to be collected and separately measure an allowance for credit losses that is deducted from the amortized cost basis of those financial assets. The Company early adopted the new standard on July 1, 2021; however, it did not have a significant impact on the Company’s financial statements.

Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new standard includes several provisions that simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and increasing consistency and clarity for the users of financial statements. The Company adopted the new standard on July 1, 2021; however, it did not have a significant impact on the Company’s financial statements.

Investments – Equity Securities, Investments – Equity Method and Joint Ventures, and Derivatives and Hedging

In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The new standard addresses interactions between the guidance to account for certain equity securities under ASC Topic 321, the guidance to account for investments under the equity method of accounting in ASC Topic 323 and the guidance in ASC Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with ASC Topic 825, Financial Instruments. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for any such interactions. The Company adopted the new standard on July 1, 2021; however, it did not have a significant impact on the Company’s financial statements.

 

Net Income Per Share

 

In accordance with FASB Accounting Standards Codification No. 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.

 

The total potential dilutive securities as of June 30, 2021 and 2020 are as follows:

  

	2021	2020
Convertible Preferred Stock	4,300,000	4,300,000
Stock options – 2015 Plan	2,500,000	4,250,000
Total	6,800,000	8,550,000

 

 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. At June 30, 2021, we carried a valuation allowance of $1.5 million against our net deferred tax assets.

 

Stock Based Compensation

 

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

 

 

NOTE 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 June 30, 2021 or 2020.

 

NOTE 4. INVENTORIES

 

All inventories are stated at the lower of cost (which approximates first-in, first-out) or net realizable value. The Company’s inventories consist of the following components at June 30, 2021 and 2020:  

 

	2021	2020
	(in thousands)
Raw materials	$1,637	$992
Work in process	396	234
Finished goods	1,531	900
Total inventories	3,564	2,126
Allowance for inventory reserves	(173)	(141)
Total inventories, net of allowance	$3,391	$1,985

 

NOTE 5. EQUIPMENT, PROPERTY AND LEASEHOLD IMPROVEMENTS, NET

 

Equipment, property and leasehold improvements at June 30, 2021 and 2020 consisted of the following: 

 

	2021	2020	Estimated Useful Life
	(in thousands)
Factory equipment	$3,567	$2,646	2-10 years
Computer equipment and software	1,146	1,087	5-7 years
Office equipment and furniture	205	205	5-7 years
Leasehold improvements	480	463	10 years
Projects in process	222	3
Subtotal	5,620	4,404
Accumulated depreciation	(3,686)	(3,466 )
Equipment, property and leasehold improvements, net	$1,934	$938

 

Depreciation expense was $220,635 and $151,105 for the years ended June 30, 2021 and 2020, respectively.

 

 

NOTE 6. OTHER ACCRUED LIABILITIES

 

Other accrued liabilities at June 30, 2021 and 2020 consisted of the following:

 

	2021	2020
	(in thousands)
Accrued compensation	$509	$468
Accrued expenses and interest	185	155
Other accrued liabilities	$694	$623

 

NOTE 7. CURRENT AND LONG-TERM DEBT SUMMARY

 

Current and long-term debt at June 30, 2021 and 2020 consisted of the following:

 

	2021	2020
Current debt:	(in thousands)
Unsecured lines of credit (Note 12)	$37	$48
Line of credit (Note 11)	1,083	1,005
Short-term unsecured notes payable (Note 8)	100	489
Current portion of equipment notes payable (Note 15)	219	102
Current portion secured notes payable (Note 13)	152	191
Current portion of leases payable	8	-
Credit card advance (net of discount) (Note 10)	-	56
Notes payable- related party (Note 9)	-	116
Total current debt	1,599	2,007
Long-term debt:
Unsecured notes payable (Note 8)	300	200
Equipment notes payable (Note 15)	853	161
Leases payable	19	-
Notes payable- related party (Note 9)	116	-
Total long-term debt	$1,288	$361

 

 

NOTE 8. UNSECURED NOTES PAYABLE

 

Unsecured notes payable at June 30, 2021 and 2020 consisted of the following:

 

	2021	2020
Current debt:	(in thousands)
20% Unsecured note, bi-weekly principal and interest, due September 18, 2020 (1)	$-	$75
20% Unsecured note, bi-weekly principal and interest, due February 19, 2021 (2)	-	214
20% Unsecured note, interest only, due May 1, 2021 (3)	-	200
20% Unsecured note, interest only, due October 31, 2021 (4)	100	-
Total current debt	100	489
Long-term debt:
13.5% Unsecured note, interest only, due May 1, 2023 (3)	200	-
20% Unsecured note, interest only, due October 31, 2021 (4)	-	100
13.5% Unsecured note, interest only, due July 31, 2023 (5)	100	100
Total long-term debt	300	200
Total unsecured notes payable	$400	$689

 

(1) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing September 18, 2020. This note was repaid in full on September 18, 2020. Personally guaranteed by principal stockholder.

 

(2) Unsecured note payable for $300,000 to two individual shareholders with interest at 20%, principal and interest paid bi-weekly, maturing February 19, 2021. $12,678 from the proceeds of this unsecured note payable was used to retire the balance of the unsecured note maturing on February 28, 2020. This note was repaid in full in February 19, 2021. Personally guaranteed by principal stockholder.

 

(3) Unsecured note payable for $200,000 to an individual with interest payable monthly at 20%, principal originally due in full on May 1, 2013, extended to May 1, 2019, then extended to May 1, 2021. 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.

 

(4) Unsecured note payable for $100,000 to an individual with interest payable monthly at 20%, principal originally due in full on October 31, 2014, extended to October 31, 2019, then extended to October 31, 2021. Personally guaranteed by principal stockholder.

 

(5) Unsecured note payable for $100,000 to an individual with interest 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.