What changed in this filing

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Item 1. Financial Statements

2021-02-12 compared with 2020-11-12 · 442 added, 381 removed, 993 unchanged (45% of the section changed)

3 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(in thousands, except share data)

9 unchanged sentences

Liabilities and stockholders’

equity (deficit):

Current liabilities:

6 unchanged sentences

Long-term debt

Long-term operating lease liability

Total noncurrent liabilities

2 unchanged sentences

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 at September 30, 2020 and June 30, 2020

Common stock, $0.01 par value, 175,000,000 shares authorized, 73,452,596 shares issued and outstanding at September 30, 2020 and June 30, 2020

Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000 at December 31, 2020 and June 30, 2020

Common stock, $0.01 par value, 175,000,000 shares authorized, 75,037,890 and 73,452,596 shares issued and outstanding at December 31, 2020 and

June 30, 2020, respectively

Additional paid-in capital

1 unchanged sentence

Total stockholders’

equity (deficit)

Total liabilities and stockholders’

equity (deficit)

See accompanying notes to unaudited condensed

4 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

(in thousands, except share data)

6 unchanged sentences

Total operating expenses

Operating income

Other expense:

Income from operations

Other Income (Expense):

Gain on forgiveness of SBA loan

Interest expense and financing costs

Total other expense

Income (loss) from operations before income taxes

Total Other Income (Expense)

Income before income taxes

Provision for income taxes

Net income (loss)

Net income (loss) per share:

Shares used in calculation of net income (loss) per share:

Net income per share:

Shares used in computing net income per share

See accompanying notes to unaudited condensed

4 unchanged sentences

in Stockholders’

For the Three Months ended September 30,

2019 and September 30, 2020

Equity (Deficit)

For the Six Months ended December 31,

2019 and December 31, 2020 (unaudited)

Series A Preferred

Stockholders’

Equity (Deficit)

(in thousands, except share data)

1 unchanged sentence

Stock-based compensation expense

Three Months Ended September 30, 2019 (unaudited)

Net income for the six months ended December 31, 2019

Balance, December 31, 2019 (unaudited)

Balance, June 30, 2020

Stock-based compensation expense

Three Months Ended, September 30, 2020 (unaudited)

Stock option exercises

Net income for the six months ended December 31, 2020

Balance, December 31, 2020 (unaudited)

For the Three Months ended December 31,

2019 and December 31, 2020 (unaudited)

Series A Preferred

Stockholders’

Equity (Deficit)

(in thousands, except share data)

Balance, September 30, 2019 (unaudited)

Stock-based compensation expense

Net income for the three months ended December 31, 2019

Balance, December 31, 2019 (unaudited)

Balance, September 30, 2020 (unaudited)

Stock-based compensation expense

Stock option exercises

Net income for the three months ended December 31, 2020

Balance, December 31, 2020 (unaudited)

See accompanying notes to unaudited condensed

3 unchanged sentences

Condensed Consolidated Statements of Cash

Three Months Ended

September 30,

( in thousands )

Six Months Ended

OPERATING ACTIVITIES:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

( in thousands )

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Forgiveness of SBA Loan

Depreciation and amortization

20 unchanged sentences

Repayment of credit card advance

Proceeds from secured notes payable

Repayments of secured notes payable

Repayment of unsecured line of credit

Proceeds from exercise of stock options

Payments on equipment notes

Principal payments on capital leases

Principal payments on lease payable

Net cash (used in) provided by financing activities

5 unchanged sentences

Purchases of equipment with equipment notes

Operating lease asset obtained in exchange for operating lease liability

Finance lease asset obligation in exchange for lease payable

Accrued interest converted for exercise of options

Operating lease asset obtained in

exchange for operating lease liability

Cash paid during the period for:

See accompanying

notes to unaudited condensed consolidated financial statements.

accompanying notes to unaudited condensed consolidated financial statements.

LUVU BRANDS, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

17 unchanged sentences

, a diverse range of

casual fashion daybeds, sofas and beanbags made from virgin and re-purposed polyurethane foam.

These products are sold through

the Company’s websites, online mass merchants and retail stores worldwide.

Many of our products are offered flat-packed and

either roll or vacuum compressed to save on shipping and reduce our carbon footprint.

In March, 2020, the Company began producing

personal face masks under the Avana brand in response to the COVID-19 pandemic with shipments beginning in April.

In April, 2020,

the Company also began producing and selling isolation gowns.

casual fashion daybeds, sofas and beanbags made from virgin and our re-purposed 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

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balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP.

The results of operations for the three months ended September 30, 2020 are not necessarily indicative of the results to be expected

The results of operations for the six months ended December 31, 2020 are not necessarily indicative of the results to be expected

for the entire fiscal year.

5 unchanged sentences

statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern.

September 30, 2020 the Company has an accumulated deficit of approximately $7.8 million and a working capital deficit of approximately

$1.3 million.

December 31, 2020 the Company has an accumulated deficit of approximately $6.4 million and a working capital deficit of approximately

This raises substantial doubt about its ability to continue as a going concern.

7 unchanged sentences

To that end, we evaluated various options for increasing the throughput

of our compressed foam products and during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation

during the second quarter of fiscal 2018.

These actions have yielded higher factory throughput at a lower cost of goods sold.

these operational improvements have been more than offset by rising wages and raw material costs.

We also plan to continue to manage

discretionary expense levels to be better aligned with current and expected revenue levels.

We estimate that the operational and

strategic growth plans we have identified over the next twelve months will, at a minimum, require approximately $150,000 of funding,

of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

of our compressed foam products and during the second quarter of fiscal 2021, we purchased new foam contouring equipment for installation

during the third quarter of fiscal 2021.

We also placed an order for a larger roll compression machine which should be operational

during the fourth quarter of fiscal 2021.

These actions should yield higher factory throughput at a lower cost of goods sold.

these operational improvements may be more than offset by rising wages and raw material costs.

We plan to raise our selling prices

to offset some of the labor and raw material cost increases.

We estimate that the operational and strategic growth plans we have

identified over the next twelve months will, at a minimum, require approximately $150,000 of funding, of which we estimate will

be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

LUVU BRANDS, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

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of recession or financial market instability.

SUMMARY OF SIGNIFICANT ACCOUNTING

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

31 unchanged sentences

The deferred revenue balance

as of September 30, 2020 was $15,204.

as of December 31, 2020 was $16,760.

Cost of Goods Sold

15 unchanged sentences

The following is a summary of Accounts Receivable

as of September 30, 2020 and June 30, 2020.

September 30,

as of December 31, 2020 and June 30, 2020.

(in thousands)

6 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

16 unchanged sentences

Corporation (“FDIC”) up to $250,000 per bank.

The Company had bank balances on deposit at September 30,

The Company had bank balances on deposit at December 31, 2020

that exceeded the balance insured by the FDIC by $1,096,404.

Accounts receivable are typically unsecured and

are derived from revenue earned from customers primarily located in North America and Europe.

During the three month ended September 30, 2020,

we purchased 32% of total inventory purchases from one vendor.

Accounts receivable are typically unsecured and are derived

from revenue earned from customers primarily located in North America and Europe.

During the three and six months ended December

31, 2020, we purchased 33% and 32% respectively, of total inventory purchases from one vendor.

During the fiscal year ended June 30, 2020,

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

As of September 30, 2020 two of the Company’s

customers represent 43% and 15% of the total accounts receivables compared to 38%, 16% and 16% of the total accounts receivable,

respectively, as of June 30, 2020.

Sales to (and through) Amazon accounted for 28% of our net sales during the three months ended

September 30, 2020 and 33% of our net sales during the three months ended September 30, 2019.

As of December 31, 2020, two of the

Company’s customers represents 29% and 14% of the total accounts receivables, respectively.

As of June 30, 2020,

three of the Company’s customers represents 38%, 16% and 16% of the total accounts receivables, respectively.

three and six months ended December 31, 2020, sales to and through Amazon accounted for 30% and 29% of our net sales,

respectively.

Fair Value of Financial Instruments

At September 30, 2020 and June 30, 2020,

At December 31, 2020 and June 30, 2020,

our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, short-term debt, and other

27 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

8 unchanged sentences

Advertising Costs

Advertising costs are expensed in the period

when the advertisements are first aired or distributed to the public.

Prepaid advertising (included in prepaid expenses) was $5,000

at September 30, 2020 and $5,000 at June 30, 2020.

Advertising expense for the three months ended September 30, 2020 and 2019 was

$68,530 and $79,868, respectively.

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 $2,500 at December 31, 2020 and $5,000 at June 30, 2020.

Advertising expense for the three months ended

December 31, 2020 and 2019 was $120,455 and $115,815, respectively.

expense for the six months ended December 31, 2020 and 2019 was $188,985 and $195,683, respectively.

Research and Development

2 unchanged sentences

Expenses for new product development totaled $27,294 and $26,179 for the three months ended

September 30, 2020 and 2019, respectively.

December 31, 2020 and 2019, respectively.

Expenses for new product development totaled $56,519 and $54,852 for the six months ended

December 31, 2020 and 2019, respectively.

Research and development costs are included in general and administrative expense.

17 unchanged sentences

The Company has determined

that there was no impairment at September 30, 2020.

that there was no impairment at December 31, 2020.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operating Leases

4 unchanged sentences

The rent expense under this lease for the three months

ended September 30, 2020 and 2019 was $88,120 and $88,120, respectively.

Subsequent to September 30, 2020, the Company entered

into an agreement with its landlord on a new lease for the current facilities for six years and two months.

The new lease includes

two months of rent abatement totaling $103,230.

ended December 30, 2020 and 2019 was $88,120 and $88,120, respectively.

The rent expense under this lease for the six months ended

December 31, 2020 and 2019 was $176,239 and $176,239, respectively.

On November 2, 2020, the Company entered into

an agreement with its landlord on a new lease for the current facilities for six years and two months.

The new lease includes two

months of rent abatement totaling $103,230.

Under the new lease, the monthly rent on the facility is $51,615 with annual escalations

1 unchanged sentence

In addition, the Company will pay the landlord a 2% property management fee.

(See Note 19, Subsequent Events ).

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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.

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.

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

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

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Three Months Ended

September 30, 2020

December 31, 2020

Three Months Ended

September 30, 2019

December 31, 2019

(in thousands)

1 unchanged sentence

Total Net Sales

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (continued)

Three Months Ended

September 30, 2020

September 30, 2019

December 31, 2020

December 31, 2019

(in thousands)

2 unchanged sentences

Total Gross Profit

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Six Months Ended

December 31, 2020

Six Months Ended

December 31, 2019

(in thousands)

Net Sales by Channel:

Total Net Sales

Six Months Ended

December 31, 2020

December 31, 2019

(in thousands)

Gross Profit by Channel:

Total Gross Profit

Recent accounting pronouncements

2 unchanged sentences

Recently adopted

In June 2016, the FASB

issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04

and ASU 2019-05 (collectively Topic 326).

Topic 326 requires the measurement and recognition of expected credit losses for financial

assets held at amortized cost.

This replaces the existing incurred loss model with an expected loss model and requires the use

of forward-looking information to calculate credit loss estimates.

The amendments in this guidance are effective for fiscal years

beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted for certain amendments.

326 must be adopted by applying a cumulative effect adjustment to retained earnings.

We adopted ASU 2016-13 and ASU 2019-11 effective

July 1, 2020.

The impact of adoption of these standards on our condensed consolidated financial statements was not material.

In August 2018, the FASB

8 unchanged sentences

statements was not material.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Not yet adopted

In December 2019, the FASB issued

In December 2019,

the FASB issued ASU No.

2019-12, "Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes"

The standard simplifies

the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred

taxes for investments, performing intra-period allocations and calculating taxes in interim periods.

ASU 2019-12 also improves

consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce

complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated

The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including

recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods.

also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance

to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of

a consolidated group.

The standard is effective for fiscal years beginning after December 15, 2020.

Early adoption is permitted.

The Company plans

to adopt the standard as of July 1, 2021 and is currently evaluating this guidance to determine the impact it may have on its consolidated

financial statements.

The Company plans to adopt the standard as of July 1, 2021 and is currently evaluating this guidance to determine the impact it

may have on its consolidated financial statements.

All other newly issued accounting pronouncements,

but not yet effective, have been deemed either immaterial or not applicable.

Net Income (Loss) Per Share

Net Income Per Share

In accordance with ASC

260, “Earnings Per Share”, basic net income (loss) per share is computed by dividing the net income (loss) available

to common stockholders for the period by the weighted average number of common shares outstanding during the period.

income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number

of common and common equivalent shares outstanding during the period plus the effect of stock options using the treasury stock

Common equivalent shares outstanding as of September 30, 2019, which consists of options and convertible preferred

stock, have been excluded from the diluted net loss per common share calculation for the three months ended September 30,

2019 because they are anti-dilutive.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Net Income (Loss) Per Share (continued)

The total potential dilutive

securities as of September 30, 2020 and 2019 are as follows:

260, “Earnings Per Share”, basic net income per share is computed by dividing the net income available to common stockholders

for the period by the weighted average number of common shares outstanding during the period.

Diluted net income per share is computed

by dividing net income available to common stockholders by the weighted average number of common and common equivalent shares outstanding

during the period plus the effect of stock options using the treasury stock method.

As of December 31, 2020 and 2019, the common

stock equivalents did not have any effect on net income per share.

Common stock options –

Convertible preferred stock

Stock options

We utilize the asset and liability method of

12 unchanged sentences

our ability to realize these assets.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Based Compensation

22 unchanged sentences

carrying value or fair value less costs to sell and would not be depreciated.

There was no impairment as of September

There was no impairment as of December

31, 2020 or June 30, 2020.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

INVENTORIES, NET

4 unchanged sentences

Inventories consisted of the following:

September 30, 2020

December 31, 2020

June 30, 2020

6 unchanged sentences

Total inventories, net of allowance

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

3 unchanged sentences

and leasehold improvements consisted of the following:

September 30, 2020

December 31, 2020

June 30, 2020

9 unchanged sentences

Depreciation expense was $51,024 and $38,913

for the three months ended September 30, 2020 and 2019, respectively.

for the three months ended December 31, 2020 and 2019, respectively.

For the six months ended December 31, 2020 and 2019, depreciation

expense was $103,476 and $79,052, respectively.

Management reviews long-lived assets for impairment

6 unchanged sentences

Management has determined no asset impairment occurred

during the three months ended September 30, 2020.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

during the six months ended December 31, 2020.

OTHER ACCRUED LIABILITIES

Other accrued liabilities at September 30,

Other accrued liabilities at December 31,

2020 and June 30, 2020:

September 30, 2020

December 31, 2020

June 30, 2020

3 unchanged sentences

Other accrued liabilities

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

CURRENT AND LONG-TERM DEBT SUMMARY

Current and long-term debt at September 30,

Current and long-term debt at December 31,

2020 and June 30, 2020 consisted of the following:

September 30, 2020

December 31, 2020

June 30, 2020

6 unchanged sentences

Current portion secured notes payable (Note 14)

Current portion of leases payable (Note 16)

Current portion of leases payable

Credit card advance (net of discount) (Note 11)

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Equipment lease payable

Equipment note payable (Note 16)

Equipment notes payable (Note 16)

Total long-term debt

UNSECURED NOTES PAYABLE

Unsecured notes payable at September 30, 2020

Unsecured notes payable at December 31, 2020

and June 30, 2020 consisted of the following:

September 30, 2020

December 31, 2020

June 30, 2020

5 unchanged sentences

20% Unsecured note, interest only, due July 31, 2021 (5)

20% Unsecured note, interest only, due October 31, 2021 (4)

Total current debt

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

22 unchanged sentences

NOTES PAYABLE - RELATED PARTY

Related party notes payable at September 30,

Related party notes payable at December 31,

2020 and June 30, 2020 consisted of the following:

September 30, 2020

December 31, 2020

June 30, 2020

6 unchanged sentences

CREDIT CARD ADVANCES

On October 12, 2018, OneUp entered into an agreement

with Power Up Lending Group, Ltd.

(“Power Up”) whereby Power Up agreed to loan OneUp and Foam Labs a total of $250,000

from Power Up.

The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections.

this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after

the funding date.

A .5% loan origination fee was deducted, and the Company received net proceeds of $248,750.

This loan was repaid

in full on August 6, 2019.

This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and

controlling shareholder (see Note 17).

On January 29, 2019, the Company borrowed

an additional $300,000 from Power Up against its future credit card receivables.

Terms for this loan calls for a repayment of $345,000

which includes a one-time finance charge of $45,000, approximately ten months after the funding date.

A 1% loan origination fee

was deducted, and the Company received net proceeds of $297,000.

This loan was repaid in full on June 16, 2020.

This loan was guaranteed

by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

On August 28, 2019, the Company borrowed an

6 unchanged sentences

was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

LINE OF CREDIT

16 unchanged sentences

In addition, the amended and restated agreement changed the interest calculation

to prime rate plus 3% (as of September 30, 2020, the interest rate was 6.25%) and the Monthly Service Fee was changed to .5% per

to prime rate plus 3% and the Monthly Service Fee was changed to .5% per month.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

LINE OF CREDIT (continued)

On December 9, 2015, the credit agreement

8 unchanged sentences

facility remain the same.

On December 1, 2020, the credit agreement

with Advance Financial Corporation was amended to reduce the interest calculation to prime rate plus 2% and the Monthly Service

Fee was unchanged at .5% per month.

As of December 31, 2020, the interest rate was 5.25%.

All other terms of the credit facility

remain the same.

The Company’s CEO, Louis Friedman, has

2 unchanged sentences

the credit facility (see Note 17).

On September 30, 2020, the balance owed under this line of credit was $1,050,490.

of September 30, 2020, we were current and in compliance with all terms and conditions of this line of credit.

On December 31, 2020, the balance owed under this line of credit was $1,068,518.

of December 31, 2020, we were current and in compliance with all terms and conditions of this line of credit.

Management believes cash flows generated

8 unchanged sentences

The aggregate amount owed on the unsecured line of credit

was $44,972 at September 30, 2020 and $47,619 at June 30, 2020.

was $42,265 at December 31, 2020 and $47,619 at June 30, 2020.

SECURED NOTE PAYABLE

5 unchanged sentences

November 13, 2019.

On September 30, 2020, the balance owed under this note payable was $65,839.

On December 31, 2020, the balance owed under this note payable was $39,462.

This note payable is guaranteed

7 unchanged sentences

Company had granted Amazon a security interest in certain assets of the Company.

On November 27, 2019 the Company entered into

an agreement with OnDeck, whereby OnDeck agreed to loan OneUp a total of $200,000.

Terms for this loan calls for a repayment of

$234,000 which includes a one-time finance charge of $34,000, approximately nine months after the funding date.

A 1% loan origination

fee was deducted, and the Company received net proceeds of $198,000.

This note payable was fully paid in August 2020.

is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder.

LUVU BRANDS, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

19 unchanged sentences

the Company will be notified whether or not the loan is forgiven.

On December 18, 2020, the company was informed

by Ameris Bank that the PPP Note had been forgiven by the U.S.

Small Business Administration.

In accounting for the terms of the PPP Loan,

the Company is guided by ASC 470 Debt , and ASC 450-30 Gain contingency .

Accordingly, the Company recorded the proceeds

of the PPP Loan of $1,096,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness

is reasonably certain.

The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and

therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e.

all conditions for forgiveness

Future minimum payments required at maturity

under the Company’s outstanding short term notes, secured line of credit, unsecured line of credit, credit cards loans, short

term related party notes and PPP loan at September 30, 2020 are as follows:

Fiscal Years Ending June 30,

(in thousands)

(nine months)

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

Accordingly, the Company derecognized the

PPP Note liability of $1,096,200 and recorded it as Other Income, as forgiveness was certain.

COMMITMENTS AND CONTINGENCIES

Operating Leases

Company leases it facilities under non-cancelable operating leases expiring at the end of 2020.

Right-of-use assets represent the

right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising

Company leases it facilities under non-cancelable operating leases which now expires February 28, 2027.

Right-of-use assets represent

the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising

from the lease.

Right-of-use assets and liabilities were recognized at July 1, 2019 based on the present value of lease payments

over the lease term, using the Company’s incremental borrowing rate based on the information available.

At September 30,

2020, the weighted average remaining lease term is 1.3 years and the weighted average discount rate is 20%.

Supplemental balance

sheet information related to leases at September 30, 2020 is as follows:

Right-of-use assets and liabilities for the lease renewal were recognized at the inception date which is November

2, 2020 based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate

based on the information available.

At December 31, 2020, the weighted average remaining lease term for the lease renewal is 6

years and the weighted average discount rate is 14.49%.

Supplemental balance sheet information related to leases at December 31,

2020 is as follows:

Operating leases

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Current lease liabilities

Operating lease obligations

Operating lease liabilities

Non-current lease liabilities

Long-term operating lease obligations

Long-term operating lease liabilities

Total lease liabilities

Maturities of lease liabilities at September

Maturities of lease liabilities at December

31, 2020 are as follows:

(in thousands)

2021 (nine months)

2021 (six months)

2025 and thereafter

Total undiscounted lease payments

present value discount

Total lease liability balance

Total operating lease liability balance

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

COMMITMENTS AND CONTINGENCIES (continued)

Equipment Notes Payable

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The following is an analysis of the minimum

future equipment note payable payments subsequent to September 30, 2020:

future equipment note payable payments subsequent to December 31, 2020:

Years ending June 30,

(in thousands)

2021 (nine months)

2021 (six months)

Future Minimum Note Payable Payments

3 unchanged sentences

Long-Term Obligations under Equipment Notes Payable

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

COMMITMENTS AND CONTINGENCIES (continued)

Employment Agreements

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Interest on the note

during the three months ended September 30, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%)

during the three months ended December 31, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%)

and totaled $623.

The accrued interest on the note as of September 30, 2020 was $32,051.

This note is subordinate to all other

credit facilities currently in place.

On December 21, 2020, the note holder used $3,750 of the accrued interest to exercise stock options that were

granted on December 29, 2015.

The accrued interest on the note as of December 31, 2020 was $28,924.

This note is subordinate to

all other credit facilities currently in place.

On October 30, 2010, Mr.

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Company $40,000.

Interest on the note during the three months ended September 30, 2020 was accrued by the Company at the prevailing

Interest on the note during the three months ended December 31, 2020 was accrued by the Company at the prevailing

prime rate (which is currently 3.25%) and totaled $328.

The accrued interest on the note as of September 30, 2020 was $11,418.

On December 21, 2020, the note holder used $6,875 of the accrued interest

to exercise stock options that were granted on December 29, 2015.

The accrued interest on the note as of December 31, 2020 was

This note is subordinate to all other credit facilities currently in place.

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addition, Luvu Brands has provided its corporate guarantees of the credit facility.

On September 30, 2020, the balance

On December 31, 2020, the balance

owed under this line of credit was $1,068,518.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

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The aggregate amount owed on the unsecured line of credit

was $44,972 at September 30, 2020 and $47,619 at June 30, 2020.

was $42,265 at December 31, 2020 and $47,619 at June 30, 2020.

The loan is personally guaranteed by the Company’s CEO and

majority shareholder, Louis S.

On March 1, 2019, the Company borrowed $300,000

from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with

the final payment due March 1, 2020.

This loan was repaid in full on February 19, 2020 (see Note 9).

The loan was personally guaranteed

by the Company’s CEO and majority shareholder, Louis S.

On April 26, 2019, the Company borrowed $300,000

from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with

the final payment due April 24, 2020.

A portion of the note proceeds were used to satisfy the balance due on the July 30, 2018

note payable and the remaining proceeds of $227,721 are for working capital purposes.

This loan was repaid in full on April 26,

2020 (see Note 9).

The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S.

On June 11, 2019, the Company entered into an

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November 13, 2019.

On September 30, 2020, the balance owed under this note payable was $65,839.

On December 31, 2020, the balance owed under this note payable was $39,462.

This note payable is guaranteed

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by the Company’s CEO and majority shareholder, Louis S.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

RELATED PARTY TRANSACTIONS (continued)

On November 27, 2019 the Company entered into

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1, 2019 note payable of $12,677 and the remaining proceeds of $281,323 are for working capital purposes.

On September 30, 2020,

On December 31, 2020,

the balance owed under this note payable was $50,132 (see Note 9).

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STOCKHOLDERS’

At September 30, 2020, the Company had the 2015

At December 31, 2020, the Company had the 2015

Stock Option Plan (the “2015 Plan”), which is a shareholder-approved and under which 3,400,000 shares are reserved

for issuance under the 2015 Plan until such Plan terminates on August 31, 2025.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

STOCKHOLDERS’

EQUITY (continued)

Under the 2015 Plan, eligible employees and

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by the Company, including shares purchased on the open market.

As of September 30, 2020, the number of shares available for issuance

As of December 31, 2020, the number of shares available for issuance

under the 2015 Plan was 1,100,000.

The following table summarizes the Company’s

stock option activities during the three months ended September 30, 2020:

stock option activities during the six months ended December 31, 2020:

Number of Shares

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Forfeited or expired

Options outstanding as of September 30, 2020

Options exercisable as of September 30, 2020

Options outstanding as of December 31, 2020

Options exercisable as of December 31, 2020

The aggregate intrinsic value in the table above

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$0.14 for such day.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

STOCKHOLDERS’

EQUITY (continued)

During the three months ended December 31, 2020,

a total of 1,600,000 stock options were exercised in exchange for various consideration including cash, accrued interest and on

a cashless basis.

There were 150,000 stock options granted during

the three months ended September 30, 2020 and 200,000 stock options granted during the three months ended September 30, 2019.

value assumptions related to options granted during the three months ended September 30, 2020, were as follows:

Ended September 30, 2020

Ended September 30, 2019

the six months ended December 31, 2020 and 300,000 stock options granted during the six months ended December 31, 2019.

assumptions related to options granted during the six months ended December 31, 2020, were as follows:

Six Months Ended

December 31, 2020

Six Months Ended

December 31, 2019

Exercise Price:

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Dividend Rate

following table summarizes the weighted average characteristics of outstanding stock options as of September 30, 2020:

following table summarizes the weighted average characteristics of outstanding stock options as of December 31, 2020:

Outstanding Options

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Total stock options

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

STOCKHOLDERS’

EQUITY (continued)

Stock-based compensation

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Stock option-based compensation expense recognized

in the condensed consolidated statements of operations for the three month periods ended September 30, 2020 and 2019 are based

on awards ultimately expected to vest, and is reduced for estimated forfeitures.

in the condensed consolidated statements of operations for the three and six month periods ended December 31, 2020 and 2019 are

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

The following table summarizes stock option-based

compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans:

As of September 30, 2020, the Company’s

As of December 31, 2020, the Company’s

total unrecognized compensation cost was $19,985 which will be recognized over the weighted average vesting period of two years.

Ended September 30,

Ended December 31,

($ in thousands)

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General and Administrative

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

2020 (UNAUDITED)

STOCKHOLDERS’

EQUITY (continued)

Total Stock-based Compensation Expense

Share Purchase Warrants

As of September 30, 2020 and 2019, there were

As of December 31, 2020 and 2019, there were

no share purchase warrants outstanding.

The Company’s authorized common stock

was 175,000,000 shares at September 30, 2020 and June 30, 2020.

was 175,000,000 shares at December 31, 2020 and June 30, 2020.

Common shareholders are entitled to dividends if and

when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights.

At September 30, 2020,

At December 31, 2020,

the Company had reserved the following shares of common stock for issuance:

September 30,

Shares of common stock reserved for issuance under the 2015 Plan

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Total shares of common stock equivalents

During the three month ended December 31,

2020, 1,585,294 shares of common stock were issued for the exercise of 1.6 million stock options by affiliates and

non-affiliate employees of the Company in exchange for various consideration including cash, accrued interest and a cashless

basis at prices ranging from $.0125 per share to $.01375 per share.

These options were granted under the 2015 Plan on

December 29, 2015 with an expiration date of December 29, 2020.

LUVU BRANDS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FOR THE SIX MONTHS ENDED DECEMBER 31,

2020 (UNAUDITED)

STOCKHOLDERS’

EQUITY (continued)

Preferred Stock

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SUBSEQUENT EVENTS

On November 2, 2020, the Company entered into

an agreement with its landlord on a new lease for the current facilities for six years and two months.

The new lease includes two

months of rent abatement totaling $103,230.

Under the new lease, the monthly rent on the facility is $51,615 with annual escalations

of 3% with the final two months of rent at $61,605.

In addition, the Company will pay the landlord a 2% property management fee.

Under the new facilities lease, the estimated operating lease asset and operating lease liability on the commencement date will

total $2,580,611 and $2,683,841, respectively.

On October 15, 2020, the Company entered into

an equipment finance agreement for the purchase of a new CNC foam contouring system from a European supplier.

At a total cost of

$325,000, the equipment finance agreement calls for 60 payments of $6,266 to the finance company.

Subsequent to September 3, 2020, 200,000 stock

options granted to an employee were exercised in exchange for a cash payment of $2,500.

Subsequent to December 31, 2020, the Company

entered into an equipment finance agreement for the purchase of a new roll compression machine from a domestic supplier.

cost of $413,000, the equipment finance agreement calls for 60 payments of $8,323 to the finance company.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Three Months Ended

September 30, 2020

September 30, 2019

December 31, 2020

December 31, 2019

Cost Of Goods Sold

Selling, General and Administrative Expenses

Operating Expenses

Income from operations

Six Months Ended

December 31, 2020

December 31, 2019

Cost Of Goods Sold

Operating Expenses

Income from operations

The following table represents the

net sales and percentage of net sales by product type:

Three Months Ended

(Dollars in thousands)

September 30, 2020

September 30, 2019

December 31, 2020

December 31, 2019

Products purchased for resale

Total Net Sales

Three Months Ended September 30, 2020 Compared to Three Months

Ended September 30, 2019

Six Months Ended

(Dollars in thousands)

December 31, 2020

December 31, 2019

Products purchased for resale

Total Net Sales

Three Months Ended December 31, 2020 Compared to Three Months

Ended December 31, 2019

Sales for the three

months ended September 30, 2020 were $5,367,306, a 31% increase from the comparable prior year period.

months ended December 31, 2020 were $5,714,000, a 20% increase from the comparable prior year period.

The major components

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Jaxx sales –

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

Jaxx product sales increased 45% from the prior year second quarter, primarily due to an expanded product offering and greater sales through e-merchants, including Amazon and Wayfair;

Avana sales –

Net sales of Avana products increased 14% during the quarter from the comparable prior year quarter.

This line of top-of-bed comfort products continues to sell well through e-merchant channels with broad consumer reach including Amazon, Overstock and others;

Net sales of Avana products decreased 20% during the quarter from the comparable prior year quarter to $833,000.

The decrease in sales of our top-of-bed comfort products was due to larger orders for Liberator and Jaxx products which taxed our production capabilities and created longer delivery lead times for the Avana products.

Longer lead times when selling through drop-ship channels like Amazon, Wayfair and Overstock typically results in lower order levels, as consumers will seek out competitive products with shorter delivery lead times.

Additional foam cutting and roll compression equipment has been ordered and is expected to reduce delivery lead times for all products;

Products purchased for resale –

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

This product category increased by $64,000 from the prior year second quarter due to higher sales of certain products through our e-commerce website, Liberator.com.

Gross margin .

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royalties and depreciation.

Despite labor cost increases in all production areas and raw material cost increases, gross

profit increased to $1,487,814 for the three months ended September 30, 2020 from $1,137,393 in the comparable prior year period,

and the gross margin, as a percentage of sales, remained constant with the prior year period at 28%.

As a result of labor and raw material cost increases, the gross profit margin, as a percentage

of sales, decreased to 27% from 32% in the prior year second quarter.

With the increased net sales, gross profit increased to $1,565,748

from $1,519,423.

Operating expenses .

Total operating

expenses for the three months ended September 30, 2020 were approximately 20% of net sales, or approximately $1,052,000, compared

expenses for the three months ended December 31, 2020 were approximately 19% of net sales, or approximately $1,109,000, compared

to 23% of net sales, or approximately $1,105,000, for the same period in the prior year.

Other income (expense) .

Interest expense during the second quarter decreased from approximately ($157,000) in fiscal 2020 to approximately ($88,000) during

the second quarter of fiscal 2021.

The decrease was primarily due to lower average borrowing balances and reduced interest expense

on those lower balances.

The PPP loan forgiveness by the Small Business Administration resulted in Other Income of approximately

Six Months Ended December 31, 2020 Compared to Six Months Ended

December 31, 2019

Sales for the six months

ended December 31, 2020 were $11,081,000, a 25% increase from the comparable prior year period.

The major components

of net sales, by product, are as follows:

Liberator sales - Sales of Liberator branded products increased $989,000, or 28%, during the first six months from the comparable prior year period, due primarily to greater sales through the company’s Liberator.com website and through Amazon.com;

Jaxx sales –

Jaxx product sales increased $1,111,000, or 48%, from the prior year first half, primarily due to an expanded product offering of outdoor and indoor products and greater sales through e-merchants, including Amazon and Wayfair;

Avana sales –

Net sales of Avana products decreased $88,000 (or 5%) during the first six months from the comparable prior year period.

Sales of this product line have been impacted by lower-priced competitive products in the market place, and longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair;

Products purchased for resale –

This product category increased by $18,000, or 2%, from the prior year first half due to greater sales of certain products through our e-commerce website, Liberator.com.

Gross margin .

Gross profit, derived

from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs

and depreciation.

As a result of labor and raw material cost increases, the gross profit margin, as a percentage of

sales, decreased to 28% from 30% in the prior year first half.

With the increased net sales, gross profit increased to $3,053,562

from $2,656,816, a 15% increase.

Operating expenses .

Total operating

expenses for the six months ended December 31, 2020 were 20% of net sales, or approximately $2,161,000, compared to 24% of net

sales, or approximately $2,129,000, for the same period in the prior year.

Of the $32,000 increase, approximately $126,000

$78,000 was due to higher general and administrative expenses (higher computer software expense, higher salaries and healthcare

costs) and $12,000 in higher depreciation expense, offset in part by $62,000 in lower advertising and other selling and marketing

expenses (lower salaries, travel and trade show costs.)

Other expense .

Other expense

during the first quarter decreased from approximately ($158,000) in fiscal 2019 to approximately ($107,000) during the first quarter

of fiscal 2020.

The decrease was primarily due to lower average borrowing balances and reduced interest expense on those lower

was due to higher insurance, equipment repairs and administrative salaries, offset in part by lower sales and marketing salaries

and personnel costs ($120,000).

Other income (expense) .

Interest expense during the first six month decreased from expense of approximately ($316,000) in fiscal 2020 to expense of approximately

($195,000) during the first half of fiscal 2021.

The decrease was primarily due to lower average borrowing balances and reduced

interest expense on those higher balances.

The PPP Note forgiveness by the U.S.

Small Business Administration resulted in Other

Income of approximately $1,096,000.

Variability of Results

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The following table summarizes our cash flows:

Three Months Ended

September 30,

Six Months Ended

(Dollars in thousands)

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Cash (used in) provided by financing activities

As of September 30, 2020, our cash and cash

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

As of December 31, 2020, our cash and cash equivalents

totaled $1,014,736, compared to $614,212 in cash and cash equivalents as of December 31, 2019.

For purposes of reporting cash flows, the Company

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Net cash provided by operating activities was

$130,567 in the three months ended September 30, 2020 compared to $95,461 net cash used in operating activities in the three months

ended September 30, 2019.

The primary components of the cash provided by operating activities in the current year is the

net income of $328,681 and a decrease in accounts receivable of $96,942, offset in part by an increase in inventory of $201,242

and an increase in accrued compensation of $92,042.

$396,000 in the six months ended December 31, 2020 compared to $117,000 net cash used in operating activities in the six months

ended December 31, 2019.

The primary components of the cash provided by operating activities in the current year is the net

income of $1,794,000 (which includes the PPP Note forgiveness of $1,096,000), a decrease in accounts receivable of $219,000, offset

in part by an increase in inventory of $505,000 and a decrease in accrued compensation of $190,000.

Investing Activities

Cash used in investing activities in the three

months ended September 30, 2020 was $27,500 and related to the purchase and installation of certain production equipment and computer

software during the first quarter.

Cash used in investing activities in the six

months ended December 31, 2020 was $81,000 and related to the purchase and installation of certain production equipment and computer

software during the first six months.

Financing Activities

Cash provided used in financing activities

during the three months ended September 30, 2020 of $323,253 was primarily attributable to the repayment of the unsecured notes

payable, secured notes payable and the credit card advance, offset in part by net borrowings under the revolving line of credit.

Cash used in financing activities during

the six months ended December 31, 2020 of $452,000 was primarily attributable to the repayment of the unsecured notes payable,

secured notes payable, the credit card advance and payments made on equipment notes, offset in part by net borrowings under the

revolving line of credit.

Cash provided by financing activities

during the three months ended September 30, 2019 of $30,166 was primarily attributable to the proceeds from the unsecured notes

during the three months ended December 31, 2019 of $94,000 was primarily attributable to the proceeds from the unsecured notes

payable and borrowings from the credit card advance, offset in part by the repayment of the unsecured notes payable and credit

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We recorded net

income of approximately $329,000 for the three months ended September 30, 2020 and net income of approximately $860,000 for the

income of approximately $1,794,000 for the six months ended December 31, 2020 and net income of approximately $860,000 for the

year ended June 30, 2020.

As of September 30, 2020, we have an accumulated deficit of approximately $7,827,000 and a working capital

deficit of approximately $1,295,000.

As of December 31, 2020, however, we have an accumulated deficit of approximately $6,362,000 and a working

capital deficit of approximately $589,000.

This raises substantial doubt about our ability to continue as a going concern.

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To that end, we evaluated various options for increasing the throughput

of our compressed foam products and during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation

during the second quarter of fiscal 2018.

These actions have yielded higher factory throughput at a lower cost of goods sold.

of our compressed foam products and during the second quarter of fiscal 2021, we purchased new foam contouring equipment for installation

during the third quarter of fiscal 2021.

We also placed an order for a larger roll compression machine which should be operational

during the fourth quarter of fiscal 2021.

These actions should yield higher factory throughput at a lower cost of goods sold.

these operational improvements have been more than offset by rising wages and raw material costs.

We also plan to continue to manage

discretionary expense levels to be better aligned with current and expected revenue levels.

We estimate that the operational and

strategic growth plans we have identified over the next twelve months will, at a minimum, require approximately $150,000 of funding,

of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

We plan to raise our selling

prices to offset some of the labor and raw material cost increases.

We estimate that the operational and strategic growth plans

we have identified over the next twelve months will, at a minimum, require approximately $150,000 of funding, of which we estimate

will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

Non-GAAP Financial Measures

Reconciliation of net income (loss) to Adjusted

EBITDA for the three months ended September 30, 2020 and 2019:

Reconciliation of net income to Adjusted EBITDA

for the six months ended December 31, 2020 and 2019:

(Dollars in thousands)

Three months ended September 30,

Net income (loss)

Six months ended December 31,

Plus interest expense, net

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As used herein, Adjusted EBITDA represents net

income (loss) before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation

income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation

We have excluded the non-cash expenses and stock-based compensation, as they do not reflect the cash-based operations

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of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared

and presented in accordance with GAAP, including the net income (loss) of the Company or net cash provided by (used in) operating

and presented in accordance with GAAP, including the net income of the Company or net cash provided by (used in) operating

Management recognizes that non-GAAP financial

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements