Luvu Brands, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS LUVU BRANDS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2022 June 30, (unaudited) 2022 Assets: (in thousands, except share data) Current assets: Cash and cash equivalents $ 1,875 $ 859 Accounts receivable, net (1) 1053 1,192 Inventories, net 3,931 3,817 Prepaid expenses 175 165 Total current assets 7,034 6,033 Equipment and leasehold improvements, net 1,963 2,029 Finance lease assets 32 47 Operating lease right-of-use assets, net 2,090 2,255 Other assets 99 100 Total assets $ 11,218 $ 10,464 Liabilities and stockholders’ equity: Current liabilities: Accounts payable $ 2,619 $ 2,680 Current debt 1,780 1,618 Other accrued liabilities (1) 675 630 Operating lease liabilities 368 331 Total current liabilities 5,442 5,259 Noncurrent liabilities: Long-term debt 727 1,183 Long-term operating lease liabilities 1,874 2,068 Total noncurrent liabilities 2,601 3,251 Total liabilities 8,043 8,510 Commitments and contingencies (See Note 13) - - Stockholders’ equity: 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 December 31, 2022 and June 30, 2022 - - Common stock, $ 0.01 par value, 175,000,000 shares authorized, 76,511,005 and 76,046,249 shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively 765 760 Additional paid-in capital 6,211 6,183 Accumulated deficit ( 3,801 ) ( 4,989 ) Total stockholders’ equity 3,175 1,954 Total liabilities and stockholders’ equity $ 11,218 $ 10,464 (1) During the six months ending December 31, 2022 we reclassified credit balances in accounts receivable of ($106,000) to deferred revenue. For the period ending June 30, 2022, accounts receivable and deferred revenue were adjusted by ($85,000) for comparability only. Consolidated Statement of Cash Flows was adjusted accordingly to reflect these reclassifications. See accompanying condensed notes to unaudited consolidated financial statements. 4 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited) Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 (in thousands, except share data) Net Sales $ 8,135 $ 7,186 $ 16,195 $ 13,411 Cost of goods sold 5,876 5,609 11,963 10,335 Gross profit 2,259 1,577 4,232 3,076 Operating expenses Advertising and promotion 200 155 386 287 Other selling and marketing 343 321 708 581 General and administrative 845 772 1,604 1,485 Depreciation and amortization 88 78 175 149 Total operating expenses 1,476 1,326 2,873 2,502 Income from operations 783 251 1,359 574 Other Income (Expense): Interest expense and financing costs ( 88 ) ( 84 ) ( 171 ) ( 180 ) Total Other Income (Expense) ( 88 ) ( 84 ) ( 171 ) ( 180 ) Income before income taxes 695 167 1,188 394 Provision for income taxes - - - - Net income $ 695 $ 167 $ 1,188 $ 394 Net income per share: Basic $ 0.01 $ 0.00 $ 0.02 $ 0.01 Diluted $ 0.01 $ 0.00 $ 0.02 $ 0.01 Shares used in computing net income per share: Basic 76,232,012 73,682,551 76,139,131 75,088,425 Diluted 76,481,239 74,050,847 76,371,111 76,594,991 See accompanying condensed notes to unaudited consolidated financial statements. 5 Table of Contents Luvu Brands, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity For the Six Months ended December 31, 2022 and December 31, 2021 (unaudited) Series A Preferred Additional Total Stock Common Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit Equity (in thousands, except share data) Balance, June 30, 2021 4,300,000 $ - 75,037,890 $ 750 $ 6,166 $ ( 5,593 ) $ 1,323 Stock-based compensation expense - - - - 10 - 10 Stock option exercises - - 222,543 2 1 - 3 Net income for the six months ended December 31, 2021 - - - - - 394 394 Balance, December 31, 2021 (unaudited) 4,300,000 $ - 75,260,433 $ 752 $ 6,177 $ ( 5,199 ) $ 1,730 Balance, June 30, 2022 4,300,000 $ - 76,046,249 $ 760 $ 6,183 $ ( 4,989 ) $ 1,954 Stock-based compensation expense - - - - 22 - 22 Stock option exercises - - 464,756 5 6 - 11 Net income for the six months ended December 31, 2022 - - - - - 1,188 1,188 Balance, December 31, 2022 (unaudited) 4,300,000 $ - 76,511,005 $ 765 $ 6,211 $ ( 3,801 ) $ 3,175 For the Three Months ended December 31, 2022 and December 31, 2021 (unaudited) Series A Preferred Additional Total Stock Common Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit Equity (in thousands, except share data) Balance, September 30, 2021 (unaudited) 4,300,000 $ - 75,037,890 $ 750 $ 6,170 $ ( 5,366 ) $ 1,554 Stock-based compensation expense - - - - 6 - 6 Stock option exercises - - 22,543 2 1 - 3 Net income for the three months ended December 31, 2021 - - - - - 167 167 Balance, December 31, 2021 (unaudited) 4,300,000 $ - 75,260,433 $ 752 $ 6,177 $ ( 5,199 ) $ 1,730 Balance, September 30, 2022 (unaudited) 4,300,000 $ - 76,046,249 $ 760 $ 6,195 $ ( 4,497 ) $ 2,458 Stock-based compensation expense - - - - 10 - 10 Stock option exercises - - 464,756 5 6 - 11 Net income for the three months ended December 31, 2022 - - - - - 695 695 Balance, December 31, 2022 (unaudited) 4,300,000 $ - 76,511,005 $ 765 $ 6,211 $ ( 3,801 ) $ 3,175 See accompanying condensed notes to unaudited consolidated financial statements. 6 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) Six Months Ended December 31, 2022 2021 OPERATING ACTIVITIES: ( in thousands ) Net income $ 1,188 $ 394 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 175 149 Stock based compensation expense 22 10 Provision for bad debt 1 1 Amortization of operating lease right-of-use assets 165 144 Changes in operating assets and liabilities: Accounts receivable (1) 54 128 Inventories ( 114 ) ( 65 ) Prepaid expenses and other assets ( 9 ) ( 38 ) Accounts payable ( 61 ) 71 Accrued compensation ( 16 ) ( 204 ) Accrued expenses and interest (1) 155 124 Operating leases liability ( 158 ) ( 128 ) Net cash provided by operating activities 1,402 444 INVESTING ACTIVITIES: Investment in equipment and leasehold improvements ( 54 ) ( 46 ) Net cash used in investing activities ( 54 ) ( 46 ) FINANCING ACTIVITIES: Repayment of unsecured notes payable - ( 200 ) Proceeds from unsecured notes payable - 200 Net cash provided by (repaid to) line of credit ( 165 ) ( 49 ) Repayments of secured notes payable - ( 117 ) Repayment of unsecured line of credit ( 6 ) ( 6 ) Proceeds from exercise of stock options 2 3 Payments on equipment notes ( 156 ) ( 121 ) Principal payments on leases payable ( 7 ) ( 4 ) Net cash used in financing activities ( 332 ) ( 294 ) Net increase (decrease) in cash and cash equivalents 1,016 104 Cash and cash equivalents at beginning of period 859 977 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,875 $ 1,081 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Non cash item: Purchases of equipment with equipment notes $ 40 $ 28 Cash paid during the period for: Interest $ - $ 179 Income taxes $ - $ - (1) During the six months ending December 31, 2022 we reclassified credit balances in accounts receivable of ($106,000) to deferred revenue. For the period ending June 30, 2022, accounts receivable and deferred revenue were adjusted by ($85,000) for comparability only. Consolidated Statement of Cash Flow was adjusted accordingly to reflect these reclassifications. See accompanying condensed notes to unaudited consolidated financial statements. 7 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 1. ORGANIZATION AND NATURE OF BUSINESS Luvu Brands, Inc. (the “Company” or “Luvu”) was incorporated in the State of Florida on February 25, 1999. References to the Company in these notes include the Company and its wholly owned subsidiaries, OneUp Innovations, Inc. (“OneUp”), and Foam Labs, Inc. (“Foam Labs”). All operations of the Company are currently conducted by OneUp. The Company is an Atlanta, Georgia based designer, manufacturer and marketer of a portfolio of consumer lifestyle brands including: Liberator ® , a brand category of iconic products for enhancing sexual performance; Avana ® inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery and chronic pain; and Jaxx ® , a diverse range of casual fashion daybeds, sofas and beanbags made from polyurethane foam and repurposed polyurethane foam trim. These products are sold through the Company’s websites, online mass merchants and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce our carbon footprint. Sales are generated through internet and print advertisements and social marketing. We have a diversified customer base with only one customer accounting for 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. The accompanying unaudited consolidated financial statements of the Company and all of its wholly-owned subsidiaries included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America ("GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the six months ended December 31, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2022 as filed with the Securities and Exchange Commission (the “SEC”) on October 14, 2022 (the “2022 10-K”). NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp and Foam Labs. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation. The accompanying consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s 2022 10-K. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: income taxes; deferred tax allowance; allowances for doubtful accounts; inventory valuation and allowances; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates. 8 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Recognition We record revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of our revenue is generated by fulfilling orders for the purchase of manufactured products and product purchased for resale to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which we are responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill our promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice. Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. We have elected to exclude sales, use and similar taxes from the measurement of the transaction price. The impact of this policy election is insignificant, as it aligns with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer. Deferred revenues Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. Deferred revenues primarily relate to gift cards purchased, but not used, prior to the end of the fiscal period. During the six months ending December 31, 2022, we reclassified credit balances in accounts receivable of ($ 106,000 ) to deferred revenue. Our total deferred revenue as of June 30, 2022 was $ 243,944 and was included in “Other accrued liabilities” in the consolidated balance sheets. The deferred revenue balance as of December 31, 2022 was $ 17,888 . Cost of Goods Sold Cost of goods sold includes raw materials, labor, manufacturing overhead, and royalty expense. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 9 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and an additional allowance may be required. The following is a summary of Accounts Receivable as of December 31, 2022 and June 30, 2022. December 31, 2022 June 30, 2022 (unaudited) (in thousands) Accounts receivable (1) $ 1,104 $ 1,199 Allowance for doubtful accounts ( 1 ) ( 1 ) Allowance for discounts and returns ( 50 ) ( 6 ) Total accounts receivable, net $ 947 $ 1,192 (1) During the six months ending December 31, 2022 we reclassified credit balances in accounts receivable of ($106,000) to deferred revenue. For the period ending June 30, 2022, accounts receivable and deferred revenue were adjusted by ($85,000) for comparability only. Consolidated Statement of Cash Flow was adjusted accordingly to reflect these reclassifications. 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 allowances 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 bank balances on deposit at December 31, 2022 that exceeded the balance insured by the FDIC by $ 1,837,756 . 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, 2022, we purchased 35 % and 35 % respectively, of total inventory purchases from one vendor. During the fiscal year ended June 30, 2022, we purchased 34 % of total inventory purchases from one vendor. As of December 31, 2022, two of the Company’s customers represents 35 % and 18 % of the total accounts receivables, respectively. As of June 30, 2022, two of the Company’s customers represents 21 % and 13 % of the total accounts receivables, respectively. For the three and six months ended December 31, 2022, sales to and through Amazon accounted for 34 % and 36 % of our net sales, respectively. 10 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments At December 31, 2022 and June 30, 2022, 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 Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement. ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows: Level 1 : Observable inputs such as quoted prices for identical assets or liabilities in active markets; Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and Level 3 : Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities. The valuation techniques that may be used to measure fair value are as follows: A. Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method. C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Advertising Costs Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $ 687 at December 31, 2022 and $ 1,050 at June 30, 2022. Advertising expense for the three months ended December 31, 2022 and 2021 was $ 199,504 and $ 154,876 , respectively. Advertising expense for the six months ended December 31, 2022 and 2021 was $ 386,498 and $ 286,766 , respectively. 11 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Research and Development Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $ 36,418 and $ 32,482 for the three months ended December 31, 2022 and 2021, respectively. Expenses for new product development totaled $ 67,368 and $ 60,805 for the six months ended December 31, 2022 and 2021, respectively. Research and development costs are included in general and administrative expense. Equipment and leasehold Improvements Equipment and Leasehold Improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated service lives for financial reporting purposes of 2 - 10 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized that time. Impairment or Disposal of Long Lived Assets Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by Financial Accounting Standards Board (“ FASB”) ASC Topic No. 360, Property, Plant, and Equipment . The Company has determined that there was no impairment at December 31, 2022. Operating Leases On November 2, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months, beginning January 1, 2021. The new lease includes two months of rent abatement totaling $ 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 three months ended December 31, 2022 and 2021 was $ 163,188 and $ 163,188 respectively. The rent expense for the six months ended December 31, 2022 and 2021 was $ 326,376 and $ 326,376 respectively. Under ASC 842, which was adopted July 1, 2019, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company elected not to recognize leases with a term less than one year on its balance sheet. Operating lease right-of-use (ROU) assets and their corresponding lease liabilities are recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. In accordance with the guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.) Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, the Company elected the practical expedient to not separate lease and non-lease components. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense. See Note 16 for details. Under prior guidance ASC 840, rent expense and lease incentives from operating leases were recognized on a straight-line basis over the lease term. The difference between rent expense recognized and rental payments was recorded as deferred rent in the accompanying consolidated balance sheets. 12 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Segment Information We have identified three reportable sales channels: Direct, Wholesale and Other . Direct includes product sales through our five e-commerce sites. Wholesale includes Liberator, Jaxx, and Avana branded products sold to distributors and retailers, purchased products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. Other consists principally of shipping and handling fees and costs derived from our Direct business and fulfillment service fees. The following is a summary of sales results for the Direct, Wholesale , and Other channels. Three Months Ended December 31 , 202 2 Three Months Ended December 31 , 202 1 % Change (in thousands) Net Sales by Channel: Direct $ 2,645 $ 2,174 22 % Wholesale $ 5,287 $ 4,827 10 % Other $ 204 $ 185 10 % Total Net Sales $ 8,136 $ 7,186 13 % Three Months Ended December 31, 2022 Margin % Three Months Ended December 31, 2021 Margin % $ % Change Gross Profit by Channel: (in thousands) (in thousands) Direct $ 1,242 47 % $ 990 46 % 25 % Wholesale $ 1,545 29 % $ 987 20 % 57 % Other $ ( 528 ) — % $ ( 400 ) — % ( 32 )% Total Gross Profit $ 2,259 28 % $ 1,577 22 % 43 % Six Months Ended December 31, 2022 Six Months Ended December 31, 2021 % Change (in thousands) Net Sales by Channel: Direct $ 4,911 $ 3,921 25 % Wholesale $ 10,885 $ 9,143 19 % Other $ 398 $ 347 15 % Total Net Sales $ 16,194 $ 13,411 21 % Six Months Ended December 31, 2022 Margin % Six Months Ended December 31, 2021 Margin % % Change (in thousands) (in thousands) Gross Profit by Channel: Direct $ 2,256 46 % $ 1,815 46 % 24 % Wholesale $ 2,858 26 % $ 1,963 21 % 46 % Other $ ( 881 ) — % $ ( 703 ) — % ( 25 )% Total Gross Profit $ 4,233 26 % $ 3,075 23 % 38 % 13 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent accounting pronouncements From time to time, new accounting pronouncements are issued by FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable. Net Income Per Share In accordance with ASC 260, “Earnings Per Share”, basic net income per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period plus the effect of stock options using the treasury stock method. As of December 31, 2022 and 2021, the common stock equivalents did not have any effect on net income per share. December 31, 2022 2021 Common stock options – 2015 Plan 1,450,000 2,350,000 Convertible preferred stock 4,300,000 4,300,000 Total 5,750,000 6,650,000 Income Taxes We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. Stock Based Compensation We account for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and restricted stock award at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period. 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. 14 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) 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 December 31, 2022 or June 30, 2022. NOTE 4. INVENTORIES, NET Inventories are stated at the lower of cost (which approximates first-in, first-out) or net realizable value. Net realizable value is defined as sales price less cost to dispose and a normal profit margin. Inventories consisted of the following: December 31, 2022 June 30, 2022 (unaudited) (in thousands) Raw materials $ 2,158 $ 1,893 Work in process 561 440 Finished goods 1,388 1,660 Total inventories 4,107 3,993 Allowance for slow moving inventory ( 176 ) ( 176 ) Total inventories, net of allowance $ 3,931 $ 3,817 NOTE 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, or the shorter of the remaining lease term or estimated useful lives for leasehold improvements. Equipment and leasehold improvements consisted of the following: December 31, 2022 June 30, 2022 Estimated Useful Life (unaudited) (in thousands) Factory equipment $ 4,275 $ 3,840 2 - 10 years Computer equipment and software 1,170 1,167 5 - 7 years Office equipment and furniture 205 205 5 - 7 years Leasehold improvements 480 480 6 years Project in process - 318 Subtotal 6,130 6,010 Accumulated depreciation and amortization ( 4,167 ) ( 3,981 ) Equipment and leasehold improvements, net $ 1,963 $ 2,029 Depreciation and amortization expense was $ 88,017 and $ 77,825 for the three months ended December 31, 2022 and 2021, respectively. For the six months ended December 31, 2022 and 2021, depreciation and amortization expense was $ 174,873 and $ 148,513 , respectively. Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the six months ended December 31, 2022. 15 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 6. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 2022 and June 30, 2022: December 31, 2022 June 30, 2022 (unaudited) (in thousands) Accrued compensation $ 327 $ 344 Accrued expenses and interest (1) 348 286 Other accrued liabilities $ 675 $ 630 (1) During the six months ending December 31, 2022 we reclassified credit balances in accounts receivable of ($ 106,000 ) to deferred revenue. For the period ending June 30, 2022, accounts receivable and deferred revenue were adjusted by ($ 85,000 ) for comparability only. Audited accounts receivable and deferred revenue balances, reported on Form 10K for the fiscal year ended June 30, 2022, did not change. NOTE 7. CURRENT AND LONG-TERM DEBT SUMMARY Current and long-term debt at December 31, 2022 and June 30, 2022 consisted of the following: December 31, 2022 June 30, 2022 (unaudited) Current debt: (in thousands) Unsecured lines of credit (Note 11) $ 19 $ 25 Line of credit (Note 10) 905 1,070 Short-term unsecured notes payable (Note 8) 400 200 Current portion of equipment notes payable (Note 13) 325 308 Current portion secured notes payable (Note 12) - - Current portion of finance leases payable (Note 13) 15 15 Current portion of notes payable – related party (Note 9) 116 116 Total current debt 1,780 1,734 Long-term debt: Unsecured notes payable (Note 8) - 200 Finance leases payable (Note 13) 17 25 Equipment notes payable (Note 13) 710 842 Total long-term debt $ 727 $ 1,067 16 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 8. UNSECURED NOTES PAYABLE Unsecured notes payable at December 31, 2022 and June 30, 2022 consisted of the following: December 31, 2022 June 30, 2022 (unaudited) Current unsecured notes payable: (in thousands) 13.5 % Unsecured note, interest only, due May 1, 2023 (2) 200 200 13.5 % Unsecured note, interest only, due July 31, 2023 (3) 100 - 13.5 % Unsecured note, interest only, due October 31, 2023 (1) 100 - Total current unsecured notes payable 400 200 Long-term unsecured notes payable: 13.5% Unsecured note, interest only, due October 31, 2023 (1) - 100 13.5% Unsecured note, interest only, due July 31, 2023 (3) - 100 Total long-term unsecured notes payable - 200 Total unsecured notes payable $ 400 $ 400 (1) Unsecured note payable for $ 100,000 to an individual with interest payable monthly at 20 %, principal originally due in full on October 31, 2014, extended to October 31, 2019, then extended to October 31, 2021. This note was repaid in full on October 1, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on October 31, 2023 . Personally guaranteed by principal stockholder. (2) Unsecured note payable for $ 200,000 to an individual with interest payable monthly at 20 %, principal originally due in full on May 1, 2013, extended to May 1, 2019, then extended to April 30, 2021. This note was repaid in full on April 30, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on May 1, 2023 . Personally guaranteed by principal stockholder. (3) Unsecured note payable for $ 100,000 to an individual with interest payable monthly at 20 %, principal originally due in full on July 31, 2013, extended to July 31, 2019, then extended to July 31, 2021. This note was repaid in full on July 30, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on July 31, 2023 . Personally guaranteed by principal stockholder. NOTE 9. NOTES PAYABLE - RELATED PARTY Related party notes payable at December 31, 2022 and June 30, 2022 consisted of the following: December 31, 2022 June 30, 2022 (unaudited) (in thousands) Unsecured note payable to an officer, with interest at 3.25 %, due on July 1, 2023 $ 40 $ 40 Unsecured note payable to an officer, with interest at 3.25 %, due on July 1, 2023 76 76 Total unsecured notes payable 116 116 Less: current portion ( 116 ) ( 116 ) Long-term unsecured notes payable $ - $ - 17 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 10. LINE OF CREDIT The Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs has entered into a credit facility with a finance company, Advance Financial Corporation dated May 24, 2011, as amended, to provide it with an asset based line of credit of up to $ 1,200,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital and includes an Inventory Advance (as defined in the agreement) of up to the lesser of $ 500,000 or 125 % of the eligible accounts receivable loan. The term of the agreement was one year, renewable for additional one year terms unless either party provides written notice of nonrenewal at least 90 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement are currently charged interest at a rate of prime rate plus 2 % over the lenders Index Rate. In addition, there is a Monthly Service Fee (as defined in the agreement) of currently 0.05 % per month. The Company’s President, Chief Executive Officer (CEO), and majority shareholder. Louis Friedman, has personally guaranteed the repayment of the facility. In addition, the Company has provided its corporate guarantee of the credit facility (see Note 14). On December 31, 2022, the balance owed under this line of credit was $ 905,410 . As of December 31, 2022, we were current and in compliance with all terms and conditions of this line of credit. Management believes cash flows generated from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may be required. NOTE 11. UNSECURED LINE OF CREDIT The Company has drawn a cash advance on an unsecured line of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 12.25 %. The aggregate amount owed on the unsecured line of credit was $ 18,942 at December 31, 2022 and $ 24,879 at June 30, 2022. NOTE 12. SECURED NOTE PAYABLE On February 17, 2021, the Company entered into an agreement with Amazon, whereby Amazon agreed to loan OneUp a total of $ 200,000 . Repayment of this note is by 12 monthly payments of $ 17,675 , which includes interest at 10.99 %. This loan was repaid in full on February 17, 2022. 18 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 13. COMMITMENTS AND CONTINGENCIES Operating Leases The 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 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, 2022, the weighted average remaining lease term for the lease renewal is 5 years and the weighted average discount rate is 14.49 %. Supplemental balance sheet information related to leases at December 31, 2022 is as follows: Operating leases Balance Sheet Classification (in thousands) Right-of-use assets Operating lease right-of-use assets, net $ 2,090 Current lease liabilities Operating lease liabilities $ 368 Non-current lease liabilities Long-term operating lease liabilities 1,874 Total lease liabilities $ 2,242 Maturities of lease liabilities at December 31, 2021 are as follows: Payments (in thousands) 2023 $ 330 2024 680 2025 721 2026 762 2027 and thereafter 528 Total undiscounted lease payments 3,021 Less: Present value discount ( 779 ) Total lease liabilities balance $ 2,242 Equipment Notes Payable The Company has acquired equipment under the provisions of long-term equipment notes. For financial reporting purposes, minimum note payments relating to the equipment have been capitalized. The equipment acquired with these equipment notes has a total cost of $ 2,139,542 . These assets are included in the fixed assets listed in Note 5 - Equipment and Leasehold Improvements and include production equipment. The equipment notes have stated or imputed interest rates ranging from 8.9 % to 11.3 %. The following is an analysis of the minimum future equipment note payable payments subsequent to December 31, 2022: Years ending June 30, (in thousands) 2023 $ 199 2024 379 2025 333 2026 215 2027 41 Future Minimum Note Payable Payments 1,167 Less Amount Representing Interest ( 132 ) Present Value of Minimum Note Payable Payments 1035 Less Current Portion ( 325 ) Long-Term Obligations under Equipment Notes Payable $ 710 19 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 13. COMMITMENTS AND CONTINGENCIES (continued) Finance Leases Payable The Company has lease obligations for equipment under the provisions of long-term finance leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The equipment acquired with these leases has a total cost of approximately $ 58,152 . These assets are included in the finance lease and include production equipment. On June 22, 2020 the Company entered into finance lease agreement with Wells Fargo in the amount of $ 34,761 with monthly payment of $ 850 with 48-month term at an imputed interest rate of 8.09 %. On February 1, 2022 the Company entered into finance lease agreement with Raymond in the amount of $ 22,862 with monthly payment of $ 514 with 48-month term at an imputed interest rate of 3.75 %. The following is an analysis of the minimum finance lease payable payments subsequent to December 31, 2022: Year ending June 30, (in thousands) 2023 8 2024 17 2025 6 2026 3 Future Minimum Finance Lease Payable Payments $ 34 Less Amount Representing Interest ( 2 ) Present Value of Minimum Finance Lease Payable Payments 32 Less Current Portion ( 15 ) Long-Term Obligations under Finance Lease Payable $ 17 Employment Agreement The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer (CEO). The agreement provides for an annual base salary of $ 150,000 and eligibility to receive a bonus. In certain termination situations, the Company is liable to pay severance compensation to Mr. Friedman for up to nine months at his current salary. Legal Proceedings As of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to the 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 adverse effect to the company. NOTE 14. RELATED PARTY TRANSACTIONS The Company has a subordinated note payable to an officer of the Company who is also the wife of the Company’s CEO (Louis Friedman) and majority shareholder in the amount of $ 76,000 (see Note 9). Interest on the note during the six months ended December 31, 2022 was accrued by the Company at the prevailing prime rate (which is currently 7.50 %) and totaled $ 1,310 . The accrued interest on the note as of December 31, 2022 was $ 31,598 . This note is subordinate to all other credit facilities currently in place. On October 30, 2010, Mr. Friedman, loaned the Company $ 40,000 (see Note 9). Interest on the note during the six months ended December 31, 2022 was accrued by the Company at the prevailing prime rate (which is currently 7.50 %) and totaled $ 689 . The accrued interest on the note as of December 31, 2022 was $ 2,520 . This note is subordinate to all other credit facilities currently in place. 20 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 14. RELATED PARTY TRANSACTIONS (continued) The Company’s CEO has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 11 – Line of Credit). In addition, Luvu Brands has provided its corporate guarantees of the credit facility. On December 31, 2022, the balance owed under this line of credit was $ 905,410 . On July 20, 2011, the Company issued an unsecured promissory note to an individual for $ 100,000 . Terms of the promissory note call for monthly interest payments of $ 1,667 (equal to interest at 20 % per annum), with the principal amount due in full on July 31, 2012; extended by the holder to July 31, 2021 under the same terms (see Note 8). 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 . Repayment of this promissory note is personally guaranteed by the Company’s CEO, Louis S. Friedman. On October 31, 2013, the Company issued an unsecured promissory note to an individual for $ 100,000 . Terms of the promissory note call for monthly interest payments of $ 1,667 (equal to interest at 20 % per annum) beginning on November 30, 2013, with the principal amount due in full on or before October 31, 2014 extended by the holder to October 31, 2021 (see Note 8). This note was repaid in full on October 31,2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5%, principal due in full on October 31, 2023 . Repayment of the promissory note is personally guaranteed by the Company’s CEO, Louis S. Friedman. On May 1, 2012, an individual loaned the Company $ 200,000 with an interest rate of 20 %. Interest on the loan is being paid monthly, with the principal due in full on May 1, 2013; then extended to May 1, 2021 (see Note 8). 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 . Mr. Friedman has personally guaranteed the repayment of the loan obligation. The Company has drawn a cash advance on one unsecured line of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 11 %. The aggregate amount owed on the unsecured line of credit was $ 18,942 at December 31, 2022 (see Note 11). The loan is personally guaranteed by the Company’s CEO, Louis S. Friedman. NOTE 15. STOCKHOLDERS’ EQUITY Options At December 31, 2022, the Company had the 2015 Stock Option Plan (the “2015 Plan”), which is a shareholder-approved and under which 1,450,000 shares are reserved for issuance under the 2015 Plan until such Plan terminates on August 31, 2025. Under the 2015 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2015 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of December 31, 2022, the number of shares available for issuance under the 2015 Plan was 362,500 . 21 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 15. STOCKHOLDERS’ EQUITY (continued) The following table summarizes the Company’s stock option activities during the six months ended December 31, 2022: Number of Shares Underlying Outstanding Options Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Intrinsic Value Options outstanding as of June 30, 2022 1,975,000 3.0 $ 0.10 $ 107,500 Granted - - - - Exercised ( 475,000 ) 0.0 $ 0.03 - Forfeited or expired ( 50,000 ) 0.0 $ 0.03 - Options outstanding as of December 31, 2022 1,450,000 2.7 $ 0.13 $ 92,200 Options exercisable as of December 31, 2022 362,500 1.7 $ 0.05 $ 52,451 The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $ 0.19 for such day. There were 475,000 stock options exercised during the six months ended December 31, 2022 and a total of 250,000 during the six months ended December 31, 2021 in exchange for various consideration including cash, accrued interest and on a cashless basis. There were no stock options granted during the six months ended December 31, 2022 and 50,000 stock options granted during the six months ended December 31, 2021. 22 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 15. STOCKHOLDERS’ EQUITY (continued) The following table summarizes the weighted average characteristics of outstanding stock options as of December 31, 2022: Outstanding Options Exercisable Options Exercise Prices Number of Shares Remaining Life (Years) Weighted Average Price Number of Shares Weighted Average Price $ .02 to $.03 400,000 1.8 $ 0.03 275,000 $ 0.03 $ .05 50,000 0.5 $ 0.05 50,000 $ 0.05 $ .16 to $.20 950,000 3.1 $ 0.17 25,000 $ 0.17 $ .30 50,000 3.6 $ 0.30 25,000 $ 0.30 Total stock options 1,450,000 2.7 $ 0.13 375,000 $ 0.05 Stock-based compensation We account for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation . We measure the cost of each stock option and at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period. Stock option-based compensation expense recognized in the condensed consolidated statements of operations for the three and six month periods ended December 31, 2022 and 2021 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures. The following table summarizes stock option-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans: Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 ($ in thousands) Cost of Goods Sold $ 1 $ 1 $ 2 $ 1 Other Selling and Marketing 3 2 7 4 General and Administrative 6 3 13 5 Total Stock-based Compensation Expense $ 10 $ 6 $ 22 $ 10 As of December 31, 2022, the Company’s total unrecognized compensation cost was $ 140,562 which will be recognized over the weighted average vesting period of approximately 3.1 years. Share Purchase Warrants As of December 31, 2022 and 2021, there were no warrants outstanding. 23 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 (UNAUDITED) NOTE 15. STOCKHOLDERS’ EQUITY (continued) Common Stock The Company’s authorized common stock was 175,000,000 shares at December 31, 2022 and June 30, 2022. Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At December 31, 2022, the Company had reserved the following shares of common stock for issuance: December 31, 2022 Shares of common stock reserved for issuance under the 2015 Plan 1,450,000 Shares of common stock issuable upon conversion of the Preferred Stock 4,300,000 Total Shares of common stock equivalents 5,750,000 Preferred Stock On February 18, 2011, the Company filed an amendment to its Articles of Incorporation, effective February 9, 2011, authorizing the issuance of preferred stock and the Company now has 10,000,000 authorized shares of preferred stock, par value $ 0.0001 per share, of which 4,300,000 shares have been designated and issued as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into one share of common stock and has a liquidation preference of $ 0.2325 ($ 1,000,000 in the aggregate). Liquidation payments to the preferred holders have priority and are made in preference to any payments to the holders of common stock. In addition, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Shares issued and outstanding at the time of such vote . At each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including the election of directors, holders of Series A Convertible Preferred Shares shall vote together with the holders of common shares as a single class. 24 Table of Contents