Luvu Brands, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS LUVU BRANDS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2024 June 30, (unaudited) 2024 Assets: (in thousands, except share data) Current assets: Cash and cash equivalents $ 1,068 $ 1,028 Accounts receivable, net of allowance for doubtful accounts and allowance for discounts and returns of $ 10 on September 30, 2024 and $ 11 on June 30, 2024 1,198 1,061 Inventories, net of allowance for inventory reserve of $ 214 on September 30, 2024 and $ 214 on June 30, 2024 3,004 3,287 Other current assets 171 141 Total current assets 5,441 5,517 Equipment, property and leasehold improvements, net 1,762 1,870 Finance lease assets 103 103 Operating lease assets 1,410 1,545 Other assets 96 96 Total assets $ 8,812 $ 9,131 Liabilities and stockholders’ equity: Current liabilities: Accounts payable $ 1,435 $ 1,502 Current debt 1,871 1,639 Other accrued liabilities 686 508 Operating lease liability 555 528 Total current liabilities 4,547 4,177 Noncurrent liabilities: Deferred Tax Liability 119 119 Long-term debt 534 854 Long-term operating lease liability 984 1,151 Total noncurrent liabilities 1,637 2,124 Total liabilities 6,183 6,301 Commitments and contingencies (See Note 12) — — Stockholders’ equity (deficit): Preferred stock, 5,700,000 shares authorized, $ 0.0001 par value none issued and outstanding — — Series A Convertible Preferred stock, 4,300,000 shares authorized $ 0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $ 1,000 as of September 30, 2024 and June 30, 2024 — — Common stock, $ 0.01 par value, 175,000,000 shares authorized, 76,834,057 and 76,547,672 shares issued and outstanding as of September 30, 2024 and June 30, 2024, respectively 766 765 Additional paid-in capital 6,261 6,253 Accumulated deficit ( 4,398 ) ( 4,188 ) Total stockholders’ equity 2,629 2,830 Total liabilities and stockholders’ equity $ 8,812 $ 9,131 See accompanying notes to unaudited consolidated financial statements. 4 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited) Three Months Ended September 30, 2024 2023 (in thousands, except share data) Net Sales $ 5,756 $ 6,126 Cost of goods sold (excluding depreciation expense presented below) 4,239 4,544 Gross profit 1,517 1,582 Operating expenses: Advertising and promotion 231 269 Other selling and marketing 414 427 General and administrative 885 819 Depreciation 109 99 Total operating expenses 1,639 1,614 Operating loss ( 122 ) ( 32 ) Other income (expense): Interest expense and financing costs, net ( 88 ) ( 94 ) (88 ) (94 ) Loss from operations before income taxes ( 210 ) ( 126 ) Provision for income taxes - 0 $ ( 210 ) $ ( 126 ) Net loss per share: Basic $ ( 0.00 ) $ ( 0.00 ) Diluted $ ( 0.00 ) $ ( 0.00 ) Shares used in calculation of net loss per share: Basic 76,834,057 76,547,672 Diluted 76,834,057 76,547,672 See accompanying notes to unaudited consolidated financial statements. 5 Table of Contents Luvu Brands, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (Deficit) For the Three Months ended September 30, 2024 and September 30, 2023 (unaudited) Additional Total Series A Preferred Stock Common Stock Paid-in Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity (in thousands, except share data) B alance, June 30, 2023 4,300,000 $ 0 76,547,672 $ 765 $ 6,234 $ ( 3,790 ) $ 3,210 Stock-based compensation expense - - - - ( 6 ) - ( 6 ) Stock option exercises - - - - - - - Net loss - - - - - ( 126 ) ( 126 ) Balance, September 30, 2023 4,300,000 $ 0 76,547,672 $ 765 $ 6,228 ($ 3,916 ) $ 3,078 Balance, June 30, 2024 4,300,000 $ 0 76,547,672 $ 765 $ 6,253 ($ 4,188 ) $ 2,830 Stock-based compensation expense - - - - 9 - 9 Stock option exercises - - 286,385 1 - - - Net loss - - - - - ( 210 ) ( 210 ) Balance, September 30, 2024 4,300,000 $ 0 76,834,057 $ 766 $ 6,261 ($ 4,398 ) $ 2,629 See accompanying notes to unaudited consolidated financial statements. 6 Table of Contents LUVU BRANDS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) Three Months Ended September 30, 2024 2023 (in thousands) OPERATING ACTIVITIES: Net loss $ ( 210 ) $ ( 126 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 109 99 Stock-based compensation expense 9 ( 6 ) Provision for bad debt - 2 Change in operating assets and liabilities: Accounts receivable ( 137 ) ( 119 ) Inventory 283 147 Prepaid expenses and other current assets ( 31 ) ( 36 ) Accounts payable ( 63 ) 63 Accrued expenses and interest 178 148 Operating lease liability ( 141 ) ( 94 ) Operating lease asset 135 93 Net cash provided by operating activities 132 171 INVESTING ACTIVITIES: Investment in equipment, software and leasehold improvements ( 1 ) ( 32 ) Net cash used in investing activities ( 1 ) ( 32 ) FINANCING ACTIVITIES: Borrowing under revolving line of credit 10 63 Repayment of unsecured line of credit ( 1 ) ( 3 ) Proceeds from unsecured notes payable - 200 Repayment of unsecured notes payable - ( 200 ) Payments on equipment notes ( 94 ) ( 99 ) Principal payments on capital leases ( 6 ) ( 4 ) Net cash used in financing activities ( 91 ) ( 43 ) Net decrease in cash and cash equivalents 40 96 Cash and cash equivalents at beginning of year 1,028 1,041 Cash and cash equivalents at end of year $ 1,068 $ 1,137 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 86 $ 94 See accompanying notes to unaudited consolidated financial statements. 7 Table of Contents 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 ® , Top-of-Bed Comfort products and inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery, and chronic pain; and Jaxx ® , a diverse range of casual fashion daybeds, sofas and beanbags made from 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 the Company’s products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce the Company’s carbon footprint. Sales are generated through internet and print advertisements and social marketing. The Company has 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. 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 or omitted pursuant to applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for fair presentation have been included. The year-end 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, 2024 are not necessarily indicative of the results to be expected for the entire fiscal year. These 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, 2024 as filed with the Securities and Exchange Commission (the “SEC”) on September 30, 2024 (the “2024 10-K”). NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements include the accounts and operations of the Company’s 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 2024 10-K. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates. 8 Table of Contents NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Recognition The Company records 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 the Company’s 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 the Company is 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 the Company’s promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with the Company’s current practice. Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. The Company has 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 the Company’s 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. The Company reviews and updates 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, the Company considers 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 shipped from the distribution center, or in some cases, picked up from one of the Company’s 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. The Company’s total deferred revenue as of September 30, 2024 was $ 20,029 and was included in “Other accrued liabilities” on the Company’s consolidated balance sheets. The deferred revenue balance as of June 30, 2024 was $ 19,454 . 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 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Doubtful Accounts The allowance for doubtful accounts reflects management's best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specifically identified nonpaying accounts, and other currently available evidence. The Company reviews its allowance for doubtful accounts monthly, focusing on significant individual past due balances over 90 days. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. The following is a summary of Accounts Receivable as of September 30, 2024 and June 30, 2024. September 30, 2024 June 30, 2024 (unaudited) (in thousands) Accounts receivable $ 1,208 $ 1,072 Allowance for doubtful accounts ( 10 ) ( 11 ) Allowance for discounts and returns - - Total accounts receivable, net $ 1,198 $ 1,061 Inventories and Inventory Reserves Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor, depreciation and overhead. The Company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or net realizable value may be adjusted in response to changing conditions. Concentration of Credit Risk The Company maintains its cash accounts with banks located in Georgia. The Federal Deposit Insurance Corporation (“FDIC”) insures the total cash balances up to $ 250,000 per bank. On September 30, 2024, the Company had bank balances on deposit that exceeded the balance insured by the FDIC by $ 817,862 . Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe. During the three months ended September 30, 2024, the Company purchased 16 % of total inventory purchases from one vendor. During the three months ended September 30, 2023, the Company purchased 35 % of total inventory purchases from one vendor. As of September 30, 2024, two of the Company’s customers represents 57 % and 8 % of the total accounts receivables, respectively. As of June 30, 2024, two of the Company’s customers represents 43 % and 17 % of the total accounts receivables, respectively. For the three months ended September 30, 2024 and September 30, 2023, sales to and through Amazon accounted for 38 % and 37 %, respectively, of the Company’s net sales. 10 Table of Contents NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments At September 30, 2024 and June 30, 2024, the Company’s 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. There were $ 338 in Prepaid advertising at September 30, 2024 and $ 836 at June 30, 2024. Advertising expense for the three months ended September 30, 2024 and 2023 was $ 231,131 and $ 268,544 , respectively. Research and Development Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $ 42,594 and $ 32,722 for the three months ended September 30, 2024 and 2023, respectively. Research and development costs are included in general and administrative expenses. 11 Table of Contents NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated service lives for financial reporting purposes of 2 - 10 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently. Impairment or Disposal of Long Lived Assets Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by Financial Accounting Standards Board (“ FASB”) ASC Topic No. 360, Property, Plant, and Equipment . The Company has determined that there was no impairment at September 30, 2024. 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 September 30, 2024 and 2023 was $ 163,188 and $ 163,188 , respectively. Under ASC 842, 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 ASC 842, 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 12 for details. 12 Table of Contents NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Segment Information The Company have identified three reportable sales channels: Direct, Wholesale and Other . Direct includes product sales through the Company’s four e-commerce sites. Wholesale includes Liberator, Jaxx, and Avana branded products sold to distributors and retailers, purchased products sold to retailers, and private label items sold to other resellers. The Wholesale category also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of the Company’s business. Other consists principally of shipping and handling fees and costs derived from the Company’s Direct business. The following is a summary of sales results for the Direct, Wholesale , and Other channels. Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 % Change (in thousands) Net Sales by Channel: Direct $ 1,664 $ 1,527 9 % Wholesale $ 3,986 $ 4,473 - 11 % Other $ 106 $ 126 - 16 % Total Net Sales $ 5,756 $ 6,126 - 6 % Three Months Ended Margin Three Months Ended Margin % September 30, 2024 % September 30, 2023 % Change (in thousands) (in thousands) Gross Profit by Channel: Direct $ 631 38 % $ 720 47 % - 12 % Wholesale $ 1,132 28 % $ 1,114 25 % 2 % Other $ ( 246 ) - 233 % $ ( 252 ) - 199 % - 2 % Total Gross Profit $ 1,518 26 % $ 1,582 26 % - 4 % 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. In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures , which provides improvements to reportable segment disclosure requirements, primarily through enhanced disclosures around segment expenses. ASU 2023-07 requires the Company to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss. ASU 2023-07 also requires that the Company disclose an amount for other segment items by reportable segment, a description of their composition and provide all annual disclosures about a reportable segment’s profit or loss and assets pursuant to Topic 280 during interim periods. The Company must also disclose the CODM’s title and position, as well as certain information around the measures used by the CODM and an explanation of how the CODM uses the reported measures in assessing segment performance and deciding how to allocate resources. For public entities with a single reportable segment, the entity must provide all the disclosures required pursuant to ASU 2023-07 and all existing segment disclosures under Topic 280. The amendments of ASU 2023-07 are effective for the Company for annual periods beginning July 1, 2024, and effective for interim periods beginning January 1, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company will evaluate the impact of ASU 2023-07 on its financial statements. All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable. 13 Table of Contents NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Net Loss 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 September 30, 2024 and 2023, the common stock equivalents did not have any effect on net loss per share. September 30, 2024 2023 Common stock options – 2015 Plan 1,250,000 1,350,000 Convertible preferred stock 4,300,000 4,300,000 Total 5,550,000 5,650,000 Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. The Company recognizes deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. The Company regularly assesses the likelihood that its deferred tax assets will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset the Company’s deferred tax assets that will not be recoverable. The Company has recorded and continues to carry a full valuation allowance against its gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If the Company determines in the future that it is more likely than not that it will realize all or a portion of its deferred tax assets, the Company will adjust its valuation allowance in the period it makes the determination. The Company expects to provide a full valuation allowance on its future tax benefits until it can sustain a level of profitability that demonstrates the Company’s ability to realize these assets. Stock Based Compensation The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. The Company measures 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 an expense in the financial statements over the respective vesting period. NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS The Company follows FASB ASC 360, Property, Plant, and Equipment , regarding impairment of the Company’s other long-lived assets (property, plant and equipment). The Company’s policy is to assess the Company’s long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of a long-lived asset. Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated. There was no impairment as of September 30, 2024 or June 30, 2024. 14 Table of Contents 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: September 30, 2024 June 30, 2024 (unaudited) (in thousands) Raw materials $ 1,317 $ 1,396 Work in process 419 460 Finished goods 1,482 1,645 Total inventories 3,218 3,501 Allowance for inventory reserves ( 214 ) ( 214 ) Total inventories, net of allowance $ 3,004 $ 3,287 NOTE 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment, property and leasehold improvements at September 30, 2024 and June 30, 2024 consisted of the following: September 30, 2024 June 30, 2024 Estimated Useful Life (unaudited) (in thousands) Factory equipment $ 4,476 $ 4,476 2 - 10 years Computer equipment and software 763 761 5 - 7 years Office equipment and furniture 151 151 5 - 7 years Leasehold improvements 475 475 6 years Subtotal 5,865 5,863 Accumulated depreciation ( 4,000 ) ( 3,890 ) Equipment and leasehold improvements, net $ 1,865 $ 1,973 Depreciation expense was $ 109,221 and $ 99,222 for the three months ended September 30, 2024 and 2023, 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 three months ended September 30, 2024. NOTE 6. OTHER ACCRUED LIABILITIES Other accrued liabilities at September 30, 2024 and June 30, 2024: September 30, 2024 June 30, 2024 (unaudited) (in thousands) Accrued compensation $ 524 $ 342 Accrued expenses and interest 162 166 Other accrued liabilities $ 686 $ 508 15 Table of Contents NOTE 7. CURRENT AND LONG-TERM DEBT SUMMARY Current and long-term debt at September 30, 2024 and June 30, 2024 consisted of the following: September 30, 2024 June 30, 2024 (unaudited) Current debt: (in thousands) Unsecured lines of credit (Note 11) $ - $ - Line of credit (Note 10) 1,054 1,044 Short-term unsecured notes payable (Note 8) 300 200 Current portion of equipment notes payable (Note 12) 380 371 Notes payable – related party 116 - Current portion of finance leases payable (Note 12) 21 24 Total current debt 1,871 1,639 Long-term debt: Unsecured notes payable (Note 8) 100 200 Finance leases payable (Note 12) 85 87 Equipment notes payable (Note 12) 349 452 Notes payable – related party - 116 Total long-term debt $ 534 $ 855 16 Table of Contents NOTE 8. UNSECURED NOTES PAYABLE Unsecured notes payable at September 30, 2024 and June 30, 2024 consisted of the following: September 30, June 30, 2024 2024 Current debt: (in thousands) 13.5% Unsecured note, interest only, due May 1, 2025 (2) $ 200 $ 200 13.5% Unsecured note, interest only, due July 31, 2025(3) 100 - Total current debt $ 300 $ 200 Long-term debt: 13.5% Unsecured note, interest only, due July 31, 2025(3) $ - $ 100 13.5% Unsecured note, interest only, due October 31, 2025(1) 100 100 Total long-term debt 100 200 Total unsecured notes payable $ 400 $ 400 (1) Unsecured note payable for $ 100,000 to a third-party 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. This note was extended in full on September 30, 2023 with the same lender with interest payable monthly at 13.5%, principal due in full on October 31, 2025. Personally guaranteed by Louis Friedman, the Company’s CEO and principal shareholder. (2) Unsecured note payable for $ 200,000 to a third-party with interest payable monthly at 20 %, principal originally due in full on May 1, 2013, extended to May 1, 2019, then extended to May 1, 2021 . This note was repaid in full on April 30, 2021 and replaced with a new note from an entity controlled by the same lender with interest payable monthly at 13.5 %, principal due in full on May 1, 2023. This note was extended in full on April 30, 2023 with the same lender with interest payable monthly at 13.5%, principal due in full on May 1, 2025. Personally guaranteed by Louis Friedman, the Company’s CEO and principal shareholder. (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. This note was extended in full on July 30, 2023 with the same lender with interest payable monthly at 13.5%, principal due in full on July 31, 2025. Personally guaranteed by the Company’s CEO and principal shareholder. 17 Table of Contents NOTE 9. NOTES PAYABLE - RELATED PARTY Related party notes payable at September 30, 2024 and June 30, 2024 consisted of the following: September 30, 2024 June 30, 2024 (unaudited) (in thousands) Unsecured note payable to an officer, with interest at 8.50%, due on July 1, 2025 $ 40 $ 40 Unsecured note payable to an officer, with interest at 8.50%, due on July 1, 2025 76 76 Total unsecured notes payable 116 116 Less: current portion ( 116 ) - Long-term unsecured notes payable $ - $ 116 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 non-renewal at least 90 days prior to the end of the current financing period. The credit facility is secured by the Company’s 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 13). On September 30, 2024, the balance owed under this line of credit was $ 1,053,908 . As of September 30, 2024, the Company was current and in compliance with all terms and conditions of this line of credit. Management believes cash flows generated from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may be required. 18 Table of Contents NOTE 11. UNSECURED LINE OF CREDIT The Company has drawn a cash advance on one unsecured line of credit that is in the name of the Company and Louis Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 11 %. The aggregate amount owed on the unsecured line of credit was $ 0 at September 30, 2024 and $ 116 at June 30, 2024. NOTE 12. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its facilities under a non-cancelable operating lease which now expires February 28, 2027. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities for the lease renewal were recognized at the inception date which is November 2, 2020 based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate based on the information available. At September 30, 2024, the weighted average remaining lease term for the lease renewal is 2.4 years and the weighted average discount rate is 14.49 %. In addition to the rent payment, The Company pays a proportionate share of operating costs, taxes, and insurance costs. The cost for these additional rent expenses for the three months ending September 30 2024 and 2023 were $ 52,992 and $ 54,484 respectively. Supplemental balance sheet information related to leases at September 30, 2024 is as follows: Operating leases Balance Sheet Classification (in thousands) Right-of-use assets Operating lease right-of-use assets, net $ 1,410 Current lease liabilities Operating lease liabilities $ 555 Non-current lease liabilities Long-term operating lease liabilities 984 Total lease liabilities $ 1,539 Maturities of lease liabilities at September 30, 2024 are as follows: Payments (in thousands) 2025 $ 545 2026 772 2027 333 Total undiscounted lease payment $ 1,836 Less: Present value discount ( 297 ) Total lease liability balance $ 1,539 19 Table of Contents NOTE 12. COMMITMENTS AND CONTINGENCIES (continued) 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 $ 2,451,838 . 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 7.1 % to 13.5 %. The following is an analysis of the minimum future equipment note payable payments subsequent to September 30, 2024: Years ending September 30, (in thousands) 2025 $ 380 2026 236 2027 93 2028 19 Future Minimum Note Payable Payments $ 728 Less Current Portion ( 380 ) Long-Term Obligations under Equipment Notes Payable $ 348 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 $ 161,920 . These assets are included in the finance lease and include production equipment. On July 1, 2020 the Company entered into finance lease agreement in the amount of $ 35,000 with monthly payment of $ 850 with 48 -month term at an imputed interest rate of 8.09 %. On January 5, 2022 the Company entered into finance lease agreement in the amount of $ 23,000 with monthly payment of $ 514 with 48 -month term at an imputed interest rate of 3.75 %. On March 15, 2024, the Company entered into a finance lease agreement in the amount of $ 63,948 with monthly payments of $ 1,325 with 60 -month term at an imputed rate of 8.90 %. On June 3, 2024, the Company entered into a finance lease agreement in the amount of $ 39,972 with monthly payments of $ 807 with 60 -month term at an imputed rate of 7.80 %. At September 30, 2024, the weighted average remaining lease term is 4.5 years, and the weighted average discount rate is 8.1 % 20 Table of Contents NOTE 12. COMMITMENTS AND CONTINGENCIES (continued) The following is an analysis of the minimum finance lease payable payments subsequent to September 30, 2024: Year ending September 30, (in thousands) 2025 $ 24 2026 29 2027 26 2028 25 2029 and thereafter 22 Future Minimum Finance Lease Payable Payments $ 126 Less Amount Representing Interest ( 20 ) Present Value of Minimum Finance Lease Payable Payments 106 Less Current Portion ( 21 ) Long-Term Obligations under Finance Lease Payable $ 85 Employment Agreements The Company has entered into an employment agreement with Louis Friedman, President and CEO of the Company. The agreement provides for an annual base salary of $ 155,000 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. On January 15, 2024, the Company, through OneUp, engaged Chris Knauf to serve as Chief Financial Officer and Controller of the Company. The Company shall pay Mr. Knauf an annual salary of $ 160,000 and Mr. Knauf received options to purchase 200,000 shares of the Company’s common stock, exercisable at $ 0.08 per share on the date of the agreement and subsequently on July 1, 2024, an additional option to purchase an additional 200,000 shares of common stock exercisable at $ 0.08 per share. 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 the Company is a party, and to the Company’s knowledge there are no material proceedings to which any of the Company’s directors, executive officers or affiliates are a party adverse to the Company or which have a material interest adverse to the Company. NOTE 13. 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 and principal shareholder in the amount of $ 76,000 (see Note 9). Interest on the note during the three months ended September 30, 2024 was accrued by the Company at the prevailing prime rate (which is currently 8.50 %) and totaled $ 1,628 and $ 1,615 for the three ended September 30, 2023. The accrued interest on the note as of September 30, 2024 and June 30, 2024 was $ 42,688 and $ 41,060 , respectively . This note is subordinate to all other credit facilities currently in place. On October 30, 2010, The Company’s CEO, loaned the Company $ 40,000 (see Note 9). The Company accrued interest on the note during the three months ended September 30, 2024 at the prevailing prime rate (which is currently 8.50 %) and totaled $ 856 and $ 850 for the three months ended September 30, 2023[RA1] . The accrued interest on the note as of September 30, 2024 and June 30, 2024 was $ 8,357 and $ 7,500 respectively. This note is subordinate to all other credit facilities currently in place. The Company’s CEO, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 10 – Line of Credit). In addition, Luvu Brands has provided its corporate guarantees of the credit facility. On September 30, 2024, the balance owed under this line of credit was $ 1,053,908 . 21 Table of Contents 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. This note was extended on July 30, 2023 with the same lender with interest payable monthly at 13.5 %, principal due in full on July 31, 2025 . Repayment of this promissory note is personally guaranteed by the Company’s CEO. 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. On October 1, 2023, this note was extended through October 31, 2025 at the same interest rate of 13.5 %. Repayment of the promissory note is personally guaranteed by the Company’s CEO. 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. This note was repaid in full on April 30, 2023 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, 2025 . The Company’s CEO has personally guaranteed the repayment of the loan obligation. The Company has drawn a cash advance on one unsecured lines of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8 %. The aggregate amount owed on the unsecured line of credit was $ 0 at September 30, 2024 and $ 116 at June 30, 2024 (see Note 11). The loan is personally guaranteed by the Company’s CEO. NOTE 15. STOCKHOLDERS’ EQUITY Options At September 30, 2024, the Company had the 2015 Stock Option Plan (the “2015 Plan”), which is shareholder-approved and under which 1,700,000 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 September 30, 2024, the number of shares available for issuance under the 2015 Plan was 450,000 . The following table summarizes the Company’s stock option activities during the three months ended September 30, 2024: Number of shares of underlying outstanding option Weighted Average Remaining Contract Life Weighted Average Exercise Price Aggregated Intrinsic Value Option Outstanding as of June 30, 2024 1,350,000 3.0 $ 0.12 $ 21,000 Granted 200,000 - 0.08 Exercised ( 300,000 ) - 0.03 ( 15,000 ) Forfeited or expired - - - Options Outstanding as of September 30, 2024 1,250,000 1.5 $ 0.13 $ 5,000 Options Exercisable as of September 30, 2024 512,500 2.0 $ 0.15 $ 5,000 22 Table of Contents 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 $ 0.07 for such day. There were 300,000 stock options exercised during the three months ended September 30, 2024 and none exercised during the three months ended September 30, 2023. The 300,000 options exercised were a cashless exercise which resulted in a net exercise amount of 286,385 stock option during the three months ended September 30, 2024 . There were 200,000 stock options granted during the three months ended September 30, 2024. There were 200,000 stock options granted during the three months ended September 30, 2023. The following table summarizes the weighted average characteristics of outstanding stock options as of September 30, 2024: Outstanding Options Exercisable Exercise Prices Number of Shares Remaining Life (Years) Weighted Average Price Options Number of Shares Weighted Average Price $0.02 to $0.03 100,000 0.1 $ 0.02 100,000 $ 0.02 $0.05 to $0.10 400,000 4.6 $ 0.08 - - $0.15 to $0.20 700,000 2.4 $ 0.16 375,000 $ 0.16 $0.30 50,000 1.9 $ 0.30 37,500 $ 0.30 Total stock options 1,250,000 2.9 $ 0.13 512,500 $ 0.15 Stock-based compensation The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation . The Company measures 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 consolidated statements of operations for the three months ended September 30, 2024 and 2023 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 Consolidated Statements of Operations, all relating to the Plans: Three Months Ended September 30, 2024 2023 ($ in thousands) Cost of Goods Sold $ 1 $ 1 Other Selling and Marketing 5 3 General and Administrative 3 ( 10 ) Total Stock-based Compensation Expense $ 9 $ ( 6 ) As of September 30, 2024, the Company’s total unrecognized compensation cost was $ 72,614 which will be recognized over the weighted average vesting period of approximately twenty-seven months. Warrants As of September 30, 2024 and 2023, there were no warrants outstanding. 23 Table of Contents Common Stock The Company’s authorized common stock was 175,000,000 shares at September 30, 2024 and June 30, 2024. Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred shareholder dividend rights. At September 30, 2024, the Company had reserved the following shares of common stock for issuance: September 30, 2024 Shares of common stock reserved for issuance under the 2015 Plan 1,250,000 Shares of common stock issuable upon conversion of the Preferred Stock 4,300,000 Total shares of common stock equivalents 5,550,000 Preferred Stock On February 18, 2011, the Company filed an amendment to its Articles of Incorporation, effective February 9, 2011, authorizing the issuance of preferred stock and the Company now has 10,000,000 authorized shares of preferred stock, par value $.0001 per share, of which 4,300,000 shares have been designated and issued as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into one share of common stock and has a liquidation preference of $.2325 ($ 1,000,000 in the aggregate). Liquidation payments to the preferred holders have priority and are made in preference to any payments to the holders of common stock. In addition, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Shares issued and outstanding at the time of such vote . At each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including the election of directors, holders of Series A Convertible Preferred Shares shall vote together with the holders of common shares as a single class. 24 Table of Contents