10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2022

OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

Commission File Number 000-53314

Luvu Brands, Inc.

(Exact name of registrant as specified in its charter)

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

2745 Bankers Industrial Drive, Atlanta, GA	30360
(Address of principal executive offices)	(Zip code)

(770) 246-6400

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ✓   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ✓   No

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of February 14, 2023, there were 76,511,005 shares of common stock outstanding. 

LUVU BRANDS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
ITEM 1.	Financial Statements	Page Number
	Consolidated Balance Sheets – At December 31, 2022 (unaudited) and June 30, 2022	4
	Consolidated Statements of Operations – For the Three and Six Months Ended December 31, 2022 and December 31, 2021 (unaudited)	5
	Consolidated Statements of Stockholders’ Equity – For the Six Months Ended December 31, 2022 and December 31, 2021 (unaudited) For the Three Months Ended December 31, 2022 and December 31, 2021 (unaudited)	6
	Consolidated Statements of Cash Flows – For the Six Months Ended December 31, 2022 and December 31, 2021 (unaudited)	7
	Condensed Notes to Consolidated Financial Statements (unaudited)	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	29
ITEM 4.	Controls and Procedures	29
PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	30
ITEM 1A.	Risk Factors	30
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 3.	Defaults Upon Senior Securities	30
ITEM 4.	Mine Safety Disclosures	30
ITEM 5.	Other Information	30
ITEM 6.	Exhibits	31
SIGNATURES		32

Unless the context otherwise indicates, when used in this report, the terms the “Company,” “LUVU”, “we,” “us, “our” and similar terms refer to LUVU Brands, Inc. and our wholly owned subsidiaries, OneUp Innovations, Inc. (“OneUp”), and Foam Labs, Inc. (“Foam Labs”). Our corporate website is www.LuvuBrands.com. There we make available copies of Luvu Brands documents, news releases and our filings with the U.S. Securities and Exchange Commission including financial statements.

Unless specifically set forth to the contrary, the information that appears on our websites or our various social media platforms is not part of this report.

2

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 This report may contain forward-looking statements, which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning the Company, the performance of the industry in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.  You should not place undue reliance on forward-looking statements.  Forward-looking statements speak only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3

PART I   FINANCIAL INFORMATION

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

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

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

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

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

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

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

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

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

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, 2022		Three Months Ended December 31, 2021		% 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

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

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

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

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

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

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

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

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

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

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

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

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

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

	Three Months Ended
	(unaudited)
	December 31, 2022			December 31, 2021
Net Sales		100.0	%		100.0	%
Cost Of Goods Sold		72.2	%		78.0	%
Gross Margin		27.8	%		22.0	%
Operating Expenses		18.1	%		18.5	%
Income from operations		9.6	%		3.5	%

	Six Months Ended
	(unaudited)
	December 31, 2022			December 31, 2021
Net Sales		100.0	%		100.0	%
Cost Of Goods Sold		73.9	%		77.1	%
Gross Margin		26.1	%		22.9	%
Operating Expenses		17.7	%		18.7	%
Income from operations		8.4	%		4.3	%

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

	Three Months Ended (unaudited)
(Dollars in thousands)	December 31, 2022				December 31, 2021
Net Sales:
Liberator	$	4,856	60	%	$	3,256	45	%
Jaxx		2,088	26	%		2,346	33	%
Avana		542	7	%		787	11	%
Products purchased for resale		370	4	%		490	7	%
Other		279	3	%		307	4	%
Total Net Sales	$	8,135	100	%	$	7,186	100	%

	Six Months Ended (unaudited)
(Dollars in thousands)	December 31, 2022				December 31, 2021
Net Sales:
Liberator	$	9,964	62	%	$	5,997	45	%
Jaxx		3,869	24	%		4,226	32	%
Avana		1,096	7	%		1,531	11	%
Products purchased for resale		685	4	%		918	7	%
Other		581	3	%		739	5	%
Total Net Sales	$	16,195	100	%	$	13,411	100	%

25

Three Months Ended December 31, 2022 Compared to Three Months Ended December 31, 2021

Net sales. Sales for the three months ended December 31, 2022 were approximately $8,135,000, a 13.2% increase from the comparable prior year period.  The major components of net sales, by product, are as follows:

· Liberator sales - Sales of Liberator branded products increased $1,601,000, or 49%, during the quarter from the comparable prior year period, due primarily to higher sales through the Company’s e-commerce site, Liberator.com, and higher sales through Amazon.

· Jaxx sales – Jaxx product sales decreased 11% from the prior year second quarter to $2,088,000, primarily due to reallocating our production resources to fulfill increased demand for the Liberator products.

· Avana sales – Net sales of Avana products decreased 31% during the quarter from the comparable prior year quarter to $542,000. Sales of this product line have been impacted by lower-priced competitive products in the marketplace, production constraints which resulted in longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair.

· Products purchased for resale – This product category decreased by 24%, or $120,000, from the prior year second quarter due to lower sales of certain products through our e-commerce website, Liberator.com.

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs, royalties and depreciation. Gross profit margin, as a percentage of sales, increased to 28% from 22% in the prior year second quarter. Gross profit increased to $2,259,000 from $1,577,000 in the prior year second quarter.

Operating expenses. Total operating expenses for the three months ended December 31, 2022 were approximately 18% of net sales, or approximately $1,476,000, compared to 19% of net sales, or approximately $1,326,000, for the same period in the prior year.  

Other income (expense). Interest expense during the second quarter increased slightly from approximately ($84,000) in fiscal 2021 to approximately ($88,000) during the second quarter of fiscal 2022. The increase was primarily due to higher average borrowing balances.

Six Months Ended December 31, 2022 Compared to Six Months Ended December 31, 2021

Net sales. Sales for the six months ended December 31, 2022 were approximately $16,195,000, a 21% increase from the $13,411,000 recorded in the comparable prior year period.  The major components of net sales, by product, are as follows:

· Liberator sales - Sales of Liberator branded products increased $3,967,000, or 66%, during the first six months from the comparable prior year period, due primarily to greater sales through the company’s Liberator.com website and through Amazon.com;

· Jaxx sales – Jaxx product sales decreased $358,000, or 8%, from the prior year first half, primarily due to reallocating our production resources to fulfill increased demand for the Liberator products;

· Avana sales – Net sales of Avana products decreased $435,000, or 28%, to $1,096,000 during the first six months from the comparable prior year period. Sales of this product line have been impacted by lower-priced competitive products in the marketplace, production constraints which resulted in longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair; and

· Products purchased for resale – This product category decreased by $233,000, or 25%, from the prior year first half due to lower sales of certain products through our e-commerce website, Liberator.com.

26

Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation.  Gross profit margin, as a percentage of sales, increased to 26% from 23% in the prior year first half. Gross profit increased by 38% to $4,232,000 from $3,076,000 in the prior year first six months.

Operating expenses. Total operating expenses for the six months ended December 31, 2022 were 18% of net sales, or approximately $2,873,000, compared to 19% of net sales, or approximately $2,502,000, for the same period in the prior year.  Of the $370,000 increase, approximately $126,000 was due to higher advertising expense.

Other income (expense). Interest expense during the first six month decreased from expense of approximately ($180,000) in fiscal 2021 to expense of approximately ($171,000) during the first half of fiscal 2022.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. Operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, seasonality costs associated with new product introductions, and increases in raw material costs. In addition, future operating results may fluctuate as a result of factors beyond our control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which we operate and sell. A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales. Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to meaningfully adjust spending in certain areas, or the inability to adjust spending quickly enough, as in personnel and administrative costs, to compensate for a sales shortfall. We may also choose to increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

Liquidity and Capital Resources

The following table summarizes our cash flows:
	Six Months Ended
	December 31,
(Dollars in thousands)	2022			2021
	(Unaudited)
Cash flow data:
Cash provided by operating activities	$	1,402		$	444
Cash used in investing activities	$	(54	)	$	(46	)
Cash used in financing activities	$	(332	)	$	(294	)

As of December 31, 2022, our cash and cash equivalents totaled $1,875,371, compared to $1,080,564 in cash and cash equivalents as of December 31, 2021.

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Our principal sources of liquidity are our cash flow that we generate from our operations, availability of borrowings under our line of credit and cash raised through equity and debt financings.

Operating Activities

Net cash provided by operating activities was $1,402,000 during the six months ended December 31, 2022 compared to $444,000 net cash provided by operating activities in the six months ended December 31, 2021.  The primary components of the cash provided by operating activities in the current year is the net income of $1,188,000, a decrease in accounts receivable of $159,000, offset in part by an increase in inventory of $114,000, and a decrease in accounts payable of $61,000.

27

Investing Activities

Cash used in investing activities in the six months ended December 31, 2022 was $54,000 and related to the purchase and installation of certain production equipment during the period.

Financing Activities

Cash used in financing activities during the six months ended December 31, 2022 of $332,000 was primarily attributable to the repayment of the line of credit and payments made on equipment notes.

Inflation

During fiscal 2022, we experienced increases in various raw material costs and increases in labor and transportation costs. These cost pressures have not stabilized and we anticipate they will continue to increase throughout fiscal 2023, although there is no assurance this will occur. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease. 

Non-GAAP Financial Measures

Reconciliation of net income to Adjusted EBITDA for the six months ended December 31, 2022 and 2021: 

(Dollars in thousands)	Six months ended December 31,
	2022		2021
Net income	$	1,188	$	394
Plus interest expense, net		172		180
Plus depreciation and amortization expense		175		149
Plus stock-based compensation		22		10
Adjusted EBITDA	$	1,557	$	733

As used herein, Adjusted EBITDA represents net income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation expense. We have excluded the non-cash expenses and stock-based compensation, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income of the Company or net cash provided by operating activities.

Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and non-cash charges for stock-based compensation expense.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of December 31, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical accounting policies

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, accounts receivable allowances and impairment of long-lived assets. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited consolidated financial statements appearing in this report.

28

Recent accounting pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the unaudited condensed consolidated accompanying financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to the management, including CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not currently subject to any material legal proceedings, nor, to our knowledge, is there any legal proceeding threatened against the Company. However, from time to time, we may become a party to certain legal proceedings in the ordinary course of business.

ITEM 1A. RISK FACTORS

This item is not required for a smaller reporting company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

30

ITEM 6. EXHIBITS

		Incorporated by Reference			Filed or Furnished
No.	Exhibit Description	Form	Date Filed	Number	Herewith
2.1	Merger and Capitalization Agreement	8-K	10/22/09	2.1
2.2	Stock Purchase and Recapitalization Agreement	8-K/A	3/24/10	2.2
2.3	Amendment No. 1 to the Stock Purchase and Recapitalization Agreement	8-K/A	3/24/10	2.3
3.1	Amended and Restated Articles of Incorporation	SB-2	3/2/07	3(i)
3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation	8-K	2/23/11	3.1
3.3	Designation of Rights and Preferences of Series A Convertible Preferred Stock	8-K	2/23/11	4.1
3.4	Articles of Amendment to the Amended and Restated Articles of Incorporation	8-K	3/3/11	3.1
3.5	Articles of Amendment to the Amended and Restated Articles of Incorporation	8-K	11/5/15	3.5
3.6	Bylaws	SB-2	3/2/07	3(ii)
31.1	Section 302 Certification by the Corporation’s Principal Executive Officer				Filed
31.2	Section 302 Certification by the Corporation’s Principal Financial and Accounting Officer				Filed
32.1	Section 906 Certification by the Corporation’s Principal Executive Officer				Filed
32.2	Section 906 Certification by the Corporation’s Principal Financial and Accounting Officer				Filed
101.INS	XBRL Instance Document				Filed
101.SCH	XBRL Taxonomy Extension Schema Document				Filed
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document				Filed
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				Filed
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document				Filed
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document				Filed

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		LUVU BRANDS, INC.
		(Registrant)
February 17, 2023	By:	/s/ Louis S. Friedman
(Date)		Louis S. Friedman
		President and Chief Executive Officer (Principal Executive Officer)
February 17, 2023	By:	/s/ Alexander A. Sannikov
(Date)		Alexander A. Sannikov
		Chief Financial Officer and Secretary (Principal Financial & Accounting Officer)

32

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Louis S. Friedman, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Luvu Brands, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 17, 2023	/s/ Louis S. Friedman
	Louis S. Friedman
	Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Alexander A. Sannikov, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Luvu Brands, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 17, 2023	/s/ Alexander A. Sannikov
	Alexander A. Sannikov
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION

In connection with the quarterly report of Luvu Brands, Inc. (the Company”) on Form 10-Q for the period ended December 31, 2022 as filed with the Securities and Exchange Commission (the Report”), I, Louis S. Friedman, Chief Executive Officer (Principal Executive Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date:  February 17, 2023	/s/ Louis S. Friedman
	Louis S. Friedman
	Chief Executive Officer (Principal Executive Officer)

EX-32.2

EXHIBIT 32.2

CERTIFICATION

In connection with the quarterly report of Luvu Brands, Inc. (the Company”) on Form 10-Q for the period ended December 31, 2022 as filed with the Securities and Exchange Commission (the Report”), I, Alexander A. Sannikov, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date:  February 17, 2023	/s/ Alexander A. Sannikov
	Alexander A. Sannikov
	Chief Financial Officer (Principal Financial and Accounting Officer)

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Cover - shares	6 Months Ended
	Dec. 31, 2022	Feb. 14, 2023
Cover [Abstract]
Entity Registrant Name	Luvu Brands, Inc.
Entity Central Index Key	0001374567
Document Type	10-Q
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Document Period End Date	Dec. 31, 2022
Entity Filer Category	Non-accelerated Filer
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2023
Entity Common Stock Shares Outstanding		76,511,005
Document Quarterly Report	true
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Entity File Number	000-53314
Entity Incorporation State Country Code	FL
Entity Tax Identification Number	59-3581576
Entity Address Address Line 1	2745 Bankers Industrial Drive
Entity Address City Or Town	Atlanta
Entity Address State Or Province	GA
Entity Address Postal Zip Code	30360
City Area Code	770
Local Phone Number	246-6400
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XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2022	Jun. 30, 2022
Current assets:
Cash and cash equivalents	$ 1,875	$ 859
Accounts receivable, net (1)	1,053	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
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)	0	0
Stockholders' equity:
Preferred stock, value	0	0
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
Series A Preferred Stock [Member]
Stockholders' equity:
Preferred stock, value	$ 0	$ 0

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Consolidated Balance Sheets (Parenthetical) - USD ($)	Dec. 31, 2022	Jun. 30, 2022
Preferred stock - par value	$ 0.0001	$ 0.0001
Preferred stock - shares authorized	5,700,000	5,700,000
Preferred stock - shares issued	0	0
Preferred stock - shares outstanding	0	0
Common stock- par value	$ 0.01	$ 0.01
Common stock- shares authorized	175,000,000	175,000,000
Common stock- shares issued	76,511,005	76,046,249
Common stock- shares outstanding	76,511,005	76,046,249
Series A Preferred Stock Shares
Preferred stock - par value	$ 0.0001	$ 0.0001
Preferred stock - shares authorized	4,300,000	4,300,000
Preferred stock - shares issued	4,300,000	4,300,000
Preferred stock - shares outstanding	4,300,000	4,300,000
Preferred stock - liquidation preference	$ 1,000	$ 1,000

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Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2022	Dec. 31, 2021
Consolidated Statements of Operations (Unaudited)
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	0	0	0	0
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

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Consolidated Statements of Changes in Stockholders Equity (Unaudited) - USD ($) $ in Thousands	Total	Series A Preferred Stocks [Member]	Common Stock	Additional Paid-In Capital	Accumulated Deficit
Balance, shares at Jun. 30, 2021		4,300,000,000	75,037,890,000
Balance, amount at Jun. 30, 2021	$ 1,323	$ 0	$ 750	$ 6,166	$ (5,593)
Stock-based compensation expense	$ 10	0	$ 0	10	0
Stock option exercises, shares	250,000		222,543,000
Stock option exercises, amount	$ 3	0	$ 2	1	0
Net income for the six months ended December 31, 2021	394	$ 0	$ 0	0	394
Balance, shares at Dec. 31, 2021		4,300,000,000	75,260,433,000
Balance, amount at Dec. 31, 2021	1,730	$ 0	$ 752	6,177	(5,199)
Balance, shares at Sep. 30, 2021		4,300,000,000	75,037,890,000
Balance, amount at Sep. 30, 2021	1,554	$ 0	$ 750	6,170	(5,366)
Stock-based compensation expense	6	0	$ 0	6	0
Stock option exercises, shares			22,543,000
Stock option exercises, amount	3	0	$ 2	1	0
Net income for the six months ended December 31, 2021	167	$ 0	$ 0	0	167
Balance, shares at Dec. 31, 2021		4,300,000,000	75,260,433,000
Balance, amount at Dec. 31, 2021	1,730	$ 0	$ 752	6,177	(5,199)
Balance, shares at Jun. 30, 2022		4,300,000,000	76,046,249,000
Balance, amount at Jun. 30, 2022	1,954	$ 0	$ 760	6,183	(4,989)
Stock-based compensation expense	$ 22	0	$ 0	22	0
Stock option exercises, shares	475,000		464,756,000
Stock option exercises, amount	$ 11	0	$ 5	6	0
Net income for the six months ended December 31, 2021	1,188	$ 0	$ 0	0	1,188
Balance, shares at Dec. 31, 2022		4,300,000,000	76,511,005,000
Balance, amount at Dec. 31, 2022	3,175	$ 0	$ 765	6,211	(3,801)
Balance, shares at Sep. 30, 2022		4,300,000,000	76,046,249,000
Balance, amount at Sep. 30, 2022	2,458	$ 0	$ 760	6,195	(4,497)
Stock-based compensation expense	10	0	$ 0	10	0
Stock option exercises, shares			464,756,000
Stock option exercises, amount	11	0	$ 5	6	0
Net income for the six months ended December 31, 2021	695	$ 0	$ 0	0	695
Balance, shares at Dec. 31, 2022		4,300,000,000	76,511,005,000
Balance, amount at Dec. 31, 2022	$ 3,175	$ 0	$ 765	$ 6,211	$ (3,801)

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Dec. 31, 2022	Dec. 31, 2021
Consolidated Statements of Cash Flows (Unaudited)
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	0	(200)
Proceeds from unsecured notes payable	0	200
Net cash provided by (repaid to) line of credit	(165)	(49)
Repayments of secured notes payable	0	(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:
Purchases of equipment with equipment notes	40	28
Cash paid during the period for:
Interest	0	179
Income taxes	$ 0	$ 0

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ORGANIZATION AND NATURE OF BUSINESS

6 Months Ended

Dec. 31, 2022

ORGANIZATION AND NATURE OF BUSINESS

ORGANIZATION AND NATURE OF BUSINESS

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”).

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Dec. 31, 2022

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.   

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.

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.

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.

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.

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, 2022		Three Months Ended December 31, 2021		% 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	%

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.

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IMPAIRMENT OF LONGLIVED ASSETS

6 Months Ended

Dec. 31, 2022

IMPAIRMENT OF LONGLIVED ASSETS

IMPAIRMENT OF LONGLIVED ASSETS

NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS

We follow FASB ASC 360, Property, Plant, and Equipment, regarding impairment of our other long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

 An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of a long-lived asset.

Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated.  There was no impairment as of December 31, 2022 or June 30, 2022.

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INVENTORIES NET

6 Months Ended

Dec. 31, 2022

INVENTORIES NET

INVENTORIES NET

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

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EQUIPMENT AND LEASEHOLD IMPROVEMENTS

6 Months Ended

Dec. 31, 2022

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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.

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OTHER ACCRUED LIABILITIES

6 Months Ended

Dec. 31, 2022

OTHER ACCRUED LIABILITIES

OTHER ACCRUED LIABILITIES

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.

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CURRENT AND LONGTERM DEBT SUMMARY

6 Months Ended

Dec. 31, 2022

CURRENT AND LONGTERM DEBT SUMMARY

CURRENT AND LONGTERM DEBT SUMMARY

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

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UNSECURED NOTES PAYABLE

6 Months Ended

Dec. 31, 2022

UNSECURED NOTES PAYABLE

UNSECURED NOTES PAYABLE

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.

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NOTES PAYABLE RELATED PARTY

6 Months Ended

Dec. 31, 2022

NOTES PAYABLE RELATED PARTY

NOTES PAYABLE RELATED PARTY

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	$	-		$	-

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LINE OF CREDIT

6 Months Ended

Dec. 31, 2022

LINE OF CREDIT

LINE OF CREDIT

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.

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UNSECURED LINE OF CREDIT

6 Months Ended

Dec. 31, 2022

UNSECURED LINE OF CREDIT

UNSECURED LINE OF CREDIT

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.

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SECURED NOTE PAYABLE

6 Months Ended

Dec. 31, 2022

SECURED NOTE PAYABLE

SECURED NOTE PAYABLE

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.

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Dec. 31, 2022

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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

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.

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RELATED PARTY TRANSACTIONS

6 Months Ended

Dec. 31, 2022

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

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. 

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. 

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STOCKHOLDERS EQUITY

6 Months Ended

Dec. 31, 2022

STOCKHOLDERS EQUITY

STOCKHOLDERS EQUITY

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.

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.

 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.

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.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Dec. 31, 2022

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.   

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.

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.

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.

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.

Property and Equipment

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.

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, 2022		Three Months Ended December 31, 2021		% 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	%

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.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Dec. 31, 2022

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable

	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

Segment Information

	Three Months Ended December 31, 2022		Three Months Ended December 31, 2021		% 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	%

Schedule of stocks

	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

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INVENTORIES, NET (Tables)

6 Months Ended

Dec. 31, 2022

INVENTORIES NET

Inventories

	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

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EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Tables)

6 Months Ended

Dec. 31, 2022

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and Leasehold Improvements

	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

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OTHER ACCRUED LIABILITIES (Tables)

6 Months Ended

Dec. 31, 2022

OTHER ACCRUED LIABILITIES

Accrued Liabilities

	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

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CURRENT AND LONG-TERM DEBT SUMMARY (Tables)

6 Months Ended

Dec. 31, 2022

CURRENT AND LONGTERM DEBT SUMMARY

Current and Long-term Debt Summary

	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

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UNSECURED NOTES PAYABLE (Tables)

6 Months Ended

Dec. 31, 2022

UNSECURED NOTES PAYABLE

UNSECURED NOTES PAYABLE

	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

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NOTES PAYABLE - RELATED PARTY (Tables)

6 Months Ended

Dec. 31, 2022

NOTES PAYABLE - RELATED PARTY (Tables)

NOTES PAYABLE - RELATED PARTY

	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	$	-		$	-

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COMMITMENTS AND CONTINGENCIES (Tables)

6 Months Ended

Dec. 31, 2022

COMMITMENTS AND CONTINGENCIES

Operating Leases

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

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

Minimum Future Equipment Notes Payable

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

Finance Leases Payable

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

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STOCKHOLDERS EQUITY (Tables)

6 Months Ended

Dec. 31, 2022

STOCKHOLDERS EQUITY

Stock option activites

	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

Weighted average stock options

		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 options compensation expense

	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

Common stock equivalents

	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

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ORGANIZATION AND NATURE OF BUSINESS (Details Narrative)	6 Months Ended
	Dec. 31, 2022
Series A Preferred Stock [Member]
Concentration Risk (percent)	10.00%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Jun. 30, 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts receivable	$ 1,104	$ 1,199
Allowance for doubtful accounts receivables	(1)	(1)
Allowance for discounts and returns	(50)	(6)
Total accounts receivable, net	$ 947	$ 1,192

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2022	Dec. 31, 2021
Net Sales	$ 8,135	$ 7,186	$ 16,195	$ 13,411
Gross profit	2,259	1,577	4,232	3,076
Direct [member]
Net Sales	2,645	2,174	4,911	3,921
Gross profit	$ 1,242	$ 990	$ 2,256	$ 1,815
% Change in Sales	22.00%		25.00%
Gross Profit Margin	47.00%	46.00%	46.00%	46.00%
% Change in Gross Profit	25.00%		24.00%
Wholesale [member]
Net Sales	$ 5,287	$ 4,827	$ 10,885	$ 9,143
Gross profit	$ 1,545	$ 987	$ 2,858	$ 1,963
% Change in Sales	10.00%		19.00%
Gross Profit Margin	29.00%	20.00%	26.00%	21.00%
% Change in Gross Profit	57.00%		46.00%
Other [Member]
Net Sales	$ 204	$ 185	$ 398	$ 347
Gross profit	$ (528)	$ (400)	$ (881)	$ (703)
% Change in Sales	10.00%		15.00%
Gross Profit Margin	0.00%	0.00%	0.00%	0.00%
% Change in Gross Profit	(32.00%)		(25.00%)
Total [member]
Net Sales	$ 8,136	$ 7,186	$ 16,194	$ 13,411
Gross profit	$ 2,259	$ 1,577	$ 4,233	$ 3,075
% Change in Sales	13.00%		21.00%
Gross Profit Margin	28.00%	22.00%	26.00%	23.00%
% Change in Gross Profit	43.00%		38.00%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) - shares	6 Months Ended
	Dec. 31, 2022	Dec. 31, 2021
Anti-dilutive Securities	5,750,000	6,650,000
Common stock options - 2015 Plan [Member]
Anti-dilutive Securities	1,450,000	2,350,000
Convertible Preferred Stock [Member]
Anti-dilutive Securities	4,300,000	4,300,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended		12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Jun. 30, 2022	Nov. 02, 2020
Accounts receivable			$ (106,000)		$ (85,000)
Deferred Revenue	$ 17,888		17,888		243,944
Total cash at banks	250,000		250,000
FDIC balance limit excess	1,837,756		1,837,756
Prepaid Advertising	687,000		687,000		$ 1,050,000
Advertising Expense	199,504	$ 154,876	386,498	$ 286,766
New product development	36,418	32,482	67,368	60,805
Rent Expense	$ 163,188	$ 163,188	$ 326,376	$ 326,376
Rental abatement						$ 103,230,000
Final two months rent						61,605
New monthly rent						$ 51,615,000
Annual escalations in rent			3.00%
Property management fee			2.00%
Sales | Amazon
Concetration percentage	34.00%		36.00%
One Vendor | Inventory Purchases
Concetration percentage	35.00%		35.00%		34.00%
Customer 1 | Accounts Receivable
Concetration percentage			35.00%		21.00%
Customer 2 | Accounts Receivable
Concetration percentage			18.00%		13.00%
Minimum
Estimated useful life			2 years
Maximum
Estimated useful life			10 years

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INVENTORIES NET (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Jun. 30, 2022
INVENTORIES NET
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

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EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Details) - USD ($)	6 Months Ended
	Dec. 31, 2022	Jun. 30, 2022
Subtotal	$ 6,130,000	$ 6,010,000
Accumulated depreciation and amortization	(4,167,000)	(3,981,000)
Property and Equipment, net	1,963,000	2,029,000
Factory Equipment
Property and Equipment, gross	$ 4,275,000	3,840,000
Factory Equipment | Minimum
Depreciation life	2
Factory Equipment | Maximum
Depreciation life	10
Computer equipment and software
Property and Equipment, gross	$ 1,170,000	1,167,000
Computer equipment and software | Minimum
Depreciation life	5
Computer equipment and software | Maximum
Depreciation life	7
Office equipment and furniture
Property and Equipment, gross	$ 205,000	205,000
Office equipment and furniture | Minimum
Depreciation life	5
Office equipment and furniture | Maximum
Depreciation life	7
Leasehold Improvements
Property and Equipment, gross	$ 480,000	480,000
Depreciation life	6
Projects in process
Property and Equipment, gross	$ 0	$ 318,000

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EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2022	Dec. 31, 2021
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization expense	$ 88,017	$ 77,825	$ 174,873	$ 148,513

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OTHER ACCRUED LIABILITIES (Details) - USD ($)	6 Months Ended	12 Months Ended
	Dec. 31, 2022	Jun. 30, 2022
OTHER ACCRUED LIABILITIES
Accrued compensation	$ 327,000	$ 344,000
Accrued expenses and interest	348,000	286,000
Other accrued liabilities	675,000	630,000
Accounts receivable	$ 106,000	$ 85,000

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CURRENT AND LONGTERM DEBT SUMMARY (Details) - USD ($)	Dec. 31, 2022	Jun. 30, 2022	May 24, 2011
Current debt:
Unsecured lines of credit (Note 11)	$ 19,000	$ 25,000
Lines of credit (Note 10)	905,000	1,070,000	$ 1,200,000
Short-term unsecured notes payable (Note 8)	400,000	200,000
Current portion of equipment notes payable (Note 13)	325,000	308,000
Current portion secured notes payable (Note 12)	0	0
Current portion of finance leases payable	15,000	15,000
Current portion of notes payable - related party	116,000	116,000
Total current debt	1,780,000	1,734,000
Long-term debt:
Unsecured notes payable (Note 8)	0	200,000
Finance leases payable (Note 13)	17,000	25,000
Equipment note payable (Note 13)	710,000	842,000
Total long-term debt	$ 727,000	$ 1,067,000

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UNSECURED NOTES PAYABLE (Details) (USD ) - USD ($)	6 Months Ended
	Dec. 31, 2022	Jun. 30, 2022
Current unsecured notes payable	$ 400,000	$ 200,000
Long-term unsecured notes payable	0	200,000
Unsecured notes payable	$ 400,000	400,000
Interest Rate	2.00%
13.5% Unsecured Notes Payable [Member}
Current unsecured notes payable	$ 200,000	200,000
Long-term unsecured notes payable	$ 0	100,000
Interest Rate	13.50%
Date of Maturity	Jul. 31, 2023
13.5% Unsecured Notes Payable #1 [Member]
Current unsecured notes payable	$ 100,000	0
Long-term unsecured notes payable	$ 0	100,000
Interest Rate	13.50%
Date of Maturity	May 01, 2023
13.5% Unsecured Notes Payable #2 [Member]
Current unsecured notes payable	$ 100,000	$ 0
Interest Rate	13.50%
Date of Maturity	Oct. 31, 2023

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UNSECURED NOTES PAYABLE (Details Narrative) $ in Thousands	6 Months Ended
	Dec. 31, 2022 USD ($)
Interest Rate	2.00%
Note 2
Note Face Amount	$ 200,000
Interest Rate	20.00%
Date of Maturity	May 01, 2023
Note 1
Note Face Amount	$ 100,000
Interest Rate	20.00%
Date of Maturity	Oct. 31, 2023
Note 3
Note Face Amount	$ 100,000
Interest Rate	20.00%
Date of Maturity	Jul. 31, 2023

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NOTES PAYABLE RELATED PARTY (Details) - USD ($)	Dec. 31, 2022	Jun. 30, 2022
Total Long-term unsecured notes payable	$ 116,000	$ 116,000
Less: current portion	116,000	116,000
Long-term unsecured notes payable	$ 0	0
Interest Rate	2.00%
Related Party Note Payable 1
Unsecured notes payable	$ 40,000	40,000
Interest Rate	3.25%
Related Party Note Payable 2
Unsecured notes payable	$ 76,000	$ 76,000
Interest Rate	3.25%

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LINE OF CREDIT (Details Narrative) - USD ($)	6 Months Ended
	Dec. 31, 2022	Jun. 30, 2022	May 24, 2011
Collateral	85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital
Monthly Service Fee	125.00%
Interest Rate	2.00%
Line of credit	$ 905,000	$ 1,070,000	$ 1,200,000
Chief Executive Officer
Line of credit	$ 905,410
Invetory Advance
Loan receviable			$ 500,000

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UNSECURED LINES OF CREDIT (Details Narrative) - USD ($)	Dec. 31, 2022	Jun. 30, 2022
UNSECURED LINES OF CREDIT (Details Narrative)
Amount owed	$ 18,942	$ 24,879
Interest rate	12.25%

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SECURED NOTE PAYABLE (Details Narrative) - USD ($)	6 Months Ended
	Dec. 31, 2022	Feb. 17, 2021
Interest Rate	2.00%
Amazon
Note Face Amount		$ 200,000
Interest Rate		10.99%
Payments	$ 17,675
Frequency of payments	12 monthly payments

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COMMITMENTS AND CONTINGENCIES (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Jun. 30, 2022
Operating Leases
Operating lease right-of-use assets, net	$ 2,090
Operating lease liability	368	$ 331
Long-term operating lease obligations	1,874	$ 2,068
Total lease liabilities	$ 2,242

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COMMITMENTS AND CONTINGENCIES (Details 1) $ in Thousands	Dec. 31, 2021 USD ($)
COMMITMENTS AND CONTINGENCIES
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 liability balance	$ 2,242

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COMMITMENTS AND CONTINGENCIES (Details 2) - USD ($) $ in Thousands	Dec. 31, 2022	Jun. 30, 2022
COMMITMENTS AND CONTINGENCIES
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	1,035
Less Current Portion	(325)
Long-Term Obligations under Equipment Notes Payable	$ 710	$ 842

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COMMITMENTS AND CONTINGENCIES (Details 3) $ in Thousands	Sep. 30, 2022 USD ($)
COMMITMENTS AND CONTINGENCIES
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

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COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($)		1 Months Ended	6 Months Ended
	Feb. 01, 2020	Jun. 22, 2020	Dec. 31, 2022	Feb. 01, 2022
Annual base salary			$ 150,000
Weighted average remaining lease term			5 years
Weighted average discount rate			14.49%
Equipment notes payable			$ 2,139,542
Operating leases expire			February 28, 2027
Finance Leases Payable [Member]
Imputed interest rates	3.75%	8.09%
Finance lease agreement		$ 34,761		$ 22,862
Total cost of approximately			$ 58,152
monthly payment		$ 850		$ 514
Minimum
Imputed interest rates			8.90%
Maximum
Imputed interest rates			11.30%

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RELATED PARTY TRANSACTIONS (Details Narrative)	6 Months Ended
	Dec. 31, 2022 USD ($)
Interest Rate	2.00%
Note Payable to Wife of CEO
Interest Rate	7.50%
Note Face Amount	$ 76,000
Prevailing prime rate	1,310
Acrrued Interest	$ 31,598
October 30, 2010 Note
Interest Rate	7.50%
Note Face Amount	$ 40,000
Prevailing prime rate	689
Acrrued Interest	2,520
Line of credit	$ 905,410
July 20, 2011 Note
Interest Rate	20.00%
Note Face Amount	$ 100,000
Interest Payment	$ 1,667
Date of Maturity	Jul. 31, 2023
Extended Date of Maturity	Jul. 31, 2021
October 31, 2013
Interest Rate	20.00%
Note Face Amount	$ 100,000
Interest Payment	$ 1,667
Date of Maturity	Oct. 31, 2023
Extended Date of Maturity	Oct. 31, 2021
May 1, 2012 Note
Interest Rate	20.00%
Note Face Amount	$ 200,000
Date of Maturity	May 01, 2023
Extended Date of Maturity	May 01, 2021
Cash Advance from Company and CEO
Interest Rate	11.00%
Line of credit	$ 18,942

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STOCKHOLDERS EQUITY (Details) - USD ($)	6 Months Ended		12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Jun. 30, 2021
STOCKHOLDERS EQUITY
Options outstanding	1,975,000
Options, Granted	0	50,000	350,000
Options, Exercised	(475,000)	(250,000)
Options, Forfeited or expired	(50,000)
Options Outstanding, Ending Balance	1,450,000
Options Outstanding, Exercisable	362,500
Weighted Average Remaining Contractual Life (Years)
Weighted Average Remaining Contractual Life, Outstanding, Beginning Balance	3 years
Weighted Average Remaining Contractual Life, Ending Balance	2 years 8 months 12 days
Weighted Average Remining Contractual Life, Exercisable	1 year 8 months 12 days
Weighted Average Exercise Price
Weighted Average Exercise Price, Outstanding, Begining Balance	$ 0.10
Weighted Average Exercise Price, Granted	0
Weighted Average Exercise Price, Exercised	0.03
Weighted Average Exercise Price, Forfeited or expired	0.03
Weighted Average Exercise Price, Outstanding, Ending Balance	0.13
Weighted Average Exercise Price, Outstanding, Exercisable	$ 0.05
Aggregate Intrinsic Value
Aggregate Intrinsic Vale, Options Outstanding, Beginning Balance	$ 107,500
Aggregate Intrinsic Vale, Options Outstanding, Ending Balance	92,200
Aggregate Intrinsic Vale, Options Exercisable	$ 52,451

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STOCKHOLDERS EQUITY (Details 1)	6 Months Ended
	Dec. 31, 2022 $ / shares shares
Outstanding Options
Number of Options | shares	1,450,000
Remaining Life (Years)	2 years 8 months 12 days
Weighted Average Price | $ / shares	$ 0.13
Number of Shares | shares	375,000
Options Exercisable, Weighted Average Price | $ / shares	$ 0.05
.02 to .03
Outstanding Options
Number of Options | shares	400,000
Remaining Life (Years)	1 year 9 months 18 days
Weighted Average Price | $ / shares	$ 0.03
Number of Shares | shares	275,000
Options Exercisable, Weighted Average Price | $ / shares	$ 0.03
.05
Outstanding Options
Number of Options | shares	50,000
Remaining Life (Years)	6 months
Weighted Average Price | $ / shares	$ 0.05
Number of Shares | shares	50,000
Options Exercisable, Weighted Average Price | $ / shares	$ 0.05
.16 to .20
Outstanding Options
Number of Options | shares	950,000
Remaining Life (Years)	3 years 1 month 6 days
Weighted Average Price | $ / shares	$ 0.17
Number of Shares | shares	25,000
Options Exercisable, Weighted Average Price | $ / shares	$ 0.17
0.30
Outstanding Options
Number of Options | shares	50,000
Remaining Life (Years)	3 years 7 months 6 days
Weighted Average Price | $ / shares	$ 0.30
Number of Shares | shares	25,000
Options Exercisable, Weighted Average Price | $ / shares	$ 0.30

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STOCKHOLDERS EQUITY (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2022	Dec. 31, 2021
Stock-based compensation expense	$ 10	$ 6	$ 22	$ 10
Cost of goods sold [Member]
Stock-based compensation expense	1	1	2	1
Other Selling and Marketing [Member]
Stock-based compensation expense	3	2	7	4
General and Administrative [Member]
Stock-based compensation expense	$ 6	$ 3	$ 13	$ 5

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STOCKHOLDERS EQUITY (Details 3)	Dec. 31, 2022 shares
STOCKHOLDERS EQUITY
Shares of common stock reserved for issuance under the 2015 Stock Option 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

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STOCKHOLDERS EQUITY (Details Narrative) - USD ($)	1 Months Ended	6 Months Ended		12 Months Ended
	Feb. 18, 2011	Dec. 31, 2022	Dec. 31, 2021	Jun. 30, 2021	Jun. 30, 2022
Unrecognized stock expense		$ 140,562
Weighted average vesting period		3 years 1 month 6 days
Shares of common stock reserved for issuance under the 2015 Plan		1,450,000
Number of shares available for issuance under the 2015 Plan		362,500
Stock options granted		0	50,000	350,000
Closing stock price		$ 0.19
Common stock- shares authorized		175,000,000			175,000,000
Preferred stock - par value		$ 0.0001			$ 0.0001
Stock options exercised		475,000	250,000
Preferred stock - shares issued		0			0
Preferred stock - shares authorized		5,700,000			5,700,000
Series A Preferred Stock Shares
Preferred stock - par value	$ 0.0001	$ 0.0001			$ 0.0001
Preferred stock - shares issued	4,300,000	4,300,000			4,300,000
Preferred stock - shares authorized	10,000,000	4,300,000			4,300,000
Voting description	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
Aggregate of liquidation preference	$ 1,000,000	$ 1,000			$ 1,000
Preferred stock - liquidation preference	$ 0.2325