10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

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

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   ü  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   ü  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	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	o

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   ü

As of November 12, 2020, there were 73,652,596 shares of common stock outstanding.

LUVU BRANDS, INC.

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION
ITEM 1.	Financial Statements	Page Number
	Condensed Consolidated Balance Sheets –	4
	At September 30, 2020 (unaudited) and June 30, 2020
	Condensed Consolidated Statements of Operations –	5
	For the Three Months Ended September 30, 2020 and September 30, 2019 (unaudited)
	Condensed Consolidated Statements of Stockholders’ Deficit – For the Three Months Ended September 30, 2020 and September 30, 2019 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows –	7
	For the Three Months Ended September 30, 2020 and September 30, 2019 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	30
ITEM 4.	Controls and Procedures	30
	PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	31
ITEM 1A.	Risk Factors	31
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
ITEM 3.	Defaults Upon Senior Securities	31
ITEM 4.	Mine Safety Disclosures	31
ITEM 5.	Other Information	31
ITEM 6.	Exhibits	32
SIGNATURES		33

2

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. 

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 IFINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets 

	September 30,
	2020			June 30,
	(unaudited)			2020
Assets:	(in thousands, except share data)
Current assets:
Cash and cash equivalents	$	932		$	1,152
Accounts receivable, net		1,039			1,135
Inventories, net		2,186			1,985
Prepaid expenses		90			55
Total current assets		4,247			4,327
Equipment, property and leasehold improvements, net		914			938
Finance lease assets		34			—
Operating lease assets		85			165
Other assets		17			17
Total assets	$	5,297		$	5,447
Liabilities and stockholders’ deficit:
Current liabilities:
Accounts payable	$	2,422		$	2,435
Current debt		1,814			2,007
Current portion of PPP loan		666			482
Other accrued liabilities		538			623
Operating lease liability		102			199
Total current liabilities		5,542			5,746
Noncurrent liabilities:
Long-term debt		264			361
PPP loan		430			614
Total noncurrent liabilities		694			975
Total liabilities		6,236			6,721
Commitments and contingencies (See Note 16)		—			—
Stockholders’ deficit:
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding		—			—
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000 at September 30, 2020 and June 30, 2020		—			—
Common stock, $0.01 par value, 175,000,000 shares authorized, 73,452,596 shares issued and outstanding at September 30, 2020 and June 30, 2020		735			735
Additional paid-in capital		6,153			6,147
Accumulated deficit		(7,827	)		(8,156	)
Total stockholders’ deficit		(939	)		(1,274	)
Total liabilities and stockholders’ deficit	$	5,297		$	5,447

See accompanying notes to unaudited condensed consolidated financial statements. 

4

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 (unaudited)

	Three Months Ended September 30,
	2020			2019
	(in thousands, except share data)
Net Sales	$	5,367		$	4,094
Cost of goods sold		3,879			2,957
Gross profit		1,488			1,137
Operating expenses:
Advertising and promotion		69			80
Other selling and marketing		267			318
General and administrative		664			586
Depreciation and amortization		52			40
Total operating expenses		1,052			1,024
Operating income		436			113
Other expense:
Interest expense and financing costs		(107	)		(158	)
Total other expense		(107	)		(158	)
Income (loss) from operations before income taxes		329			(45	)
Provision for income taxes		—			—
Net income (loss)	$	329		$	(45	)
Net income (loss) per share:
Basic	$	0.00		$	(0.00	)
Diluted	$	0.00		$	(0.00	)
Shares used in calculation of net income (loss) per share:
Basic		73,452,596			73,452,596
Diluted		76,034,134			73,452,596

See accompanying notes to unaudited condensed consolidated financial statements.

5

Luvu Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

For the Three Months ended September 30, 2019 and September 30, 2020

	Series A Preferred								Additional					Total
	Stock				Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
	(in thousands, except share data)
Balance, June 30, 2019		4,300,000	$	—		73,452,596	$	735	$	6,126	$	(9,016	)	$	(2,155	)
Stock-based compensation expense		—		—		—		—		5		—			5
Net loss		—		—		—		—		—		(45	)		(45	)
Three Months Ended September 30, 2019 (unaudited)		4,300,000	$	—		73,452,596	$	735	$	6,131	$	(9,061	)	$	(2,195	)
Balance, June 30, 2020		4,300,000	$	—		73,452,596	$	735	$	6,147	$	(8,156	)	$	(1,274	)
Stock-based compensation expense		—		—		—		—		6		—			6
Net income		—		—		—		—		—		329			329
Three Months Ended, September 30, 2020 (unaudited)		4,300,000	$	—		73,452,596	$	735	$	6,153	$	(7,827	)	$	(939	)

See accompanying notes to unaudited condensed consolidated financial statements.

6

LUVU BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended
	September 30,
	2020			2019
	(in thousands)
OPERATING ACTIVITIES:
Net income (loss)	$	329		$	(45	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		52			40
Stock based compensation expense		6			5
Provision for bad debt		(1	)		—
Amortization of operating lease asset		80			72
Changes in operating assets and liabilities:
Accounts receivable		97			72
Inventories		(201	)		(202	)
Prepaid expenses and other assets		(35	)		9
Accounts payable		(13	)		108
Accrued compensation		(93	)		(64	)
Accrued expenses and interest		6			(4	)
Operating lease liability		(97	)		(86	)
Net cash provided by (used in) operating activities		130			(95	)
INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(27	)		(8	)
Net cash used in investing activities		(27	)		(8	)
FINANCING ACTIVITIES:
Repayment of term note-shareholder		—			(49	)
Repayment of unsecured note payable		(154	)		(209	)
Proceeds from unsecured note payable		—			300
Net cash provided by line of credit		45			1
Borrowings of credit card advance		—			250
Repayment of credit card advance		(56	)		(152	)
Repayments of secured notes payable		(125	)		(70	)
Repayment of unsecured line of credit		(3	)		(3	)
Payments on equipment notes		(28	)		(32	)
Principal payments on capital leases		(2	)		(6	)
Net cash (used in) provided by financing activities		(323	)		30
Net decrease in cash and cash equivalents		(220	)		(73	)
Cash and cash equivalents at beginning of period		1,152			649
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	932		$	576
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non cash item:
Purchases of equipment with equipment notes	$	35		$	—
Operating lease asset obtained in exchange for operating lease liability	$	—		$	448
Cash paid during the period for:
Interest	$	106		$	157
Income taxes	$	—		$	—

See accompanying notes to unaudited condensed consolidated financial statements. 

7

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (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 sensuality and intimacy; 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 virgin and re-purposed polyurethane foam. These products are sold through the Company’s websites, online mass merchants and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce our carbon footprint. In March, 2020, the Company began producing personal face masks under the Avana brand in response to the COVID-19 pandemic with shipments beginning in April. In April, 2020, the Company also began producing and selling isolation gowns.

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 condensed 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 three months ended September 30, 2020 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, 2020 as filed with the Securities and Exchange Commission (the “SEC”) on October 1, 2020 (the “2020 10-K”).

NOTE 2. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. As of September 30, 2020 the Company has an accumulated deficit of approximately $7.8 million and a working capital deficit of approximately $1.3 million. This raises substantial doubt about its ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations.  Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase sales, gross profits and our gross profit margin. To that end, we evaluated various options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation during the second quarter of fiscal 2018. These actions have yielded higher factory throughput at a lower cost of goods sold. However, these operational improvements have been more than offset by rising wages and raw material costs. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. We estimate that the operational and strategic growth plans we have identified over the next twelve months will, at a minimum, require approximately $150,000 of funding, of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

8

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 2. GOING CONCERN (continued)

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.  However, management cannot provide any assurances that the Company will be successful in accomplishing these plans.  The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Although we have three separate brands with diverse channels of distribution, the continued COVID-19 pandemic may negatively impact our business operations and the operations of our suppliers and customers as a result of quarantines, facility closures and travel and logistics restrictions. There is substantial uncertainty regarding the duration and degree of COVID-19’s continued effects over time. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic or recurrence thereof, timing of development and deployment of an effective vaccine, governmental, business and individuals' actions in response to the pandemic and the impact on economic activity including the possibility of recession or financial market instability.

 NOTE 3. 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 condensed 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 condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s 2020 10-K.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Significant estimates in these consolidated financial statements include estimates of: income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves; share-based compensation; and useful lives for depreciation and amortization.  Actual results could differ materially from these estimates.   

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.

9

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. We have elected to exclude sales, use and similar taxes from the measurement of the transaction price.  The impact of this policy election is insignificant, as it aligns with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts.  Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer. 

Deferred revenues

Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. Deferred revenues primarily relate to gift cards purchased, but not used, prior to the end of the fiscal period. Our total deferred revenue as of June 30, 2020 was $14,898 and was included in “Other accrued liabilities” on our consolidated balance sheets. The deferred revenue balance as of September 30, 2020 was $15,204.

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 September 30, 2020 and June 30, 2020.

	September 30, 2020			June 30, 2020
	(unaudited)
	(in thousands)
Accounts receivable	$	1,050		$	1,135
Allowance for doubtful accounts		(1	)		—
Allowance for discounts and returns		(10	)		—
Total accounts receivable, net	$	1,039		$	1,135

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LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories and Inventory Reserves

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

Concentration of Credit Risk

The Company maintains its cash accounts with banks located in Georgia.  The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank.  The Company had bank balances on deposit at September 30, 2020 that exceeded the balance insured by the FDIC by $681,658.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During the three month ended September 30, 2020, we purchased 32% of total inventory purchases from one vendor.

During the fiscal year ended June 30, 2020, we purchased 33 % of total inventory purchases from one vendor.

As of September 30, 2020 two of the Company’s customers represent 43% and 15% of the total accounts receivables compared to 38%, 16% and 16% of the total accounts receivable, respectively, as of June 30, 2020. Sales to (and through) Amazon accounted for 28% of our net sales during the three months ended September 30, 2020 and 33% of our net sales during the three months ended September 30, 2019.

Fair Value of Financial Instruments

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

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

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

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LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

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

Advertising Costs

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $5,000 at September 30, 2020 and $5,000 at June 30, 2020. Advertising expense for the three months ended September 30, 2020 and 2019 was $68,530 and $79,868, respectively.

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $29,225 and $28,673 for the three months ended September 30, 2020 and 2019, respectively. Research and development costs are included in general and administrative expense.

Property and Equipment

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

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently.

Impairment or Disposal of Long Lived Assets

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by Financial Accounting Standards Board (“FASB”) ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at September 30, 2020.

Operating Leases

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amended the lease to expire on December 31, 2020. The rent expense under this lease for the three months ended September 30, 2020 and 2019 was $88,120 and $88,120, respectively. Subsequent to September 30, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two months of rent abatement totaling $103,230. 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. (See Note 19, Subsequent Events).

12

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		% Change
	(in thousands)
Net Sales by Channel:
Direct	$	1,458	$	1,144		27	%
Wholesale	$	3,783	$	2,871		32	%
Other	$	126	$	79		59	%
Total Net Sales	$	5,367	$	4,094		31	%

	Three Months Ended			Margin			Three Months Ended			Margin	%
	September 30, 2020			%			September 30, 2019			%	Change
	(in thousands)						(in thousands)
Gross Profit by Channel:
Direct	$	760			52	%	$	540		47%		41	%
Wholesale	$	982			26	%	$	808		28%		22	%
Other	$	(254	)		(202	)%	$	(211	)	(267)%		(20	)%
Total Gross Profit	$	1,488			28	%	$	1,137		28%		31	%

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LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 3. 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.

Recently adopted 

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for fiscal years beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. We adopted ASU 2016-13 and ASU 2019-11 effective July 1, 2020. The impact of adoption of these standards on our condensed consolidated financial statements was not material.

In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted. We adopted ASU 2018-13 effective July 1, 2020. The impact of adoption of this standard on our condensed consolidated financial statements was not material.

Not yet adopted

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods. ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company plans to adopt the standard as of July 1, 2021 and is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

Net Income (Loss) Per Share

In accordance with ASC 260, “Earnings Per Share”, basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period plus the effect of stock options using the treasury stock method. Common equivalent shares outstanding as of September 30, 2019, which consists of options and convertible preferred stock, have been excluded from the diluted net loss per common share calculation for the three months ended September 30, 2019 because they are anti-dilutive.

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LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Net Income (Loss) Per Share (continued)

The total potential dilutive securities as of September 30, 2020 and 2019 are as follows:

	2020		2019
Convertible Preferred Stock		4,300,000		4,300,000
Stock options		4,400,000		4,200,000
Total		8,700,000		8,500,000

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 4. 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 September 30, 2020 or June 30, 2020.

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LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 5. INVENTORIES, NET

Inventories are stated at the lower of cost (which approximates first-in, first-out) or net realizable value. Net realizable value is defined as sales price less cost to dispose and a normal profit margin.  Inventories consisted of the following: 

	September 30, 2020			June 30, 2020
		(unaudited)
	(in thousands)
Raw materials	$	1,085		$	992
Work in process		270			234
Finished goods		972			900
Total inventories		2,327			2,126
Allowance for inventory reserves		(141	)		(141	)
Total inventories, net of allowance	$	2,186		$	1,985

NOTE 6. 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:

	September 30, 2020			June 30, 2020			Estimated Useful Life
		(unaudited)
	(in thousands)
Factory equipment	$	2,657		$	2,646		2-10 years
Computer equipment and software		1,099			1,087		5-7 years
Office equipment and furniture		205			205		5-7 years
Leasehold improvements		463			463		10 years
Project in process		8			3
Subtotal		4,432			4,404
Accumulated depreciation		(3,518	)		(3,466	)
Equipment and leasehold improvements, net	$	914		$	938

Depreciation expense was $52,452 and $40,139 for the three months ended September 30, 2020 and 2019, respectively.

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the three months ended September 30, 2020.

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LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 7. OTHER ACCRUED LIABILITIES

Other accrued liabilities at September 30, 2020 and June 30, 2020:  

	September 30, 2020		June 30, 2020
		(unaudited)
	(in thousands)
Accrued compensation	$	377	$	468
Accrued expenses and interest		161		155
Other accrued liabilities	$	538	$	623

NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY

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

	September 30, 2020		June 30, 2020
		(unaudited)
Current debt:	(in thousands)
Unsecured lines of credit (Note 13)	$	45	$	48
Line of credit (Note 12)		1,050		1,005
Short-term unsecured notes payable (Note  9)		434		489
Current portion of equipment notes payable (Note 16)		95		102
Current portion secured notes payable (Note 14)		66		191
Current portion of leases payable (Note 16)		8		—
Credit card advance (net of discount) (Note 11)		—		56
Notes payable – related party (Note 10)		116		116
Total current debt		1,814		2,007
Long-term debt:
Unsecured notes payable (Note 9)		100		200
Equipment lease payable		25		—
Equipment note payable (Note 16)		139		161
Total long-term debt	$	264	$	361

 NOTE 9. UNSECURED NOTES PAYABLE

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

	September 30, 2020		June 30, 2020
		(unaudited)
Current debt:	(in thousands)
20% Unsecured note, bi-weekly principal and interest, due September 18, 2020 (1)	$	—	$	75
20% Unsecured note, bi-weekly principal and interest, due February 19, 2021 (2)		134		214
20% Unsecured note, interest only, due May 1, 2021 (3)		200		200
20% Unsecured note, interest only, due July 31, 2021 (5)		100		—
Total current debt		434		489
Long-term debt:
20% Unsecured note, interest only, due October 31, 2021 (4)		100		100
20% Unsecured note, interest only, due July 31, 2021 (5)		—		100
Total long-term debt		100		200
Total unsecured notes payable	$	534	$	689

17

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

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

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

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

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

(5) Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2013; extended to July 31, 2019; then extended by the holder to July 31, 2021. Personally guaranteed by principal stockholder.

NOTE 10. NOTES PAYABLE - RELATED PARTY

Related party notes payable at September 30, 2020 and June 30, 2020 consisted of the following:

	September 30, 2020			June 30, 2020
		(unaudited)
	(in thousands)
Unsecured note payable to an officer, with interest at 4.25%, due on demand	$	40		$	40
Unsecured note payable to an officer, with interest at 4.25%, due on demand		76			76
Total unsecured notes payable		116			116
Less: current portion		(116	)		(116	)
Long-term unsecured notes payable	$	—		$	—

NOTE 11. CREDIT CARD ADVANCES

On October 12, 2018, OneUp entered into an agreement with Power Up Lending Group, Ltd. (“Power Up”) whereby Power Up agreed to loan OneUp and Foam Labs a total of $250,000 from Power Up. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms for this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after the funding date. A .5% loan origination fee was deducted, and the Company received net proceeds of $248,750. This loan was repaid in full on August 6, 2019. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

On January 29, 2019, the Company borrowed an additional $300,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $345,000 which includes a one-time finance charge of $45,000, approximately ten months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $297,000. This loan was repaid in full on June 16, 2020. This loan was guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

On August 28, 2019, the Company borrowed an additional $250,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $247,500. This loan was repaid in full on September 16, 2020. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

18

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 12. LINE OF CREDIT

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital.  The term of the agreement was one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility was 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 were charged interest at a rate of 2.5% over the lenders Index Rate.  In addition there was a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month.

On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,000,000 to include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% (as of September 30, 2020, the interest rate was 6.25%) and the Monthly Service Fee was changed to .5% per month.

On December 9, 2015, the credit agreement with Advance Financial Corporation was amended to increase the asset based line of credit to $1,200,000 to include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. All other terms of the credit facility remain the same.

On November 27, 2018, the credit agreement with Advance Financial Corporation was amended to increase the Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $500,000 or 125% of the eligible accounts receivable loan. All other terms of the credit facility remain the same.

The Company’s CEO, 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 18).  On September 30, 2020, the balance owed under this line of credit was $1,050,490.  As of September 30, 2020, 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 13. UNSECURED LINES OF CREDIT 

The Company has drawn a cash advance on one unsecured line of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit was $44,972 at September 30, 2020 and $47,619 at June 30, 2020.

NOTE 14. SECURED NOTE PAYABLE

On June 11, 2019, the Company entered into an agreement with a secured lender, whereby the lender agreed to loan OneUp a total of $150,000. After partial repayment of this loan, in November, 2019 the Company borrowed an additional $33,000. Repayment of this note is by 78 weekly payments of $2,298, beginning November 13, 2019. On September 30, 2020, the balance owed under this note payable was $65,839. This note payable is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On June 28, 2019, the Company entered into an agreement with Amazon.com, Inc. (“Amazon”), whereby Amazon agreed to loan OneUp a total of $302,000. Repayment of this note is by 12 monthly payments of $26,301, which includes interest at 8.22%. This loan was repaid in full on August 3, 2020. The Company had granted Amazon a security interest in certain assets of the Company.

19

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 15. PPP LOAN

On April 26, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1,096,200 made to the Company under the Payroll Protection Plan ("PPP"). The PPP is a liquidity facility program established by the U.S. government as part of the CARES Act in response to the negative economic impact of the COVID-19 outbreak. The PPP Loan to the Company is being administered by Ameris Bank. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months. Beginning November 26, 2020, seven months from the date of the PPP Note, the Company is required to make monthly payments of principal and interest in the amount of $61,691.

The PPP Loan is a forgivable loan to the extent proceeds are used to cover qualified documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement period (as amended) following loan funding. For the loan to be forgiven, the Company is required to formally apply for forgiveness, and potentially, required to pass an audit that it met the eligibility qualifications of the loan. Within 150 days from the application, the Company will be notified whether or not the loan is forgiven.

In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain contingency. Accordingly, the Company recorded the proceeds of the PPP Loan of $1,096,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness is reasonably certain. The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e. all conditions for forgiveness are met).

Future minimum payments required at maturity under the Company’s outstanding short term notes, secured line of credit, unsecured line of credit, credit cards loans, short term related party notes and PPP loan at September 30, 2020 are as follows:

Fiscal Years Ending June 30,		(in thousands)
	2021 (nine months)		2,377
	2022		530
	Total	$	2,907

20

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 16. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases it facilities under non-cancelable operating leases expiring at the end of 2020. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities were recognized at July 1, 2019 based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate based on the information available. At September 30, 2020, the weighted average remaining lease term is 1.3 years and the weighted average discount rate is 20%. Supplemental balance sheet information related to leases at September 30, 2020 is as follows:

Operating leases	Balance Sheet Classification	(in thousands)
Right-of-use assets	Operating lease right-of-use assets, net	$	85
Current lease liabilities	Operating lease obligations	$	102
Non-current lease liabilities	Long-term operating lease obligations		—
Total lease liabilities		$	102

Maturities of lease liabilities at September 30, 2020 are as follows: 

Payments	(in thousands)
2021 (nine months)	$	105
Total undiscounted lease payments		105
Less: present value discount		(3	)
Total lease liability balance	$	102

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 $530,682. These assets are included in the fixed assets listed in Note 6 - 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 September 30, 2020:  

Years ending June 30,	(in thousands)
2021 (nine months)		88
2022		82
2023		60
2024		39
2025		2
Future Minimum Note Payable Payments	$	271
Less Amount Representing Interest		(37	)
Present Value of Minimum Note Payable Payments		234
Less Current Portion		(95	)
Long-Term Obligations under Equipment Notes Payable	$	139

21

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 16. COMMITMENTS AND CONTINGENCIES (continued)

Employment Agreements

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. 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 our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

NOTE 17. RELATED PARTY TRANSACTIONS

The Company has a subordinated note payable to the wife of the Company’s CEO (Louis Friedman) and majority shareholder in the amount of $76,000. Interest on the note during the three months ended September 30, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $623. The accrued interest on the note as of September 30, 2020 was $32,051. This note is subordinate to all other credit facilities currently in place.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the note during the three months ended September 30, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $328. The accrued interest on the note as of September 30, 2020 was $11,418. This note is subordinate to all other credit facilities currently in place.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 12 – Line of Credit).  In addition, Luvu Brands has provided its corporate guarantees of the credit facility.  On September 30, 2020, the balance owed under this line of credit was $1,050,490.

22

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 17. RELATED PARTY TRANSACTIONS (continued)

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 9). Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, 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 9). Repayment of the promissory note is personally guaranteed by the Company’s CEO and majority shareholder, 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 9). Mr. Friedman personally guaranteed the repayment of the loan obligation.

The loans from Power Up (see Note 12) to OneUp are guaranteed by the Company (including OneUp and Foam Labs) and are personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman. Power Up is controlled by Curt Kramer, who also controls Hope Capital, Inc.(“HCI”). As last reported to us, HCI owns 7.5% of our common stock.

The Company has drawn a cash advance on one unsecured lines of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit was $44,972 at September 30, 2020 and $47,619 at June 30, 2020. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On March 1, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due March 1, 2020. This loan was repaid in full on February 19, 2020 (see Note 9). The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On April 26, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due April 24, 2020. A portion of the note proceeds were used to satisfy the balance due on the July 30, 2018 note payable and the remaining proceeds of $227,721 are for working capital purposes. This loan was repaid in full on April 26, 2020 (see Note 9). The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On June 11, 2019, the Company entered into an agreement with a secured lender, whereby the lender agreed to loan OneUp a total of $150,000. After partial repayment of this loan, in November, 2019 the Company borrowed an additional $33,000. Repayment of this note is by 78 weekly payments of $2,298, beginning November 13, 2019. On September 30, 2020, the balance owed under this note payable was $65,839. This note payable is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On September 23, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due September 18, 2020. This loan was repaid in full September 18, 2020. The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

23

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 17. RELATED PARTY TRANSACTIONS (continued)

On November 27, 2019 the Company entered into an agreement with OnDeck, whereby OnDeck agreed to loan OneUp a total of $200,000. Terms for this loan calls for a repayment of $234,000 which includes a one-time finance charge of $34,000, approximately nine months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $198,000. This note payable was fully paid in August 2020. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder.

On February 21, 2020, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due February 19, 2021. The lenders deducted an original issue discount of 2% and the balance due on the March 1, 2019 note payable of $12,677 and the remaining proceeds of $281,323 are for working capital purposes. On September 30, 2020, the balance owed under this note payable was $134,249 (see Note 9). The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

 NOTE 18. STOCKHOLDERS’ EQUITY

Options

At September 30, 2020, the Company had the 2015 Stock Option Plan (the “2015 Plan”), which is a shareholder-approved and under which 5,000,000 shares are reserved for issuance under the 2015 Plan until such Plan terminates on August 31, 2025.

Under the 2015 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2015 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of September 30, 2020, the number of shares available for issuance under the 2015 Plan was 600,000.

The following table summarizes the Company’s stock option activities during the three months ended September 30, 2020:

	Number of Shares Underlying Outstanding Options		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Intrinsic Value
Options outstanding as of June 30, 2020		4,250,000		1.7 years	$	.02	$	624,700
Granted		150,000		4.8 years		.16		—
Exercised		—		—		—		—
Forfeited or expired		—		—		—		—
Options outstanding as of September 30, 2020		4,400,000		1.6 years		.03	$	584,200
Options exercisable as of September 30, 2020		3,050,000		.9 years		.02	$	427,100

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 $0.16 for such day. 

24

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

 NOTE 18. STOCKHOLDERS’ EQUITY (continued)

There were 150,000 stock options granted during the three months ended September 30, 2020 and 200,000 stock options granted during the three months ended September 30, 2019. The value assumptions related to options granted during the three months ended September 30, 2020, were as follows:

	Three Months  Ended September 30, 2020			Three Months  Ended September 30, 2019
Exercise Price:		$.15 - $.17		$	.03
Volatility:		469% - 470%			407	%
Risk Free Rate:		.25	%		1.81	%
Vesting Period:		4 years			4 years
Forfeiture Rate:		0	%		0	%
Expected Life		4.1 years			4.1 years
Dividend Rate		0	%		0	%

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

			Outstanding Options						Exercisable Options
Exercise Prices			Number of Shares		Remaining Life  (Years)		Weighted Average  Price		Number of Shares			Weighted Average  Price
	$	.01 to .03		4,050,000		1.4	$	.02		2,950,000	$	.02
	$	.034 to .05		200,000		2.8	$	.05		100,000	$	.05
	$	.15 to .17		150,000		4.8	$	.15		-	$	-
Total stock options				4,400,000		1.6	$	.03		3,050,000	$	.02

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 month periods ended September 30, 2020 and 2019 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures.

The following table summarizes stock option-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans: 

As of September 30, 2020, the Company’s total unrecognized compensation cost was $47,081 which will be recognized over the weighted average vesting period of two years.

	Three Months Ended September 30,
	2020		2019
	(in thousands)
Other Selling and Marketing	$	1	$	1
General and Administrative		5		4
Total	$	6	$	5

25

LUVU BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

NOTE 18. STOCKHOLDERS’ EQUITY (continued)

Share Purchase Warrants

As of September 30, 2020 and 2019, there were no share purchase warrants outstanding.

Common Stock

The Company’s authorized common stock was 175,000,000 shares at September 30, 2020 and June 30, 2020.  Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At September 30, 2020, the Company had reserved the following shares of common stock for issuance:

	September 30,
	2020
Shares of common stock reserved for issuance under the 2015 Plan		5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock		4,300,000
Total shares of common stock equivalents		9,300,000

Preferred Stock

On February 18, 2011, the Company filed an amendment to its Articles of Incorporation, effective February 9, 2011, authorizing the issuance of preferred stock and the Company now has 10,000,000 authorized shares of preferred stock, par value $.0001 per share, of which 4,300,000 shares have been designated and issued as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into one share of common stock and has a liquidation preference of $.2325 ($1,000,000 in the aggregate). Liquidation payments to the preferred holders have priority and are made in preference to any payments to the holders of common stock. In addition, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Shares issued and outstanding at the time of such vote. At each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including the election of directors, holders of Series A Convertible Preferred Shares shall vote together with the holders of common shares as a single class.

NOTE 19. – SUBSEQUENT EVENTS

On November 2, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two months of rent abatement totaling $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee. Under the new facilities lease, the estimated operating lease asset and operating lease liability on the commencement date will total $2,580,611 and $2,683,841, respectively.

On October 15, 2020, the Company entered into an equipment finance agreement for the purchase of a new CNC foam contouring system from a European supplier. At a total cost of $325,000, the equipment finance agreement calls for 60 payments of $6,266 to the finance company.

Subsequent to September 3, 2020, 200,000 stock options granted to an employee were exercised in exchange for a cash payment of $2,500.

26

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 Interim Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales.  The discussion that follows the table should be read in conjunction with our Interim Unaudited Condensed Consolidated Financial Statements.

	Three Months Ended
	(unaudited)
	September 30, 2020			September 30, 2019
Net Sales		100.0	%		100.0	%
Cost Of Goods Sold		72.3	%		72.2	%
Gross Margin		27.7	%		27.8	%
Selling, General and Administrative Expenses		19.6	%		25	%
Income from operations		8.1	%		2.8	%

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

	Three Months Ended (unaudited)
(Dollars in thousands)	September 30, 2020				September 30, 2019
Net Sales:
Liberator	$	2,013	38	%	$	1,512	37	%
Jaxx		1,713	32	%		1,135	28	%
Avana		960	18	%		843	21	%
Products purchased for resale		337	6	%		382	9	%
Other		344	6	%		222	5	%
Total Net Sales	$	5,367	100	%	$	4,094	100	%

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Net sales. Sales for the three months ended September 30, 2020 were $5,367,306, a 31% 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 $501,000, or 33%, 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, partially offset by lower sales through brick-and-mortar retail customers.

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

· Avana sales – Net sales of Avana products increased 14% during the quarter from the comparable prior year quarter. This line of top-of-bed comfort products continues to sell well through e-merchant channels with broad consumer reach including Amazon, Overstock and others; and

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

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.  Despite labor cost increases in all production areas and raw material cost increases, gross profit increased to $1,487,814 for the three months ended September 30, 2020 from $1,137,393 in the comparable prior year period, and the gross margin, as a percentage of sales, remained constant with the prior year period at 28%.

27

Operating expenses. Total operating expenses for the three months ended September 30, 2020 were approximately 20% of net sales, or approximately $1,052,000, compared to 25% of net sales, or approximately $1,024,000, for the same period in the prior year.  Of the $28,000 increase, approximately $78,000 was due to higher general and administrative expenses (higher computer software expense, higher salaries and healthcare costs) and $12,000 in higher depreciation expense, offset in part by $62,000 in lower advertising and other selling and marketing expenses (lower salaries, travel and trade show costs.) 

Other expense. Other expense during the first quarter decreased from approximately ($158,000) in fiscal 2019 to approximately ($107,000) during the first quarter of fiscal 2020. The decrease was primarily due to lower average borrowing balances and reduced interest expense on those lower balances.

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:
	Three Months Ended
	September 30,
(Dollars in thousands)	2020			2019
	(Unaudited)
Cash flow data:
Cash provided by (used in) operating activities	$	130		$	(95	)
Cash used in investing activities	$	(27	)	$	(8	)
Cash (used in) provided by financing activities	$	(323	)	$	30

As of September 30, 2020, our cash and cash equivalents totaled $931,741, compared to $576,051 in cash and cash equivalents as of September 30, 2019.

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 $130,567 in the three months ended September 30, 2020 compared to $95,461 net cash used in operating activities in the three months ended September 30, 2019.  The primary components of the cash provided by operating activities in the current year is the net income of $328,681 and a decrease in accounts receivable of $96,942, offset in part by an increase in inventory of $201,242 and an increase in accrued compensation of $92,042.

28

Investing Activities

Cash used in investing activities in the three months ended September 30, 2020 was $27,500 and related to the purchase and installation of certain production equipment and computer software during the first quarter.

Financing Activities

Cash provided used in financing activities during the three months ended September 30, 2020 of $323,253 was primarily attributable to the repayment of the unsecured notes payable, secured notes payable and the credit card advance, offset in part by net borrowings under the revolving line of credit.

Cash provided by financing activities during the three months ended September 30, 2019 of $30,166 was primarily attributable to the proceeds from the unsecured notes payable and borrowings from the credit card advance, offset in part by the repayment of the unsecured notes payable and credit card advance.

Inflation

During fiscal 2019 and 2020, we experienced increases in various raw material costs and increases in labor costs and government mandated employee benefits. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2021, although there is no assurance this will occur. Inflation and import tariffs can harm our margins and profitability if we are unable to increase prices or improve productivity enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease. 

Sufficiency of Liquidity

The accompanying consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. We recorded net income of approximately $329,000 for the three months ended September 30, 2020 and net income of approximately $860,000 for the year ended June 30, 2020. As of September 30, 2020, we have an accumulated deficit of approximately $7,827,000 and a working capital deficit of approximately $1,295,000. This raises substantial doubt about our ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations.  Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase sales, gross profits and our gross profit margin. To that end, we evaluated various options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation during the second quarter of fiscal 2018. These actions have yielded higher factory throughput at a lower cost of goods sold. However, these operational improvements have been more than offset by rising wages and raw material costs. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. We estimate that the operational and strategic growth plans we have identified over the next twelve months will, at a minimum, require approximately $150,000 of funding, of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

29

Non-GAAP Financial Measures

Reconciliation of net income (loss) to Adjusted EBITDA for the three months ended September 30, 2020 and 2019: 

(Dollars in thousands)	Three months ended September 30,
	2020		2019
		(Unaudited)
Net income (loss)	$	329	$	(45	)
Plus interest expense, net		107		158
Plus depreciation and amortization expense		52		40
Plus stock-based compensation		6		5
Adjusted EBITDA	$	494	$	158

As used herein, Adjusted EBITDA represents net income (loss) 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 (loss) of the Company or net cash provided by (used in) 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.

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.

30

PART IIOTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings, nor, to our knowledge, is there any legal proceeding threatened against us. 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

 On November 2, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two months of rent abatement totaling $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee. The foregoing summary of the terms and conditions of this agreement is qualified in its entirety by reference to the agreement, a copy of which is filed as Exhibit 10.1 to this report.

On October 15, 2020, the Company entered into an equipment finance agreement for the purchase of a new CNC foam contouring system from a European supplier. At a total cost of $325,000, the equipment finance agreement calls for 60 payments of $6,266 to the finance company.

31

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
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	Articles of Amendment to the Amended and Restated Articles of Incorporation	8-K	3/3/11	3.1
3.4	Articles of Amendment to the Amended and Restated Articles of Incorporation	8-K	11/5/15	3.5
3.5	Bylaws	SB-2	3/2/07	3(ii)
10.1	Lease Agreement between Goodson Land Partners, LLC And One Up Innovations, Inc., dated November 2, 2020				Filed
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

32

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)
November 12, 2020	By:	/s/ Louis S. Friedman
(Date)		Louis S. Friedman
		President and Chief Executive Officer (Principal Executive Officer)
November 12, 2020	By:	/s/ Ronald P. Scott
(Date)		Ronald P. Scott
		Chief Financial Officer and Secretary (Principal Financial & Accounting Officer)

33

EX-10.1

LEASE AGREEMENT BETWEEN

GOODSON LAND PARTNERS, LLC

AS LANDLORD, AND

ONE UP INNOVATIONS, INC.,

AS TENANT

DATED November 2, 2020

2745 BANKERS INDUSTRIAL DRIVE

ATLANTA, GEORGIA 30360

BASIC LEASE INFORMATION

Lease Date:	November 2, 2020
Landlord:	GOODSON LAND PARTNERS, LLC, a Georgia limited liability company
Tenant:	ONE UP INNOVATIONS, INC., a Georgia corporation
Premises:	That certain building containing approximately 133,200 rentable square feet, and being located at 2745 Bankers Industrial Drive, Atlanta, Georgia 30360 (the “Building”). The land on which the Building is located (the "Land") is described on Exhibit A attached hereto and made a part hereof. The Premises shall include the Building, the Land and the driveways, parking facilities, loading dock areas, roadways, any rail tracks associated with the Building and similar improvements and easements associated with the foregoing or the operation thereof.
Term:	Seventy-four (74) full calendar months, plus any partial month from the Commencement Date to the end of the month in which the Commencement Date falls, starting on the Commencement Date and ending at 5:00 p.m. local time on the last day of the 74th full calendar month following the Commencement Date, subject to adjustment and earlier termination as provided in the Lease.
Commencement Date:	January 1, 2021
Basic Rent:	Basic Rent shall be the following amounts for the following periods of time:
	Lease Period	Annual Basic Rent Rate Per Rentable Square Foot	Monthly Basic Rent
	1/1/21 – 12/31/21	$4.65	$51,615.00*
	1/1/22 – 12/31/22	$4.79	$53,169.00
	1/1/23 – 12/31/23	$4.93	$54,723.00
	1/1/24 – 12/31/24	$5.08	$56,388.00
	1/1/25 – 12/31/25	$5.23	$58,053.00
	1/1/26 – 12/31/26	$5.39	$59,829.00
	1/1/27 – 2/28/27	$5.55	$61,605.00
	*Basic Rent for January 1, 2021 and February 1, 2021 will be conditionally abated in accordance with Section 4(c) below .
	As used herein, the term "Lease Month" means each calendar month during the Term (and if the Commencement Date does not occur on the first day of a calendar month, the period from the Commencement Date to the first day of the next calendar month for which Basic Rent is payable shall be included in the first Lease Month for purposes of determining the duration of the Term and the monthly Basic Rent rate applicable for such partial month).
Additional Rent:	Tenant's Proportionate Share of Operating Costs, Taxes and Insurance Costs. Landlord’s good faith estimate of Tenant’s Proportionate Share of the aforesaid costs for the first Lease Year shall be as follows: Operating Costs: $0.32/SF; Taxes: $0.90/SF; Insurance: $0.05/SF. Operating Costs for the Lease Period 1/1/21 through 12/31/21 shall not exceed $0.50/SF.
Security Deposit:	$51,615.00
Rent:	Basic Rent, Additional Rent, and all other sums that Tenant may owe to Landlord or otherwise be required to pay under the Lease.

Permitted Use:	General industrial/warehouse use for the purpose of receiving, storing, shipping, manufacturing, factory showroom and selling (but limited to wholesale sales and ancillary retail sales) products, materials and merchandise made and/or distributed by Tenant and any other lawful purpose.
Tenant's Proportionate Share:	100%, which is the percentage obtained by dividing (a) the number of rentable square feet in the Premises as stated above by (b) the 133,200 rentable square feet in the Building. Landlord and Tenant stipulate that the number of rentable square feet in the Premises and in the Building set forth above is conclusive and shall be binding upon them.
Tenant's Address:	One Up Innovations, Inc. 2745 Bankers Industrial Drive Atlanta, GA 30360 Attention: Ron Scott Telephone: 770-246-6426 Email: ron@luvubrands.com
Landlord's Address:	Goodson Land Partners, LLC c/o Reliant Real Estate Partners, LLC 3565 Piedmont Road, NE Building 2, Suite 740 Atlanta, GA 30305 Attention: Adam Richards Telephone: 404-760-7180 Email: arichards@reliant-re.com

LEASE

This Lease Agreement (this "Lease") is entered into as of November 2, 2020, between GOODSON LAND PARTNERS, LLC, a Georgia limited liability company ("Landlord"), and ONE UP INNOVATIONS, INC., a Georgia corporation ("Tenant").

1.Definitions and Basic Provisions. The definitions and basic provisions set forth in the Basic Lease Information (the "Basic Lease Information") executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes. The Basic Lease Information is incorporated into and made a part of the Lease identified above. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control. Additionally, the following terms shall have the following meanings when used in this Lease: "Affiliate" means any person or entity which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the party in question; "Building's Structure" means the Building's exterior walls, roof, footings, foundations, structural portions of load-bearing walls, structural floors and subfloors, and structural columns and beams; "Building's Systems" means the Building's HVAC, life-safety, plumbing, electrical, and mechanical systems; "including" means including, without limitation; "Laws" means all federal, state, and local laws with jurisdiction over this Lease, ordinances, rules and regulations, all court orders, governmental directives, and governmental orders, and all interpretations of the foregoing, and all restrictive covenants affecting this Lease, and "Law" means any of the foregoing; "Tenant's Off-Premises Equipment" means any of Tenant's equipment or other property that may be located on or about the Building and Land (other than inside the Premises); and "Tenant Party" means any of the following persons: Tenant; any assignees claiming by, through, or under Tenant; any subtenants claiming by, through, or under Tenant; and any of their respective agents, contractors, employees, licensees, guests and invitees.

2.Lease Grant. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises. Additionally, subject to the terms of this Lease and Landlord's rules and regulations.

3.Tender of Possession. Tenant is currently occupying the Premises and, by occupying the Premises, Tenant shall be deemed to have accepted the Premises in their as-is condition as of the date of such occupancy. Landlord agrees to diligently pursue completion of Landlord’s Work and any punch-list items, if any. This Lease shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord, and Tenant has only a usufruct which is not subject to levy or sale. Landlord discloses to Tenant, and Tenant acknowledges, that Landlord is the owner of record of the Building and of the Premises. The address of Landlord and the address of the Manager is set forth in the Basic Lease Information.

4.Rent.

(a)Payment. Tenant shall timely pay to Landlord Rent, without notice, demand, deduction or set off (except as otherwise expressly provided herein), by good and sufficient check drawn on a national banking association at Landlord's address provided for in this Lease or as otherwise specified by Landlord. The obligations of Tenant to pay Basic Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Basic Rent shall be payable monthly in advance. Basic Rent shall be payable on the first day of each month beginning on the first day of the third (3rd) Lease Month of the Term. The monthly Basic Rent for any partial month at the beginning of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month, and shall be due on the Commencement Date. Payments of Basic Rent for any fractional calendar month at the end of the Term shall be similarly prorated. Tenant shall pay Additional Rent at the same time and in the same manner as Basic Rent.

(b)Operating Costs.

(1)Tenant shall pay to Landlord Tenant's Proportionate Share of the annual Operating Costs (defined below). Landlord may make a good faith estimate of Tenant's Proportionate Share of Operating Costs to be due by Tenant for any calendar year or part thereof during the Term. During each calendar year or partial calendar year of the Term, Tenant shall pay to Landlord, in advance concurrently with each monthly installment of Basic Rent, an amount equal to the estimated Tenant's Proportionate Share of Operating Costs for such calendar year or part thereof divided by the number of months therein. From time to time, Landlord may estimate and re-estimate the amount of Tenant's Proportionate Share of Operating Costs to be due by Tenant and deliver a copy of the estimate or re-estimate to Tenant. Thereafter, the monthly installments of Tenant's Proportionate Share of Operating Costs payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of Tenant's Proportionate Share of Operating Costs as estimated by Landlord. Any amounts paid based on such an estimate shall be subject to adjustment as herein provided when actual Operating Costs are available for each calendar year.

(2)The term "Operating Costs" means all expenses and disbursements (subject to the limitations set forth below) that Landlord incurs in connection with the ownership, operation, and maintenance of the Premises, determined in accordance with sound accounting principles consistently applied, including, without limitation, the following costs: (A) intentionally omitted; (B) all supplies and materials used in the operation, maintenance, repair, replacement, and security of the common areas of the Land, excluding the interior of the Premises; (C) intentionally omitted (D) repairs, replacements, and general maintenance of the Premises including paving and parking areas, roads, roof repairs (but not replacement), , sweeping and removal of trash for the common areas, mowing and snow removal, landscaping and exterior painting, the cost of maintaining utility lines, fire sprinklers and fire protection systems, exterior lighting, and, to the extent the following items serve more than one tenant in the Premises, dock doors, drains and sump pumps; (E)  a 2% management fee); (F) service, maintenance and management contracts with independent contractors for the operation, maintenance, management, repair, replacement, and security of the Premises; (G) intentionally omitted; (H) intentionally omitted; (I) the cost of any insurance deductibles for insurance required to be maintained by Landlord; and (J) costs for improvements made to the Premises (excluding Landlord’s Work) which, although capital in nature, are expected to reduce the normal operating costs (including all utility costs) of the Premises, as amortized using a commercially reasonable interest rate over the useful economic life of such improvements estimated by Landlord to recover the costs thereof taking into consideration the anticipated cost savings, as determined by Landlord using its good faith, commercially reasonable judgment, as well as capital improvements made in order to comply with any Law hereafter promulgated by any governmental authority or any new interpretations of any Law hereafter rendered with respect to any existing Law, as amortized using a commercially reasonable interest rate over the useful economic life of such improvements as determined by Landlord in its reasonable discretion. If the Premises is part of an industrial park complex (the "Complex"), Operating Costs, Taxes (defined below) and Insurance Costs (defined below) for the Complex may be prorated among the Premises and the other buildings of the Complex, as reasonably determined by Landlord based on square footage and expenses actually shared. Landlord hereby acknowledges that, as of the date of its signature hereto, the Premises is not part of a Complex.

Operating Costs shall not include costs for (i) capital improvements made to the Premises, other than capital improvements described in Section 4(b)(2) (J) and except for items which are generally considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies (if any), and the like; (ii) repair, replacements and general maintenance paid by proceeds of insurance or by Tenant or other third parties; (iii) interest, amortization or other payments on loans to Landlord; (iv) depreciation; (v) leasing commissions; (vi) legal expenses for services, other than those that benefit the Building or Land generally (e.g., tax disputes); (vii) Taxes; (viii) Insurance Costs; and (ix) renovating or otherwise improving space for occupants of the Premises or vacant space in the Premises.

(3)Tenant shall also pay Tenant's Proportionate Share of the Taxes for each year and partial year falling within the Term. Tenant shall pay Tenant's Proportionate Share of Taxes in the same manner as provided above for Tenant's Proportionate Share of Operating Costs. "Taxes" means taxes, assessments, and governmental charges or fees whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments (including non-governmental assessments for common charges under a restrictive covenant or other private agreement that are not treated as part of Operating Costs) now or hereafter attributable to the Premises (or its operation), excluding, however, penalties and interest thereon and federal and state taxes on income (if the present method of taxation changes so that in lieu of or in addition to the whole or any part of any Taxes, there is levied on Landlord a capital tax, sales tax or use tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Premises, then all such taxes, assessments, or charges, or the part thereof so based, shall be deemed to be included within the term "Taxes" for purposes hereof). Taxes shall include the costs of consultants retained in an effort to lower taxes and all costs incurred in disputing any taxes or in seeking to lower the tax valuation of the Premises. For property tax purposes, Tenant waives all rights to protest or appeal the appraised value of the Premises, as well as the Premises, and all rights to receive notices of reappraisement. However, if requested in writing by Tenant, Landlord may agree (in Landlord’s sole discretion and at Tenant’s sole cost and expense) to work in good faith with Tenant to protest or appeal the appraised value of the Premises.

(4)By April 1 of each calendar year, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of Operating Costs and Taxes for the previous year (the "Operating Costs and Tax Statement") which will summarize all expenses. Upon written request, Landlord shall supply Tenant with invoices and other back-up items to detail all expenses. If Tenant's estimated payments of Operating Costs or Taxes under this Section 4(b) for the year covered by the Operating Costs and Tax Statement exceed Tenant's Proportionate Share of such items as indicated in the Operating Costs and Tax Statement, then Landlord shall promptly credit or reimburse Tenant for such excess; likewise, if Tenant's estimated payments of Operating Costs or Taxes under this Section 4(b) for such year are less than Tenant's Proportionate Share of such items as indicated in the Operating Costs and Tax Statement, then Tenant shall promptly pay Landlord such deficiency.

(5)With respect to any calendar year or partial calendar year in which the Building is not occupied to the extent of 95% of the rentable area thereof, the Operating Costs for such period which vary with the occupancy of the Building shall, for the purposes hereof, be increased to the amount which would have been incurred had the Building been occupied to the extent of 95% of the rentable area thereof.

(6)       Following the first full year of the Term, in no event shall the Operating Costs of the Premises payable hereunder for any calendar year during the Lease Term increase (on an annual basis) by more than five percent (5%) on a cumulative, compounding basis, over the Operating Costs payable during the immediately preceding Lease Year; provided, however, such limitation shall not apply to Uncontrollable Costs (as hereinafter defined). For purposes of this Lease, “Uncontrollable Costs” shall mean all costs incurred by Landlord with respect to snow removal expenses, Insurance Costs, utilities, and Taxes.

(c)       Abatement. Basic Rent shall be conditionally abated during the first two (2) Lease Months of the Term. Commencing with the first day of the third (3rd) Lease Month of the Term, Tenant shall make Basic Rent payments as otherwise provided in this Lease.

The abatement of Basic Rent provided for herein is conditioned upon Tenant's full and timely performance of all of its obligations under this Lease. If at any time during the Term any monetary Event of Default by Tenant occurs, or any nonmonetary Event of Default occurs which costs (in the aggregate) in excess of the Security Deposit then being held by Landlord, then Landlord will provide Tenant with a written notice indicating that in the event Tenant fails to cure the Event of Default within ten (10) days, the abatement of Basic Rent provided for herein shall immediately become void, and Tenant shall promptly pay to Landlord, in addition to all other amounts due to Landlord under this Lease, the full amount of all Basic Rent herein abated.

In consideration of said abatement, Tenant shall improve the Premises from a cosmetic perspective including, without limitation, repainting the Premises and updating the bathroom(s) in the Premises; however, failure of Tenant to do so shall not be a default for which repayment to Landlord by Tenant of the abated Basic Rent (as described in the immediately preceding paragraph) shall apply.

5.Delinquent Payment; Handling Charges. All past due payments required of Tenant hereunder not paid within five (5) days of the date due shall bear interest from the date due until paid at the lesser of eighteen percent per annum or the maximum lawful rate of interest (such lesser amount is referred to herein as the "Default Rate"); additionally, Landlord, in addition to all other rights and remedies available to it, may charge Tenant a fee equal to the greater of (a) $50.00 or (b) five percent of the delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant's delinquency. In no event, however, shall the charges permitted under this Section 5 or elsewhere in this Lease, to the extent they are considered to be interest under applicable Law, exceed the maximum lawful rate of interest. Notwithstanding the foregoing, the late fee referenced above shall not be charged with respect to the first occurrence (but not any subsequent occurrence) during any 12-month period that Tenant fails to make payment when due, until five days after Landlord delivers written notice of such delinquency to Tenant.

6.Security Deposit. On or before January 1, 2021, Tenant shall pay to Landlord the Security Deposit, which shall be held by Landlord to secure Tenant's performance of its obligations under this Lease. The Security Deposit is not an advance payment of Rent or a measure or limit of Landlord's damages upon an Event of Default (as defined herein). Landlord may, from time to time following an Event of Default and without prejudice to any other remedy, use all or a part of the Security Deposit to perform any obligation Tenant fails to perform hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. Subject to the requirements of, and conditions imposed by, Laws applicable to security deposits under commercial leases, Landlord shall, within the time required by applicable Law, return to Tenant the portion of the Security Deposit remaining after deducting all damages, charges and other amounts permitted by Law. Landlord and Tenant agree that such deductions shall include, without limitation, all damages and losses that Landlord has suffered as a result of any breach of this Lease by Tenant. The Security Deposit may be commingled with other funds, and no interest shall be paid thereon. If Landlord transfers its interest in the Premises, Landlord shall assign the Security Deposit to the transferee and, upon such transfer and the delivery to Tenant of an acknowledgement of the transferee's responsibility for the Security Deposit as provided by this Lease and the Law, Landlord thereafter shall have no further liability for the return of the Security Deposit.

7.Landlord's Maintenance Obligations. This Lease is intended to be a net lease; accordingly, Landlord's maintenance obligations are limited to the replacement of the Building's Structure; Landlord shall not be responsible for (1) any such work until Tenant notifies Landlord of the need therefor in writing or (2) for alterations to the Building's Structure required by applicable law because of Tenant's use of the Premises (which alterations shall be Tenant's responsibility). The Building's Structure does not include skylights, windows, glass or plate glass, doors or overhead doors, special fronts, or office entries, dock bumpers, dock plates or levelers, loading areas and docks, and loading dock equipment, all of which shall be maintained by Tenant. Landlord's liability for any defects, repairs, replacement or maintenance for which Landlord is specifically responsible for under this Lease shall be limited to the cost of performing the work. Additionally, Landlord shall maintain the parking areas, and other common areas of the Building, including driveways, alleys, landscape and grounds surrounding the Premises and utility lines in a good condition, consistent with the operation of a bulk warehouse/industrial or service center facility, including maintenance, repair, and replacement of the exterior of the Building (including painting), landscaping sprinkler systems, and any items normally associated with the foregoing. All costs in performing the work described in the foregoing sentence shall be included in Operating Costs. Tenant shall promptly notify Landlord in writing of any work required to be performed under this Section 7, and Landlord shall not be responsible for performing such work until Tenant delivers to Landlord such notice. Additionally, in no event shall Landlord be responsible for alterations to the Building's Structure required by applicable Law because of Tenant's use of the Premises (which alterations shall be made by Tenant at its sole cost and expense). Notwithstanding anything to the contrary contained herein, Landlord shall, in its sole and reasonable discretion, determine the appropriate remedial action required of it to satisfy its maintenance obligations hereunder (e.g., Landlord shall, in its sole discretion, reasonably determine whether, and to the extent, repairs or replacements are the appropriate remedial action).

8.Improvements; Alterations; Tenant's Maintenance and Repair Obligations.

(a)Improvements; Alterations. Landlord shall perform the work set forth on Exhibit C attached hereto and made a part hereof (sometimes referred to herein as “Landlord’s Work”). All other improvements to the Premises shall be installed at Tenant's expense only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, which approval shall be governed by the provisions set forth in this Section 8(a). No alterations or physical additions in or to the Premises may be made without Landlord's prior written consent, which shall not be unreasonably withheld or delayed; however, Landlord may withhold its consent to any alteration or addition that would adversely affect (in the reasonable discretion of Landlord) (1) the Building's Structure or the Building's Systems (including the Building's restrooms or mechanical rooms), (2) the exterior appearance of the Building, (3) the appearance of the Building's common areas, or (4) the provision of services to other Building occupants (if any). Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type visible from the exterior of the Premises without the prior written consent of Landlord, which consent may be withheld in Landlord's sole and absolute discretion. All alterations, additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord's consent to or approval of any alterations, additions or improvements (or the plans therefor) shall not constitute a representation or warranty by Landlord, nor Landlord's acceptance, that the same comply with sound architectural and/or engineering practices or with all applicable Laws, and Tenant shall be solely responsible for ensuring all such compliance.

(b)Repairs; Maintenance. Tenant shall maintain the Building Systems in good condition and repair. Tenant shall maintain the Premises, loading areas and dock, and loading dock equipment in connection with the Premises, in a clean, safe, and operable condition, and shall not permit or allow to remain any waste or damage to any portion of the Premises. Additionally, Tenant, at its sole expense, shall repair, replace and maintain in good condition and in accordance with all Laws and the equipment manufacturer's suggested service programs, all portions of the Premises, Tenant's Off-Premises Equipment and all areas, improvements and systems exclusively serving the Premises including loading docks, sump pumps, dock wells, dock equipment and loading areas, dock doors, dock seals, overhead doors, "levellors" and similar leveling equipment, plumbing, water, fire sprinkler system, and sewer lines up to points of common connection, entries, doors, ceilings, windows, interior walls, and the interior side of demising walls, and heating, ventilation and air conditioning systems (including any evaporative units), and other building and mechanical systems serving the Premises. Such repair and replacements include capital expenditures and repairs whose benefit may extend beyond the Term. No later than 14 days prior to the end of the Term, Tenant shall deliver to Landlord a certificate from an engineer reasonably acceptable to Landlord certifying that all such items which Tenant is required to maintain hereunder are then in good repair and condition, normal wear and tear excepted, and have been maintained in accordance with this Section 8. If Tenant fails to perform Tenant’s maintenance obligations, and such failure continues for fifteen (15) days after written notice from Landlord, Landlord may perform Tenant's maintenance obligations at Tenant's cost. Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Building caused by a Tenant Party. If Tenant fails to make such repairs or replacements within 15 days after receipt of written notice of the occurrence of such damage, then Landlord may make the same at Tenant's cost. If any such damage occurs outside of the Premises, then Landlord may elect to repair such damage at Tenant's expense, rather than having Tenant repair such damage. The reasonable cost of all maintenance, repair or replacement work performed by Landlord under this Section 8 shall be paid by Tenant to Landlord within 30 days after Landlord has invoiced Tenant therefor.

Tenant shall, at Tenant’s expense, enter into (i) a maintenance contract with respect to the HVAC system serving the Premises which contract shall, at a minimum, include quarterly performance of those items set forth on Exhibit F attached hereto, and (ii) a maintenance contract with respect to the fire protection system serving the Premises, in each case with a contractor reasonably approved by Landlord, copies of which contracts will be provided to Landlord upon Landlord’s request. Tenant shall be responsible, at Tenant’s cost, for any required repairs to any HVAC unit specifically serving the Premises as of the date hereof.

(c)Performance of Work. All work described in this Section 8 shall be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord. Tenant shall cause all contractors and subcontractors to procure and maintain insurance coverage naming Landlord, Landlord's property management company and Landlord's asset management company as additional insureds against such risks, in such amounts, and with such companies as Landlord may reasonably require. Tenant shall provide Landlord with the identities, mailing addresses and telephone numbers of all persons performing work or supplying materials prior to beginning such construction and Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable Laws. All such work shall be performed in accordance with all Laws and in a good and workmanlike manner so as not to damage the Building (including the Premises, the Building's Structure and the Building's Systems). All such work which may affect the Building's Structure or the Building's Systems must be approved by the Building's engineer of record, at Tenant's expense and, at Landlord's election, must be performed by Landlord's usual contractor for such work. All work affecting the roof of the Building must be performed by Landlord's roofing contractor, and no such work will be permitted if it would void or reduce the warranty on the roof.

 (d)Mechanic's Liens. All work performed, materials furnished, or obligations incurred by or at the request of a Tenant Party shall be deemed authorized and ordered by Tenant only, and Tenant shall not permit any mechanic's liens to be filed against the Premises or the Premises in connection therewith. Upon completion of any such work, Tenant shall deliver to Landlord final lien waivers from all contractors, subcontractors and materialmen who performed such work. If such a lien is filed, then Tenant shall, within thirty days after Landlord has delivered notice of the filing thereof to Tenant (or such earlier time period as may be necessary to prevent the forfeiture of the Premises, the Premises or any interest of Landlord therein or the imposition of a civil or criminal fine with respect thereto), either (1) pay the amount of the lien and cause the lien to be released of record, or (2) diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor. Landlord and Tenant acknowledge and agree that their relationship is and shall be solely that of "landlord-tenant" (thereby excluding a relationship of "owner-contractor," "owner-agent" or other similar relationships). Accordingly, all materialmen, contractors, artisans, mechanics, laborers and any other persons now or hereafter contracting with Tenant, any contractor or subcontractor of Tenant or any other Tenant Party for the furnishing of any labor, services, materials, supplies or equipment with respect to any portion of the Premises, at any time from the date hereof until the end of the Term, are hereby charged with notice that they look exclusively to Tenant to obtain payment for same. Nothing herein shall be deemed a consent by Landlord to any liens being placed upon the Premises, the Premises or Landlord's interest therein due to any work performed by or for Tenant or deemed to give any contractor or subcontractor or materialman any right or interest in any funds held by Landlord to reimburse Tenant for any portion of the cost of such work. Tenant shall defend, indemnify and hold harmless Landlord and its agents and representatives from and against all claims, demands, causes of action, suits, judgments, damages and expenses (including attorneys' fees) in any way arising from or relating to the failure by any Tenant Party to pay for any work performed, materials furnished, or obligations incurred by or at the request of a Tenant Party. This indemnity provision shall survive termination or expiration of this Lease.

(e)Janitorial Services. Tenant, at its sole expense, shall provide its own janitorial services to the Premises and shall maintain the Premises in a clean and safe condition. Tenant shall store all trash and garbage within the area and in receptacles designated from time to time by Landlord and shall, at its sole expense, arrange for the regular pickup of such trash and garbage at times, and pursuant to reasonable regulations, established by Landlord from time to time. If Tenant fails to provide janitorial services to the Premises or trash removal services in compliance with the foregoing, and such failure continues for ten (10) days after written notice from Landlord, Landlord, in addition to any other rights and remedies available to it, may provide such services, and Tenant shall pay to Landlord the cost thereof, plus an administrative fee equal to 15% of such cost, within ten days after Landlord delivers to Tenant an invoice therefor.

9.Utilities. Tenant shall pay for all water, gas, electricity, heat, telephone, sewer, sprinkler charges and other utilities and services used at the Premises, together with any taxes, penalties, surcharges, connection charges, maintenance charges, and the like pertaining to Tenant's use of the Premises. To the extent any utility service for the Premises is submetered, the meter shall be read by Landlord or Landlord's designee, and Tenant shall pay to Landlord, within 30 days after receipt of an invoice therefor, the cost of such service based on rates charged for such service by the utility company furnishing such service, including all fuel adjustment charges, demand charges and taxes. To the extent that any particular utility is not separately metered or submetered as provided above (e.g., water or sewer charges), Landlord shall, using its good-faith, reasonable judgment, allocate the expenses for such utility among the existing tenants of the Premises based upon density, usage, and other factors in Landlord's reasonable judgment. Tenant, at its expense, shall obtain all utility services for the Premises (other than a utility that is submetered or otherwise provided to the Premises by Landlord), including making all applications therefor, obtaining meters and other related equipment, and paying all deposits and connection charges. Landlord shall not be liable for any interruption or failure of utility service to the Premises, and such interruption or failure of utility service shall not be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, entitle Tenant to any abatement of Tenant's obligations hereunder. If, however, Tenant is prevented from using the Premises for more than 5 consecutive business days because of the unavailability of any such service and such unavailability was caused by Landlord and restoration of such service is within the reasonable control of Landlord, then Tenant shall, as its exclusive remedy be entitled to a reasonable abatement of Rent for each consecutive day (after such 5-day period) that Tenant is so prevented from using the Premises. Rent shall not abate by reason of the interruption, insufficiency, unavailability or discontinuance of such service if such unavailability or discontinuance was not caused by Landlord and restoration of such service is not within the reasonable control of Landlord.

10.Use. Tenant shall occupy and use the Premises only for the Permitted Use and shall comply with all Laws relating to this Lease and/or the use, condition, access to, and occupancy of the Premises and will not commit waste, overload the Building's Structure or the Building's Systems or subject the Premises to use that would damage the Premises. Notwithstanding anything in this Lease to the contrary, as between Landlord and Tenant, (a) Tenant shall bear the risk of complying with Title III of the Americans With Disabilities Act of 1990, any state laws governing handicapped access or architectural barriers, and all rules, regulations, and guidelines promulgated under such laws, as amended from time to time (the "Disabilities Acts") within the Premises, and (b) Landlord shall bear the risk of complying with the Disabilities Acts in the common areas of the Building, other than compliance that is necessitated by the use of the Premises for other than the Permitted Use or as a result of any alterations or additions, including any tenant improvement work, made by or on behalf of a Tenant Party (which risk and responsibility shall be borne by Tenant). The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents, or for the storage of any Hazardous Materials (except as provided in Section 27 hereto). Outside storage, including storage of trucks or other vehicles, is prohibited without Landlord's prior written consent. If, because of a Tenant Party's acts or because Tenant vacates the Premises, the rate of insurance on the Building or its contents increases, then such acts shall be an Event of Default, Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not waive any of Landlord's other rights. Tenant shall conduct its business and control each other Tenant Party so as not to create any nuisance or unreasonably interfere with other tenants (if any) or Landlord in its management of the Building.

11.Assignment and Subletting.

(a)Transfers. Except as provided in Section 11(h), Tenant shall not, without the prior written consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law, (2) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization, (3) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant, (4) sublet any portion of the Premises, (5) grant any license, concession, or other right of occupancy of any portion of the Premises, or (6) permit the use of the Premises by any parties other than Tenant (any of the events listed in Section 11(a)(h)(1) through 11(a) (6) being a "Transfer").

(b)Consent Standards. Landlord shall not unreasonably withhold its consent to any Transfer or assignment or subletting of the Premises, provided that the proposed transferee (1) is creditworthy, (2) has a good reputation in the business community, (3) will use the Premises for the Permitted Use (thus, excluding, without limitation, uses for credit processing and telemarketing) and will not use the Premises in any manner that would conflict with any exclusive use agreement or other similar agreement entered into by Landlord with any other tenant of the Building or Complex, (4) will not use the Premises, Building or Premises in a manner that would materially increase the pedestrian or vehicular traffic to the Premises, Building or Premises, (5) is not a governmental entity, or subdivision or agency thereof, (6) is not another occupant of the Building or Complex, (7) is in compliance with the regulations of the Office of Foreign Asset Control ("OFAC") of the Department of the Treasury (including those named on OFAC's Specially Designated Nationals and Blocked Persons List) and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism), or other governmental action relating thereto; and (8) is not a person or entity with whom Landlord is then, or has been within the six-month period prior to the time Tenant seeks to enter into such assignment or subletting, negotiating to lease space in the Building or Complex, or any Affiliate of any such person or entity; otherwise, Landlord may withhold its consent in its sole discretion. Additionally, Landlord may withhold its consent in its sole discretion to any proposed Transfer if any Event of Default by Tenant then exists beyond applicable notice and opportunity to cure.

(c)Request for Consent. If Tenant requests Landlord's consent to a Transfer, then, at least 15 business days prior to the effective date of the proposed Transfer, Tenant shall provide Landlord with a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address of the proposed transferee and any entities and persons who own, control or direct the proposed transferee; reasonably satisfactory information about its business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferee's creditworthiness and character. Concurrently with Tenant's notice of any request for consent to a Transfer, Tenant shall pay to Landlord a fee of $1,000 to defray Landlord's expenses in reviewing such request and for its reasonable attorneys' fees incurred in connection with considering any request for consent to a Transfer.

(d)Conditions to Consent. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes Tenant's obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer for the period of the Transfer. No Transfer shall release Tenant from its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor. Landlord's consent to any Transfer shall not waive Landlord's rights as to any subsequent Transfers. If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so following the occurrence of an Event of Default hereunder. Tenant shall pay for the cost of any demising walls or other improvements necessitated by a proposed subletting or assignment.

(e)Attornment by Subtenants. Each sublease by Tenant hereunder shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and each subtenant by entering into a sublease is deemed to have agreed that in the event of termination, re-entry or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublandlord, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (1) liable for any previous act or omission of Tenant under such sublease, (2) subject to any counterclaim, offset or defense that such subtenant might have against Tenant, (3) bound by any previous modification of such sublease not approved by Landlord in writing or by any rent or additional rent or advance rent which such subtenant might have paid for more than the current month to Tenant, and all such rent shall remain due and owing, notwithstanding such advance payment, (4) bound by any security or advance rental deposit made by such subtenant which is not delivered or paid over to Landlord and with respect to which such subtenant shall look solely to Tenant for refund or reimbursement, or (5) obligated to perform any work in the subleased space or to prepare it for occupancy, and in connection with such attornment, the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such attornment. Each subtenant or licensee of Tenant shall be deemed, automatically upon and as a condition of its occupying or using the Premises or any part thereof, to have agreed to be bound by the terms and conditions set forth in this Section 11(e). The provisions of this Section 11(e) shall be self-operative, and no further instrument shall be required to give effect to this provision.

(f)Cancellation. Landlord may, within 30 days after submission of Tenant's written request for Landlord's consent to an assignment or subletting (the “Consent Request”), by written notice (the “Cancellation Notice”) to Tenant, cancel this Lease as to the portion of the Premises proposed to be sublet or assigned as of the date the proposed Transfer is to be effective. If Landlord cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises and Tenant shall pay to Landlord all Rent accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer. Thereafter, Landlord may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Tenant. Notwithstanding the foregoing, Tenant shall have the right to withdraw its Consent Request by giving Landlord written notice of its election to withdraw same within ten (10) days after receipt of a Cancellation Notice, in which event Tenant’s respective Consent Request and Landlord’s respective Cancellation Notice shall each be of no further force or effect.

(g)Additional Compensation. Tenant shall pay to Landlord, immediately upon receipt thereof, one-half (1/2) of the excess of (1) all compensation received by Tenant for a Transfer less the actual out-of-pocket costs reasonably incurred by Tenant with unaffiliated third parties (i.e., brokerage commissions and tenant finish work) in connection with such Transfer (such costs shall be amortized on a straight-line basis over the term of the Transfer in question) over (2) the Rent allocable to the portion of the Premises covered thereby.

(h)Permitted Transfers. Notwithstanding Section 11(a), Tenant may Transfer all or part of its interest in this Lease or all or part of the Premises (a "Permitted Transfer") to the following types of entities (a "Permitted Transferee") without the written consent of Landlord:

(1)an Affiliate of Tenant;

(2)any corporation, limited partnership, limited liability partnership, limited liability company or other business entity in which or with which Tenant, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of business entities, so long as (A) Tenant's obligations hereunder are assumed by the entity surviving such merger or created by such consolidation; and (B) the Tangible Net Worth of the surviving or created entity is not less than the Tangible Net Worth of Tenant as of the date hereof; or

(3)any corporation, limited partnership, limited liability partnership, limited liability company or other business entity acquiring all or substantially all of Tenant's assets if such entity's Tangible Net Worth after such acquisition is not less than the Tangible Net Worth of Tenant as of the date hereof.

Tenant shall promptly notify Landlord of any such Permitted Transfer. Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder, or if Tenant no longer exists because of a merger, consolidation, or acquisition, the surviving or acquiring entity shall expressly assume in writing the obligations of Tenant hereunder. Additionally, the Permitted Transferee shall comply with all of the terms and conditions of this Lease, including the Permitted Use, and the use of the Premises by the Permitted Transferee may not violate any other agreements affecting the Premises, the Building, the Complex, Landlord or other tenants (if any) of the Building or Complex. No later than 30 days after the effective date of any Permitted Transfer, Tenant agrees to furnish Landlord with (A) copies of the instrument effecting any of the foregoing Transfers, (B) documentation establishing Tenant's satisfaction of the requirements set forth above applicable to any such Transfer, (C) evidence of insurance as required under this Lease with respect to the Permitted Transferee, and (D) evidence of compliance with the regulations of OFAC and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action relating thereto, including the name and address of the Permitted Transferee and any entities and persons who own, control or direct the Permitted Transferee. The occurrence of a Permitted Transfer shall not waive Landlord's rights as to any subsequent Transfers. "Tangible Net Worth" means the excess of total assets over total liabilities, in each case as determined in accordance with generally accepted accounting principles consistently applied ("GAAP"), excluding, however, from the determination of total assets all assets which would be classified as intangible assets under GAAP including goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee shall be subject to the terms of this Section 11.

12.Insurance; Waivers; Subrogation; Indemnity.

(a)Tenant's Insurance. Effective as of the earlier of (1) the date Tenant enters or occupies the Premises, or (2) the Commencement Date, and continuing throughout the Term, Tenant shall maintain the following insurance policies: (A) commercial general liability insurance in amounts of $3,000,000 per occurrence or, following the expiration of the initial Term, such other amounts as Landlord may from time to time reasonably require (and, if the use and occupancy of the Premises include any activity or matter that is or may be excluded from coverage under a commercial general liability policy [e.g., the sale, service or consumption of alcoholic beverages], Tenant shall obtain such endorsements to the commercial general liability policy or otherwise obtain insurance to insure all liability arising from such activity or matter [including liquor liability, if applicable] in such amounts as Landlord may reasonably require), insuring Tenant, Landlord, Landlord's property management company, Landlord's asset management company and, if requested in writing by Landlord, Landlord's Mortgagee against all liability for injury to or death of a person or persons or damage to property arising from the use and occupancy of the Premises and (without implying any consent by Landlord to the installation thereof) the installation, operation, maintenance, repair or removal of Tenant's Off-Premises Equipment, (B) insurance covering the full value of all alterations and improvements and betterments in the Premises, naming Landlord and Landlord's Mortgagee as additional loss payees as their interests may appear, (C) insurance covering the full value of all furniture, trade fixtures and personal property (including property of Tenant or others) in the Premises or otherwise placed in the Premises by or on behalf of a Tenant Party (including Tenant's Off-Premises Equipment), (D) contractual liability insurance sufficient to cover Tenant's indemnity obligations hereunder (but only if such contractual liability insurance is not already included in Tenant's commercial general liability insurance policy), (E) worker's compensation insurance, and (F) business interruption insurance in an amount reasonably acceptable to Landlord. The commercial general liability insurance to be maintained by Tenant may have a deductible of no more than $5,000 per occurrence; the property insurance to be maintained by Tenant may have a deductible of no more than $25,000 per occurrence; and, all other insurance to be maintained by Tenant shall have no deductible. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder at least ten days prior to the earlier of the Commencement Date or the date Tenant enters or occupies the Premises, and at least 15 days prior to each renewal of said insurance, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies with a Best's rating of A-:VII or better, reasonably satisfactory to Landlord. If Tenant fails to comply with the foregoing insurance requirements or to deliver to Landlord the certificates or evidence of coverage required herein, Landlord, in addition to any other remedy available pursuant to this Lease or otherwise, may, but shall not be obligated to, obtain such insurance and Tenant shall pay to Landlord on demand the premium costs thereof, plus an administrative fee of 15% of such cost.

(b)Landlord's Insurance. Throughout the Term of this Lease, Landlord shall maintain, as a minimum, the following insurance policies: (1) property insurance for the Building's replacement value (excluding property required to be insured by Tenant), less a commercially-reasonable deductible if Landlord so chooses, and (2) commercial general liability insurance in an amount of not less than $3,000,000. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary. The cost of all insurance carried by Landlord with respect to the Premises shall be included in Insurance Costs (defined below). The foregoing insurance policies and any other insurance carried by Landlord shall be for the sole benefit of Landlord and under Landlord's sole control, and Tenant shall have no right or claim to any proceeds thereof or any other rights thereunder.

(c)No Subrogation; Waiver of Property Claims. Landlord and Tenant each waives any claim it might have against the other for any damage to or theft, destruction, loss, or loss of use of any property, to the extent the same is insured against under any insurance policy of the types described in this Section 12 that covers the Premises, the Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements, or business, or is required to be insured against under the terms hereof, regardless of whether the negligence of the other party caused such Loss (defined below). Additionally, Tenant waives any claim it may have against Landlord for any Loss to the extent such Loss is caused by a terrorist act. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. Notwithstanding any provision in this Lease to the contrary, Landlord, its agents, employees and contractors shall not be liable to Tenant or to any party claiming by, through or under Tenant for (and Tenant hereby releases Landlord and its servants, agents, contractors, employees and invitees from any claim or responsibility for) any damage to or destruction, loss, or loss of use, or theft of any property of any Tenant Party located in or about the Premises, caused by casualty, theft, fire, third parties or any other matter or cause, regardless of whether the negligence of any party caused such loss in whole or in part. Tenant acknowledges that Landlord shall not carry insurance on, and shall not be responsible for damage to, any property of any Tenant Party located in or about the Premises.

(d)Indemnity. Subject to Section 12(c), Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages, and expenses (including reasonable attorneys' fees) arising from any injury to or death of any person or the damage to or theft, destruction, loss or loss of use of, any property or inconvenience (each, a "Loss"; collectively, “Losses”) (1) occurring in or on the Premises (other than within the Premises) to the extent caused by the negligence or willful misconduct of any Tenant Party, (2) occurring in the Premises except to the extent caused by the negligence or willful misconduct of Landlord and its representatives and agents, or (3) arising out of the installation, operation, maintenance, repair or removal of any property of any Tenant Party located in or about the Premises, including Tenant's Off-Premises Equipment. If any proceeding is filed for which indemnity is required hereunder, the indemnifying party agrees, upon request therefor, to defend the indemnified party in such proceeding at its sole cost utilizing counsel satisfactory to the indemnified party.

Subject to Section 12(c), and except to the extent caused by the negligence or willful misconduct of Tenant Parties (as defined below), Landlord shall indemnify, defend, protect, and hold harmless Tenant, its officers, directors, agents, contractors and employees (collectively, “Tenant Parties”) from and against all reasonable Losses actually incurred or suffered by Tenant Parties as a result of the gross negligence or willful misconduct of Landlord.

The indemnities set forth in this Lease shall survive termination or expiration of this Lease and shall not terminate or be waived, diminished or affected in any manner by any abatement or apportionment of Rent under any provision of this Lease.

(e)Cost of Landlord's Insurance. Tenant shall pay Tenant's Proportionate Share of the cost of the property and liability insurance carried by Landlord from time to time with respect to the Building (including other improvements and Landlord's personal property used in connection therewith), which may include fire and extended coverage insurance (including extended and broad form coverage risks, mudslide, land subsidence, volcanic eruption, flood, earthquake and rent loss insurance) and comprehensive general public liability insurance and excess liability insurance, in such amounts and containing such terms as Landlord deems necessary or desirable (collectively, "Insurance Costs"). During each month of the Term, Tenant shall make a monthly payment to Landlord equal to 1/12th of Tenant's Proportionate Share of Insurance Costs that will be due and payable for that particular year. Each payment of Insurance Costs shall be due and payable at the same time as, and in the same manner as, provided above for Tenant's Proportionate Share of Operating Costs. The initial monthly payment of Insurance Costs is based upon Landlord's good faith estimate of Tenant's Proportionate Share of the estimated Insurance Costs for the remainder of the first calendar year. The monthly payment of Insurance Costs is subject to increase or decrease as determined by Landlord to reflect accurately Tenant's Proportionate Share of estimated Insurance Costs. If, following Landlord's receipt of the bill for the insurance premiums for a calendar year, Landlord determines that Tenant's total payments of Insurance Costs are less than Tenant's Proportionate Share of actual Insurance Costs, Tenant shall pay to Landlord the difference upon demand; if Tenant's total payments of Insurance Costs are more than Tenant's Proportionate Share of actual Insurance Costs, Landlord shall retain such excess and credit it to Tenant's future payments of Insurance Costs (unless such adjustment is at the end of the Term, in which event Landlord shall refund such excess to Tenant).

13.Subordination; Attornment; Notice to Landlord's Mortgagee.

(a)Subordination. This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument (each, a "Mortgage"), or any ground lease, master lease, or primary lease (each, a "Primary Lease"), that now or hereafter covers all or any part of the Premises (the mortgagee under any such Mortgage, beneficiary under any such deed of trust, or the lessor under any such Primary Lease is referred to herein as a "Landlord's Mortgagee"). Any Landlord's Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its Mortgage, Primary Lease, or other interest in the Premises by so notifying Tenant in writing. The provisions of this Section shall be self-operative and no further instrument of subordination shall be required; however, in confirmation of such subordination, Tenant shall execute and return to Landlord (or such other party designated by Landlord) within ten days after written request therefor such documentation, in recordable form if required, as a Landlord's Mortgagee may reasonably request to evidence the subordination of this Lease to such Landlord's Mortgagee's Mortgage or Primary Lease (including a subordination, non-disturbance and attornment agreement) or, if the Landlord's Mortgagee so elects, the subordination of such Landlord's Mortgagee's Mortgage or Primary Lease to this Lease. Notwithstanding the above, Landlord agrees that within thirty (30) days following the date of this Lease, Landlord will request from the holders of any Mortgage as of the date of this Lease, a subordination, non-disturbance and attornment agreement ("SNDA") in favor of Tenant, on such holder's standard form of SNDA. However, if Tenant elects to negotiate the terms of any SNDA, Landlord makes no promises or guarantees that the lender will provide the SNDA or agree to any of Tenant’s requested changes and such failure of the lender to so agree will not constitute a default by Landlord under this Lease. Landlord shall not be obligated to expend any money to obtain an SNDA, and the inability or failure of Landlord to obtain such SNDA shall not constitute a default by Landlord hereunder, entitle Tenant to cancel or otherwise terminate this Lease, or affect the automatic subordination of this Lease, to all such mortgages, deeds to secure debt and other security instruments. If any lender charges Landlord any fees, including, without limitation, attorneys’ fees, in order to provide the SNDA, such fees and costs will be paid by Tenant.

(b)Attornment. Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, and shall execute such agreements confirming such attornment as such party may reasonably request.

(c)Notice to Landlord's Mortgagee. Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording such Landlord's Mortgagee a reasonable opportunity to perform Landlord's obligations hereunder.

(d)Landlord's Mortgagee's Protection Provisions. If Landlord's Mortgagee shall succeed to the interest of Landlord under this Lease, Landlord's Mortgagee shall not be: (1) liable for any act or omission of any prior lessor (including Landlord); (2) bound by any rent or additional rent or advance rent which Tenant might have paid for more than the current month to any prior lessor (including Landlord), and all such rent shall remain due and owing, notwithstanding such advance payment; (3) bound by any security or advance rental deposit made by Tenant which is not delivered or paid over to Landlord's Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (4) bound by any termination, amendment or modification of this Lease made without Landlord's Mortgagee's consent and written approval, except for those terminations, amendments and modifications permitted to be made by Landlord without Landlord's Mortgagee's consent pursuant to the terms of the loan documents between Landlord and Landlord's Mortgagee; (5) subject to the defenses which Tenant might have against any prior lessor (including Landlord); and (6) subject to the offsets which Tenant might have against any prior lessor (including Landlord) except for those offset rights which (A) are expressly provided in this Lease, (B) relate to periods of time following the acquisition of the Building by Landlord's Mortgagee, and (C) Tenant has provided written notice to Landlord's Mortgagee and provided Landlord's Mortgagee a reasonable opportunity to cure the event giving rise to such offset event. Landlord's Mortgagee shall have no liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Premises. Nothing in this Lease shall be construed to require Landlord's Mortgagee to see to the application of the proceeds of any loan, and Tenant's agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing any loan.

14.Rules and Regulations. Tenant shall comply with the rules and regulations of the Premises which are attached hereto as Exhibit B. Landlord may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Premises and related facilities, provided that such changes are applicable to all tenants (if more than one) of the Premises, will not unreasonably interfere with Tenant's use of the Premises and are enforced by Landlord in a non-discriminatory manner. Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party.

15.Condemnation.

(a)Total Taking. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "Taking"), this Lease shall terminate as of the date of the Taking.

(b)Partial Taking - Tenant's Rights. If any part of the Building becomes subject to a Taking and such Taking will prevent Tenant from conducting on a permanent basis its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within 30 days after the Taking, and Basic Rent and Additional Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking.

(c)Partial Taking - Landlord's Rights. If any material portion, but less than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds arising from a Taking to a Landlord's Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within 30 days after such Taking, and Basic Rent and Additional Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 15(b).

(d)Temporary Taking. If all or any portion of the Premises becomes subject to a Taking for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all of the terms, conditions and covenants of this Lease, including the payment of Basic Rent and all other amounts required hereunder. If any such temporary Taking terminates prior to the expiration of the Term, Tenant shall restore the Premises as nearly as possible to the condition prior to such temporary Taking, at Tenant's sole cost and expense. Landlord shall be entitled to receive the entire award for any such temporary Taking, except that Tenant shall be entitled to receive the portion of such award which (1) compensates Tenant for its loss of use of the Premises within the Term and (2) reimburses Tenant for the reasonable out-of-pocket costs actually incurred by Tenant to restore the Premises as required by this Section.

(e)Award. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the Land, the Building, and other improvements taken; however, Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving costs, loss of business, and other claims it may have.

16.Fire or Other Casualty.

(a)Repair Estimate. If the Premises or the Building are damaged by fire or other casualty (a "Casualty"), Landlord shall, within 90 days after such Casualty, deliver to Tenant a good faith estimate (the "Damage Notice") of the time needed to repair the damage caused by such Casualty.

(b)Tenant's Rights. If a material portion of the Premises is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within 270 days after the commencement of repairs (the "Repair Period"), then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant.

(c)Landlord's Rights. If a Casualty damages the Premises or a material portion of the Building and (1) Landlord estimates that the damage to the Premises cannot be repaired within the Repair Period, (2) the damage to the Premises exceeds 50% of the replacement cost thereof (excluding foundations and footings), as estimated by Landlord, and such damage occurs during the last two years of the Term, (3) regardless of the extent of damage to the Premises, the damage is not fully covered by Landlord's insurance policies or Landlord makes a good faith determination that restoring the Building would be uneconomical, or (4) Landlord is required to pay any insurance proceeds arising out of the Casualty to a Landlord's Mortgagee, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant.

(d)Repair Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Premises and shall proceed with reasonable diligence to restore the Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any alterations or betterments within the Premises (which shall be promptly and with due diligence repaired and restored by Tenant at Tenant's sole cost and expense) or any furniture, equipment, trade fixtures or personal property of Tenant or others in the Premises or the Building, and Landlord's obligation to repair or restore the Premises shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question. If this Lease is terminated under the provisions of this Section 16, Landlord shall be entitled to the full proceeds of the insurance policies providing coverage for all alterations, improvements and betterments in the Premises (and, if Tenant has failed to maintain insurance on such items as required by this Lease, Tenant shall pay Landlord an amount equal to the proceeds Landlord would have received had Tenant maintained insurance on such items as required by this Lease).

(e)Abatement of Rent. If the Premises are damaged by Casualty, Rent for the portion of the Premises rendered untenantable by the damage shall be abated on a reasonable basis from the date of damage until the completion of Landlord's repairs (or until the date of termination of this Lease by Landlord or Tenant as provided above, as the case may be), unless a Tenant Party caused such damage, in which case, Tenant shall continue to pay Rent without abatement.

17.Personal Property Taxes. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises or in or on the Building or Premises.

18.Events of Default. Each of the following occurrences shall be an "Event of Default":

(a)Payment Default. Tenant's failure to pay Rent within five days after Landlord has delivered written notice to Tenant that the same has not been received when due; however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Tenant fails to pay Rent when due and, during the 12 month interval preceding such failure, Landlord has given Tenant written notice of failure to pay Rent on one or more occasions;

(b)Abandonment. Tenant abandons the Premises;

(c)Estoppel. Tenant fails to provide any estoppel certificate after Landlord's written request therefor pursuant to Section 26(e) and such failure shall continue for five days after Landlord's second written notice thereof to Tenant;

(d)Insurance. Tenant fails to procure, maintain and deliver to Landlord evidence of the insurance policies and coverages as required under Section 12(a);

(e)Mechanic's Liens. Tenant fails to pay and release of record, or diligently contest and bond around, any mechanic's lien filed against the Premises or the Premises for any work performed, materials furnished, or obligation incurred by or at the request of Tenant, within the time and in the manner required by Section 8(d);

(f)Other Defaults. Tenant's failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than 30 days after Landlord has delivered to Tenant written notice thereof (provided, however, if the nature of the cure is such that it will take longer than 30 days to complete, Tenant shall have additional time to cure and will not be in Default if Tenant commences to cure within said 30 days and diligently prosecutes said cure to completion (not to exceed sixty (60) days)); and

(g)Insolvency. The filing of a petition by or against Tenant (the term "Tenant" shall include, for the purpose of this Section 18(g), any guarantor of Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; (4) for the reorganization or modification of Tenant's capital structure; or (5) in any assignment for the benefit of creditors proceeding; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within 90 days after the filing thereof.

19.Remedies. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any one or more of the following actions:

(a)Termination of Lease. Terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 20(a), and (3) an amount equal to (A) the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at a per annum rate equal to the "Prime Rate" as published on the date this Lease is terminated by The Wall Street Journal, Southeast Edition, in its listing of "Money Rates" minus one percent, minus (B) the then present fair rental value of the Premises for such period, similarly discounted;

(b)Termination of Possession. Terminate Tenant's right to possess the Premises without terminating this Lease by giving written notice thereof to Tenant, in which event Tenant shall pay to Landlord (1) all Rent and other amounts accrued hereunder to the date of termination of possession, (2) all amounts due from time to time under Section 20(a), and (3) all Rent and other net sums required hereunder to be paid by Tenant during the remainder of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during such period, after deducting all costs incurred by Landlord in reletting the Premises. If Landlord elects to proceed under this Section 19(b), Landlord may remove all of Tenant's property from the Premises and store the same in a public warehouse or elsewhere at the cost of, and for the account of, Tenant, without becoming liable for any loss or damage which may be occasioned thereby. Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord shall not be obligated to relet the Premises before leasing other portions of the Building or Complex and Landlord shall not be obligated to accept any prospective tenant proposed by Tenant unless such proposed tenant meets all of Landlord's leasing criteria. Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or to collect rent due for such reletting. Tenant shall not be entitled to the excess of any consideration obtained by reletting over the Rent due hereunder. Reentry by Landlord in the Premises shall not affect Tenant's obligations hereunder for the unexpired Term; rather, Landlord may, from time to time, bring an action against Tenant to collect amounts due by Tenant, without the necessity of Landlord's waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 19(b). If Landlord elects to proceed under this Section 19(b), it may at any time elect to terminate this Lease under Section 19(a);

(c)Perform Acts on Behalf of Tenant. Perform any act Tenant is obligated to perform under the terms of this Lease (and enter upon the Premises in connection therewith if necessary) in Tenant's name and on Tenant's behalf, without being liable for any claim for damages therefor, and Tenant shall reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease (including, but not limited to, collection costs and legal expenses), plus interest thereon at the Default Rate;

(d)Suspension of Services. Suspend any services required to be provided by Landlord hereunder without being liable for any claim for damages therefor; or

(e)Alteration of Locks. Intentionally deleted.

20.Payment by Tenant; Non-Waiver; Cumulative Remedies.

(a)Payment by Tenant. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any other occupant's property, (3) repairing, restoring, altering, remodeling, or otherwise putting the Premises into condition acceptable to a new tenant, (4) if Tenant is dispossessed of the Premises and this Lease is not terminated, reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenant's obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of, its rights, remedies, and recourses arising out of the default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of the state in which the Premises are located shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease.

(b)No Waiver. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord's rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due.

(c)Cumulative Remedies. Any and all remedies set forth in this Lease: (1) shall be in addition to any and all other remedies Landlord may have at law or in equity, (2) shall be cumulative, and (3) may be pursued successively or concurrently as Landlord may elect. The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future. Additionally, Tenant shall defend, indemnify and hold harmless Landlord, Landlord's Mortgagee and their respective representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys' fees) arising from Tenant's failure to perform its obligations under this Lease.

21.Landlord's Lien. In addition to any statutory landlord's lien, now or hereafter enacted, Tenant grants to Landlord, to secure performance of Tenant's obligations hereunder, a security interest in all of Tenant's property situated in, or upon, or used in connection with the Premises or the Premises, and all proceeds thereof (except merchandise sold in the ordinary course of business) (collectively, the "Collateral"), and the Collateral shall not be removed from the Premises or the Premises without the prior written consent of Landlord until all obligations of Tenant have been fully performed. Such personalty thus encumbered includes specifically all trade and other fixtures for the purpose of this Section 21 and inventory, equipment, contract rights, accounts receivable and the proceeds thereof. Upon the occurrence of an Event of Default, Landlord may, in addition to all other remedies, without notice or demand except as provided below, exercise the rights afforded to a secured party under the Uniform Commercial Code of the state in which the Premises are located (the "UCC"). To the extent the UCC requires Landlord to give to Tenant notice of any act or event and such notice cannot be validly waived before a default occurs, then five-days' prior written notice thereof shall be reasonable notice of the act or event. In order to perfect such security interest, Landlord may file any financing statement or other instrument necessary at Tenant's expense at the state and county Uniform Commercial Code filing offices. Tenant grants to Landlord a power of attorney to execute and file any financing statement or other instrument necessary to perfect Landlord's security interest under this Section 21, which power is coupled with an interest and is irrevocable during the Term. Landlord may also file a copy of this Lease as a financing statement to perfect its security interest in the Collateral. Within ten days following written request therefor, Tenant shall execute financing statements to be filed of record to perfect Landlord's security interest in the Collateral. Notwithstanding the above, upon written request from Tenant, Landlord agrees to waive or subordinate its interest in the Collateral in favor of Tenant’s lender, which has a security interest in all of Tenant’s personal property located in the Premises, by signing an agreement in favor of Tenant’s lender acknowledging such waiver or subordination and permitting Tenant’s lender to enter the Premises for the limited purpose of removing the Collateral in substantially the same form as attached hereto as Exhibit G and made a part hereof.

22.Surrender of Premises. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, free of Hazardous Materials placed on the Premises during the Term, broom-clean, reasonable wear and tear (and condemnation and Casualty damage not caused by Tenant, as to which Sections 15 and 16 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises or elsewhere in the Building by Tenant (but Tenant may not remove any such item which was paid for, in whole or in part, by Landlord or any wiring or cabling unless Landlord requires such removal). Additionally, at Landlord's option, Tenant shall remove such alterations, additions, improvements, trade fixtures, personal property, equipment, wiring, conduits, cabling, and furniture (including Tenant's Off-Premises Equipment) as Landlord may request; however, Tenant shall not be required to remove any addition or improvement to the Premises or the Premises if Landlord has specifically agreed in writing that the improvement or addition in question need not be removed. Tenant shall repair all damage caused by such removal. All items not so removed shall, at Landlord's option, be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items; any such disposition shall not be considered a strict foreclosure or other exercise of Landlord's rights in respect of the security interest granted under Section 21. The provisions of this Section 22 shall survive the end of the Term.

23.Holding Over. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at sufferance and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, (a) Tenant shall pay, in addition to the other Rent, Basic Rent equal to 150% of the Basic Rent payable during the last month of the Term, and (b) Tenant shall otherwise continue to be subject to all of Tenant's obligations under this Lease. The provisions of this Section 23 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including any claims made by any succeeding tenant founded upon such failure to surrender, and any lost rents to Landlord resulting therefrom.

24.Certain Rights Reserved by Landlord. Provided that the exercise of such rights does not unreasonably interfere with Tenant's occupancy of the Premises, Landlord shall have the following rights:

(a)Building Operations. To make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Premises, or any part thereof; to enter upon the Premises (after giving Tenant reasonable prior notice thereof, which may be oral notice, except in cases of real or apparent emergency, in which case no notice shall be required).

(b)Security. To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes; temporarily denying access to the Building; and closing the Building after normal business hours and on Sundays and holidays, subject, however, to Tenant's right to enter when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time;

(c)Prospective Purchasers and Lenders. To enter the Premises at all reasonable hours to show the Premises to prospective purchasers or lenders; and

(d)Prospective Tenants. At any time during the last 9 months of the Term (or earlier if Tenant has notified Landlord in writing that it does not desire to renew the Term) or at any time following the occurrence of an Event of Default, to enter the Premises at all reasonable hours to show the Premises to prospective tenants.

25.Intentionally omitted.

26.Miscellaneous.

(a)Landlord Transfer. Landlord may transfer any portion of the Premises and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any further obligations hereunder arising after the date of transfer, provided that the assignee assumes in writing Landlord's obligations hereunder arising from and after the transfer date and Landlord transfers the Security Deposit to the assignee.

(b)Landlord's Liability. The liability of Landlord (and its partners, shareholders or members) to Tenant (or any person or entity claiming by, through or under Tenant) for any default by Landlord under the terms of this Lease or any matter relating to or arising out of the occupancy or use of the Premises and/or other areas of the Building shall be limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building and the rents derived therefrom, and Landlord (and its partners, shareholders or members) shall not be personally liable for any deficiency. The provisions of this Section shall survive any expiration or termination of this Lease.

(c)Force Majeure. Other than for Tenant's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, terrorist acts or activities, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party.

(d)Brokerage. Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than MK Management Company, Inc. and Reliant Real Estate Services LLC, whose commission shall be paid by Landlord pursuant to a separate written agreement. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, liens and other liability for commissions or other compensation claimed by any other brokers or agents claiming the same by, through, or under the indemnifying party. This provision shall survive the expiration or earlier termination of this Lease. Certain principals of Landlord hold a Georgia real estate license.

(e)Estoppel Certificates. From time to time, Tenant shall furnish to any party designated by Landlord, within ten days after Landlord has made a request therefor, a certificate signed by Tenant confirming and containing such factual certifications and representations as to this Lease as Landlord may reasonably request. Unless otherwise required by Landlord's Mortgagee or a prospective purchaser or mortgagee of the Premises, the initial form of estoppel certificate to be signed by Tenant is attached hereto as Exhibit D. If Tenant does not deliver to Landlord the certificate signed by Tenant within such required time period, Landlord, Landlord's Mortgagee and any prospective purchaser or mortgagee, may conclusively presume and rely upon the following facts: (1) this Lease is in full force and effect; (2) the terms and provisions of this Lease have not been changed except as otherwise agreed in writing; (3) not more than one monthly installment of Basic Rent and other charges have been paid in advance; (4) there are no claims against Landlord nor any defenses or rights of offset against collection of Rent or other charges (unless Tenant has alleged same in writing to Landlord); and (5) Landlord is not in default under this Lease (unless Tenant has sent written notice to Landlord of a default). In such event, Tenant shall be estopped from denying the truth of the presumed facts.

(f)Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in the Basic Lease Information, (2) hand delivered to the intended addressee, (3) sent by a nationally recognized overnight courier service, or (4) sent by facsimile transmission during normal business hours followed by a confirmatory letter sent in another manner permitted hereunder. All notices shall be effective upon delivery to the address of the addressee (even if such addressee refuses delivery thereof). The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision.

(g)Separability. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable.

(h)Amendments; Binding Effect; No Electronic Records. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. Landlord and Tenant hereby agree not to conduct the transactions or communications contemplated by this Lease by electronic means, except by facsimile transmission as specifically set forth in Section 26(f); nor shall the use of the phrase "in writing" or the word "written" be construed to include electronic communications except by facsimile transmissions as specifically set forth in Section 26(f). The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof.

(i)Quiet Enjoyment. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, but not otherwise, subject to the terms and conditions of this Lease.

(j)No Merger. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate.

(k)No Offer. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.

(l)Entire Agreement. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto.

(m)Waiver of Jury Trial. TO THE MAXIMUM EXTENT PERMITTED BY LAW, LANDLORD AND TENANT EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LITIGATION OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF OR WITH RESPECT TO THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.

(n)Governing Law. This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises are located.

(o)Recording. Tenant shall not record this Lease or any memorandum of this Lease without the prior written consent of Landlord, which consent may be withheld or denied in the sole and absolute discretion of Landlord, and any recordation by Tenant shall be a material breach of this Lease. Tenant grants to Landlord a power of attorney to execute and record a release releasing any such recorded instrument of record that was recorded without the prior written consent of Landlord.

(p)Water or Mold Notification. To the extent Tenant or its agents or employees discover any water leakage, water damage or mold in or about the Premises or Premises, Tenant shall promptly notify Landlord thereof in writing.

(q)Joint and Several Liability. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease. All unperformed obligations of Tenant hereunder not fully performed at the end of the Term shall survive the end of the Term, including payment obligations with respect to Rent and all obligations concerning the condition and repair of the Premises.

(r)Financial Reports. Within 15 days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant or, failing those, Tenant's internally prepared financial statements. If Tenant is a publicly traded corporation, Tenant may satisfy its obligations hereunder by providing to Landlord Tenant's most recent annual and quarterly reports. Tenant will discuss its financial statements with Landlord and, following the occurrence of an Event of Default hereunder, will give Landlord access to Tenant's books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant's financial statements that Tenant designates to Landlord as confidential except (1) to Landlord's Mortgagee or prospective mortgagees or purchasers of the Building, (2) in litigation between Landlord and Tenant, and/or (3) if required by court order. Tenant shall not be required to deliver the financial statements required under this Section 26(r) more than once in any 12-month period unless requested by Landlord's Mortgagee or a prospective buyer or lender of the Building or an Event of Default occurs.

(s)Landlord's Fees. Whenever Tenant requests Landlord to take any action not required of it hereunder or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for Landlord's reasonable, out-of-pocket costs payable to third parties and incurred by Landlord in reviewing the proposed action or consent, including reasonable attorneys', engineers' or architects' fees, within 30 days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action.

(t)Telecommunications. Tenant and its telecommunications companies, including local exchange telecommunications companies and alternative access vendor services companies, shall have the right of access to and within the Building, for the installation and operation of telecommunications systems, including voice, video, data, Internet, and any other services provided over wire, fiber optic, microwave, wireless, and any other transmission systems ("Telecommunications Services"), for part or all of Tenant's telecommunications within the Building and from the Building to any other location without Landlord's prior written consent. All providers of Telecommunications Services shall be required to comply with the rules and regulations of the Building, applicable Laws and Landlord's policies and practices for the Building. Tenant acknowledges that Landlord shall not be required to provide or arrange for any Telecommunications Services and that Landlord shall have no liability to any Tenant Party in connection with the installation, operation or maintenance of Telecommunications Services or any equipment or facilities relating thereto. Tenant, at its cost and for its own account, shall be solely responsible for obtaining all Telecommunications Services.

(u)Confidentiality. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord's benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord's prior written consent; however, Tenant may disclose the terms and conditions of this Lease to its attorneys, accountants, employees, agents and existing or prospective financial partners provided same are advised by Tenant of the confidential nature of such terms and conditions and agree to maintain the confidentiality thereof (in each case, prior to disclosure). Tenant shall be liable for any disclosures made in violation of this Section by Tenant or by any entity or individual to whom the terms of and conditions of this Lease were disclosed or made available by Tenant. The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure.

(v)Authority. Tenant (if a corporation, partnership or other business entity) hereby represents and warrants to Landlord that Tenant is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Tenant has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Tenant is authorized to do so, and that Tenant's organizational identification number assigned by the Georgia Secretary of State is listed on the signature page of this Lease. Landlord hereby represents and warrants to Tenant that Landlord is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Landlord has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Landlord is authorized to do so.

(w)Security Service. Tenant acknowledges and agrees that, while Landlord may (but shall not be obligated to) patrol the Building, Landlord is not providing any security services with respect to the Premises or Tenant's Off-Premises Equipment and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any area where Tenant's Off-Premises Equipment is located or any other breach of security with respect to the Premises or Tenant's Off-Premises Equipment.

(x)List of Exhibits. All exhibits and attachments attached hereto are incorporated herein by this reference.

Exhibit A - Description of the Land
Exhibit B - Building Rules and Regulations
Exhibit C – Landlord’s Work
Exhibit D - Form of Tenant Estoppel Certificate

Exhibit E – Form of Guaranty Agreement

Exhibit F – Maintenance Requirements

(y)Prohibited Persons and Transactions. Tenant represents and warrants to Landlord that Tenant is currently in compliance with and shall at all times during the Term (including any extension thereof) remain in compliance with the regulations of the OFAC of the Department of the Treasury (including those named on OFAC's Specially Designated Nationals and Blocked Persons List) and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism), or other governmental action relating thereto.

(z)No Invasive Testing. Tenant shall not undertake, nor shall Tenant permit any Tenant Party to undertake, any invasive investigation, drilling or sampling of the soil or groundwater at the Premises without the prior written consent of Landlord, which consent shall be in Landlord's sole discretion.

27.Environmental Requirements.

(a)Prohibition against Hazardous Materials. Except for Hazardous Materials contained in products used by Tenant in de minimis quantities for ordinary cleaning and office purposes, Tenant shall not permit or cause any party to bring any Hazardous Materials upon the Premises or in the Premises or transport, store, use, generate, manufacture, dispose, or release any Hazardous Materials on or from the Premises or the Premises without Landlord's prior written consent. Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and all requirements of this Lease. Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant's transportation, storage, use, generation, manufacture, or release of Hazardous Materials on the Premises or in the Premises, Tenant shall promptly notify Landlord of any spill, release, discharge or disposal of Hazardous Materials at, on, under or from the Premises or Property in violation of any Environmental Requirements, and Tenant shall promptly deliver to Landlord a copy of any notice of violation relating to the Premises or the Premises of any Environmental Requirement.

(b)Environmental Requirements. The term "Environmental Requirements" means all Laws regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the Premises or the environment including the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Toxic Substances Control Act and all state and local counterparts thereto, and any common or civil law obligations including nuisance or trespass, and any other requirements of Section 14 and Exhibit B of this Lease. The term "Hazardous Materials" means and includes any substance, material, waste, pollutant, or contaminant that is or could be regulated under any Environmental Requirement or that may adversely affect human health or the environment, including any solid or hazardous waste, hazardous substance, asbestos, petroleum (including crude oil or any fraction thereof, natural gas, synthetic gas, polychlorinated biphenyls (PCBs), and radioactive material). For purposes of Environmental Requirements, to the extent authorized by law, Tenant is and shall be deemed to be the responsible party, including the "owner" and "operator" of Tenant's "facility" and the "owner" of all Hazardous Materials brought on the Premises or the Premises by a Tenant Party and the wastes, by-products, or residues generated, resulting, or produced therefrom.

(c)Removal of Hazardous Materials. Tenant, at its sole cost and expense, shall remove all Hazardous Materials stored, disposed of or otherwise released by a Tenant Party onto or from the Premises or the Premises, in a manner and to a level satisfactory to Landlord in its sole discretion, but in no event to a level and in a manner less than that which complies with all Environmental Requirements and does not limit any future uses of the Premises or the Premises or require the recording of any deed restriction or notice regarding the Premises or the Premises. Tenant shall perform such work at any time during the period of this Lease upon written request by Landlord or, in the absence of a specific request by Landlord, before Tenant's right to possession of the Premises terminates or expires. If Tenant fails to perform such work within the time period specified by Landlord or before Tenant's right to possession terminates or expires (whichever is earlier), Landlord may at its discretion, and without waiving any other remedy available under this Lease or at law or equity (including an action to compel Tenant to perform such work), perform such work at Tenant's cost. Tenant shall pay all costs incurred by Landlord in performing such work within ten days after Landlord's request therefor. Such work performed by Landlord is on behalf of Tenant and Tenant remains the owner, generator, operator, transporter, and/or arranger of the Hazardous Materials for purposes of Environmental Requirements. Tenant agrees not to enter into any agreement with any person, including any governmental authority, regarding the removal of Hazardous Materials that have been disposed of or otherwise released onto or from the Premises or the Premises without the written approval of the Landlord.

(d)Tenant's Indemnity. Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including diminution in value of the Premises or the Premises and loss of rental income from the Premises), liabilities (INCLUDING ANY STRICT LIABILITY), claims, demands, actions, suits, damages (including punitive damages), expenses (including remediation, removal, repair, corrective action, or cleanup expenses), and costs (including actual attorneys' fees, consultant fees or expert fees and including removal or management of any asbestos brought into the Premises by a Tenant party or disturbed in breach of the requirements of this Section 27, regardless of whether such removal or management is required by Law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials or any breach of the requirements under this Section 27 by a Tenant Party regardless of whether Tenant had knowledge of such noncompliance. The obligations of Tenant under this Section 27 shall survive any expiration or termination of this Lease.

(e)Inspections and Tests. Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant's compliance with Environmental Requirements, its obligations under this Section 27, or the environmental condition of the Premises. Access shall be granted to Landlord upon Landlord's prior written notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant's operations. Such inspections and tests shall be conducted at Landlord's expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests. Landlord's receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against Tenant. Tenant shall promptly notify Landlord of any communication or report that Tenant makes to any governmental authority regarding any possible violation of Environmental Requirements or release or threat of release of any Hazardous Materials onto or from the Premises or the Premises. Tenant shall, within five days of receipt thereof, provide Landlord with a copy of any documents or correspondence received from any governmental agency or other party relating to a possible violation of Environmental Requirements or claim or liability associated with the release or threat of release of any Hazardous Materials onto or from the Premises or the Premises. Upon request, Tenant shall provide Landlord with an inventory of Hazardous Materials located at, on or in the Premises and copies of any Material Safety Data Sheet in Tenant's possession required by any Environmental Requirement or related to any Hazardous Material.

(f)Tenant's Financial Assurance in the Event of a Breach. In addition to all other rights and remedies available to Landlord under this Lease or otherwise, Landlord may, in the event of a breach of the requirements of this Section 27 that is not cured within 30 days following notice of such breach by Landlord, require Tenant to provide financial assurance (such as insurance, escrow of funds or third party guarantee) in an amount and form satisfactory to Landlord. The requirements of this Section 27 are in addition to and not in lieu of any other provision in this Lease. Tenant's obligations under this Section 27 shall also apply to the areas where Tenant's Off-Premises Equipment is located.

28.Parking. Tenant shall have the non-exclusive right, in common with other tenants of the Building, if any, to use all parking spaces associated with the Building. Landlord shall use its reasonable discretion in allocating parking spaces to the tenants of the Building if more than one tenant, taking into consideration all factors Landlord deems relevant, including the density and type (e.g., office or industrial) of use conducted by the tenants of the Building in their respective premises. Initially, Tenant shall have the non-exclusive right to use all of the parking spaces associated with the Building. Parking spaces will be available to Tenant without charge during the Term. Landlord shall not be responsible for enforcing Tenant's parking rights against third parties.

29.LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND TENANT'S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, DEMAND, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED.

30.Guaranty. This Lease has been entered into by Lessor in reliance upon Tenant’s representation that Tenant’s obligations hereunder will be personally guaranteed by Luvu Brands, Inc. (“Guarantor”). Contemporaneously with Tenant’s execution of this Lease, Tenant shall have the Guaranty Agreement attached hereto as Exhibit E executed by Guarantor, and shall deliver such executed Guaranty Agreement to Landlord contemporaneously with Tenant’s delivery of the executed Lease to Landlord. In the event that Tenant shall fail to deliver such executed Guaranty Agreement to Landlord contemporaneously with Tenant’s delivery of the executed Lease, then this Lease shall be voidable at Lessor’s sole discretion.

31.Options to Renew. Tenant shall have the right to renew the term of this Lease for two (2) additional three (3) year periods. Said renewal options may be exercised by Tenant by delivering written to Landlord on or before 180 days prior to the end of the then current term of the Lease so long as (a) Tenant is not in default hereunder beyond applicable cure periods as of the date of delivery of such written notice, (b) Tenant is not in default hereunder beyond applicable notice and cure periods as of the date of commencement of such renewal term and (c) Tenant has not assigned or sublet this Lease without the consent of Landlord. In the event of any such renewal, the terms and provisions set forth herein shall remain in full force and effect in accordance with their terms, with the exception of the Basic Rent, which shall continue to increase at 3% annually. All Additional Rent under the Lease shall otherwise be payable in accordance with the terms of the Lease.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

This Lease is executed on the respective dates set forth below, but for reference purposes, this Lease shall be dated as of the date first above written. If the execution date is left blank, this Lease shall be deemed executed as of the date first written above.

LANDLORD:	GOODSON LAND PARTNERS, LLC, a Georgia limited liability company By:/s/ Adam K. Richards Name:Adam K. Richards Title: Manager Execution Date: November 2, 2020
TENANT:	ONE UP INNOVATIONS, INC., a Georgia corporation By: /s/ Louis S. Friedman Name: Louis S. Friedman Title: President and CEO Execution Date: October 30, 2020

EXHIBIT A

DESCRIPTION OF THE LAND

All that tract or parcel of land lying and being in Land Lots 248 and 249 of the 6th District of DeKalb County, Georgia, and in Land Lots 247, 248, 249 and 250 of the 6th District of Gwinnett County, Georgia, and being more particularly described as follows:

BEGINNING at 2” pipe found on the southwesterly right-of-way line of Bankers Industrial Drive 1,055.21 feet southeasterly from the intersection formed by the southwesterly right-of-way line of Bankers Industrial Drive with the southeasterly right-of-way line of Bankers Circle, as measured along the southwesterly right-of-way line of Bankers Industrial Drive (having a 60’ right-of-way), thence run along said right-of-way line of Bankers Industrial Drive South 34°53'30" East, a distance of 146.03 feet to a point; thence run southwest along said right-of-way line of Bankers Industrial Drive along the arc of a curve 280.21 feet, concave to the northeast, having a central angle of 69°48'11" and a radius of 230.00 feet and being subtended by a chord which bears South 69°45'52" East, a distance of 263.20 feet to a 2” pipe found located on the northwesterly right of way line of Norfolk Southern Railroad (variable right of way); thence leaving said right-of-way line of Bankers Industrial Drive, run thence along said Norfolk Southern Railroad right of way South 50°06'45" West, a distance of 985.58 feet to a 2” pipe found; thence leaving the aforesaid right of way line, run along the northeast property line of property now of formerly owned by Williams Energy Ventures, Inc., North 41°57'13" West, a distance of 430.31 feet to a 1” open top pipe found; thence along the east property line of property now or formerly owned by PCCP JSP Lincoln Parc Apartments, LLC., North 18°55'45" West, a distance of 21.59 feet to a ½” rebar found; thence along the southeast property line of property now or formerly owned by IC Industrial Reit, North 55°06'32" East, a distance of 878.32 feet to a 2” pipe found and the POINT OF BEGINNING.

Said tract containing 8.362 acres (364,239 SQ. FT.) as depicted on the ALTA / NSPS Land Title Survey prepared by Metro Engineering and Surveying Company, Inc. of McDonough, Georgia, dated 06-14-18. (Job No. 14388).

EXHIBIT B

BUILDING RULES AND REGULATIONS

The following rules and regulations shall apply to the Premises, the Building, the parking areas associated therewith, and the appurtenances thereto:

1.Sidewalks, doorways, vestibules, halls, stairways, loading dock areas and associated overhead doors, and other similar areas shall not be obstructed by tenants or used by any tenant for purposes other than ingress and egress to and from their respective leased premises and for going from one to another part of the Building.

2.Plumbing (including outside drains and sump pumps), fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or deposited therein. Damage resulting to any such fixtures or appliances from misuse by a tenant or its agents, employees or invitees, shall be paid by such tenant.

3.No signs, advertisements or notices shall be painted or affixed on or to any windows or doors or other part of the Building visible from the exterior of the Premises without the prior written consent of Landlord, other than door signs which are permitted. Except as consented to in writing by Landlord or in accordance with Tenant's building standard improvements, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the Premises. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors, or windows which might appear unsightly from outside the Premises.

4.Tenant, at its expense, shall be responsible for providing all door locks in the Premises and shall provide to Landlord, at Tenant's expense, contemporaneously with the installation of such devices, a master key, card keys, access codes or other means to allow Landlord immediate access to all areas within the Premises.

5.Landlord may prescribe weight limitations and determine the locations for safes and other heavy equipment or items, which shall in all cases be placed in the Building so as to distribute weight in a manner acceptable to Landlord which may include the use of such supporting devices as Landlord may require. All damages to the Building caused by the installation or removal of any property of a tenant, or done by a tenant's property while in the Building, shall be repaired at the expense of such tenant.

6.Corridor doors, when not in use, shall be kept closed. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds or animals (other than seeing-eye dogs) shall be brought into or kept in, on or about any tenant's leased premises. No portion of any tenant's leased premises shall at any time be used or occupied as sleeping or lodging quarters.

7.Tenant shall not make or permit any vibration or improper, objectionable or unpleasant noises or odors in the Building or otherwise interfere in any way with other tenants or persons having business with them. Tenant shall not introduce, disturb or release asbestos or PCB's into or from the Premises.

8.Tenant shall not keep in the Building any flammable or explosive fluid or substance. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises without the prior written consent of Landlord. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Building.

9.Landlord will not be responsible for lost or stolen personal property, money or jewelry from tenant's leased premises or public or common areas regardless of whether such loss occurs when the area is locked against entry or not.

10.Tenant shall not conduct any activity on or about the Premises or Building which will draw pickets, demonstrators, or the like.

11.All vehicles are to be currently licensed, in good operating condition, parked for business purposes having to do with Tenant's business operated in the Premises, parked within designated parking spaces, one vehicle to each space. No vehicle shall be parked as a "billboard" vehicle in the parking lot. Parking on the grass is not permitted. Any vehicle parked improperly may be towed away. Tenant, Tenant's agents, employees, vendors and customers who do not operate or park their vehicles as required shall subject the vehicle to being towed at the expense of the owner or driver. Landlord may place a "boot" on the vehicle to immobilize it and may levy a charge of $50.00 to remove the "boot." Tenant shall indemnify, hold and save harmless Landlord of any liability arising from the towing or booting of any vehicles belonging to a Tenant Party.

12.No tenant occupying less than 100% of the Building may enter into phone rooms, electrical rooms, mechanical rooms, or other service areas of the Building unless accompanied by Landlord or the Building manager.

13.Tenant shall not permit storage outside the Premises, excluding outside storage of trucks and other vehicles which is permitted, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises; provided, however, that any vehicles, trucks or trailers stored must be in operable, good working condition.

14.Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises.

15.Tenant may park or operate any semi-trucks or semi-trailers in the parking areas associated with the Building.

16.Tenant will not permit any Tenant Party to bring onto the Premises any handgun, firearm or other weapons of any kind, illegal drugs or, unless expressly permitted by Landlord in writing, alcoholic beverages.

17.Tenant shall not permit its employees, invitees or guests to smoke in the Premises or the lobbies, passages, corridors, elevators, vending rooms, rest rooms, stairways or any other area shared in common with other tenants in the Building, or permit its employees, invitees, or guests to loiter at the Building entrances for the purposes of smoking. Landlord may, but shall not be required to, designate an area for smoking outside the Building.

EXHIBIT C

LANDLORD’S WORK

1.Acceptance of Premises. Except as set forth in this Exhibit, Tenant accepts the Premises in their "AS-IS" condition on the date that this Lease is entered into.

2.Scope of Work. Landlord, at its expense, shall perform the work in the Premises described below in this Exhibit (the "Work"). All Landlord’s Work will be diligently and timely performed with commercially reasonable efforts made to minimize interruption to Tenant’s business.

A.       Miscellaneous

• Patch and repair holes in exterior brick and block around the building and remove misc., unneeded items attached to the building

• Paint the exterior of the Building (including doors and metals)

• Remove all site fencing and bollards

• Replace all dock doors

• Replace all dock canopies

• Demo all dock seals

• Renovate overhang at office entry

• Update building and site lighting

• Paint new building address numbers on the front corner building façade

• Clear brush and overgrowth around the building perimeter

• Renovate landscaping

• Pressure wash sidewalks, concrete truck courts and drive-in ramps

• Install new bollards around electrical transformer at rear of property

• Replace seven (7) exterior metal personnel doors and hardware

• Replace four (4) sets of exterior metal stairs

• Demo and replace four (4) storefront windows at rear office area.

B.       Paving – See Schedule 1 attached hereto and made a part hereof

Schedule 1

EXHIBIT D

FORM OF TENANT ESTOPPEL CERTIFICATE

The undersigned is the Tenant under the Lease (defined below) between _______________________, a ___________________, as Landlord, and the undersigned as Tenant, for the Premises on the __________ floor(s) of the office building located at _____________________, __________ and commonly known as _______________________, and hereby certifies as follows:

1.The Lease consists of the original Lease Agreement dated as of ___________, 20___ between Tenant and Landlord['s predecessor-in-interest] and the following amendments or modifications thereto (if none, please state "none"):

The documents listed above are herein collectively referred to as the "Lease" and represent the entire agreement between the parties with respect to the Premises. All capitalized terms used herein but not defined shall be given the meaning assigned to them in the Lease.

2.The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Section  1 above.

3.The Term commenced on __________________, 20__ and the Term expires, excluding any renewal options, on _____________________, 20__, and Tenant has no option to purchase all or any part of the Premises or the Building or, except as expressly set forth in the Lease, any option to terminate or cancel the Lease.

4.Tenant currently occupies the Premises described in the Lease and Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows (if none, please state "none"):

5.All monthly installments of Basic Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through ______________. The current monthly installment of Basic Rent is $____________.

6.All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder. In addition, Tenant has not delivered any notice to Landlord regarding a default by Landlord thereunder.

7.As of the date hereof, there are no existing defenses or offsets, or, to the undersigned's knowledge, claims or any basis for a claim, that the undersigned has against Landlord and no event has occurred and no condition exists, which, with the giving of notice or the passage of time, or both, will constitute a default under the Lease.

8.No rental has been paid more than 30 days in advance and no security deposit has been delivered to Landlord except as provided in the Lease.

9.If Tenant is a corporation, partnership or other business entity, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in the state in which the Premises are located and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so.

10.There are no actions pending against Tenant under any bankruptcy or similar laws of the United States or any state.

11.Other than in compliance with all applicable laws and incidental to the ordinary course of the use of the Premises, the undersigned has not used or stored any hazardous substances in the Premises.

12.Tenant is not itself, and is not directly or indirectly owned, controlled or supported by, a "Specially Designated National" or otherwise designated as a blocked person under any regulation of the Office of Foreign Assets Control, U.S. Department of Treasury (see: www.ustreas.gov/offices/enforcement/OFAC).

13.All tenant improvement work to be performed by Landlord under the Lease has been completed in accordance with the Lease and has been accepted by the undersigned and all reimbursements and allowances due to the undersigned under the Lease in connection with any tenant improvement work have been paid in full.

Tenant acknowledges that this Estoppel Certificate may be delivered to Landlord, Landlord's Mortgagee or to a prospective mortgagee or prospective purchaser, and their respective successors and assigns, and acknowledges that Landlord, Landlord's Mortgagee and/or such prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in disbursing loan advances or making a new loan or acquiring the property of which the Premises are a part and that receipt by it of this certificate is a condition of disbursing loan advances or making such loan or acquiring such property.

Executed as of ____________________, 20_.

TENANT: _____________________________________, a _______________   By: Name: Title:    

EXHIBIT E

FORM OF GUARANTY AGREEMENT

THIS Guaranty Agreement (this “Guaranty”) is executed and delivered this 30th day of October, 2020 by LUVU BRANDS, INC., a Florida corporation (“Guarantor”) in favor of GOODSON LAND PARTNERS, LLC, a Georgia limited liability company (“Landlord”).

R E C I T A L S:

A. One Up Innovations, Inc., a Georgia corporation (“Tenant”), and Landlord are party to that certain Lease Agreement dated November 2, 2020 (the “Lease”).

B. In order to induce Landlord to enter into the Lease, Guarantor agreed to execute and deliver to Landlord this Guaranty.

C. Guarantor acknowledges that Landlord would not have entered into the Lease without the execution and delivery by Guarantor of this Guaranty.

NOW THEREFORE, in consideration of the Premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Guarantor, Guarantor hereby agrees in favor of Landlord (and Landlord’s successors and assigns) as follows:

Guarantor hereby acknowledges and covenants that it has read the Lease and is aware of the terms, conditions, and requirements contained therein. Guarantor absolutely, unconditionally and irrevocably guarantees the prompt and complete payment and performance when due, whether by acceleration or otherwise, of all obligations, liabilities and covenants, whether now in existence or hereafter arising, of Tenant to Landlord, and arising under the Lease, including without limitation all amounts due to Landlord as Rent or otherwise under the Lease (the “Obligations”). Guarantor hereby agrees to pay and/or perform punctually, upon written demand by Landlord, each such Obligation which is not paid or performed as and when due and payable by Tenant, in like manner as such amount is due from Tenant. For purposes hereof, the Obligations shall be performed and/or due and payable when due and payable under the terms of the Lease notwithstanding the fact that the collection or enforcement thereof as against Tenant may be stayed or enjoined under Title 11 of the United States Code or similar applicable law. This Guaranty is one of payment and not of collection.

Guarantor’s obligations under this Guaranty are absolute and unconditional and shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations or the Lease, or by any other circumstance relating to the Obligations or the Lease which might otherwise constitute a legal or equitable discharge of or defense of a guarantor or surety. Guarantor hereby irrevocably waives any and all suretyship defenses, defenses that could be asserted by Tenant (except payment) and all other defenses that would otherwise be available to Guarantor. All payments by Guarantor pursuant to this Guaranty shall be made without setoff. Landlord shall not be obligated to file any claim relating to the Obligations in the event that Tenant becomes subject to a bankruptcy, reorganization or similar proceeding, and the failure of Landlord so to file shall not affect Guarantor’s obligations under this Guaranty. Guarantor irrevocably waives any right to require Landlord to pursue any other remedy in Landlord’s power whatsoever, whether against Tenant or any other obligor principally or secondarily obligated with respect to the Obligations. Guarantor irrevocably waives any defense arising by reason of any disability, bankruptcy, reorganization or similar proceeding involving Tenant. In furtherance of the foregoing, Guarantor hereby waives and agrees not to assert or take advantage of (a) the defense of the statute of limitations in any action hereunder or for the collection of any amounts or the performance of any obligations hereby guaranteed; (b) any defense that may arise by reasons of the incapacity, lack of authority, death or disability of Guarantor or any other person or entity, or the failure of Landlord to file or enforce a claim against the estate (either in administration, bankruptcy, or any other proceeding) of Tenant or any other person or entity; (c) any defense based on the failure of Landlord to give notice of the existence, creation or incurring of any new or additional indebtedness or obligation or of any action or non-action on the part of any other person whomsoever, in connection with any obligation hereby guaranteed; (d) any defense based upon an election of remedies by Landlord which destroys or otherwise impairs any subrogation or rights of Guarantor or the right of Guarantor to proceed against Tenant for reimbursement, or both; (e) any defense based upon failure of Landlord to commence an action against Tenant; (f) any duty on the part of Landlord to disclose to Guarantor any facts it may now or

hereafter know regarding Tenant; (g) acceptance or notice of acceptance of this Guaranty by Landlord; (h) notice of presentment and demand for payment of any of the amounts or performance of any of the obligations hereby guaranteed; (i) protest and notice of dishonor or of default or Guarantor or to any other party with respect to payment of the amounts or performance of obligations hereby guaranteed; (j) any and all other notices whatsoever to which Guarantor might otherwise be entitled; and (k) any defense based on lack of due diligence by Landlord in collection, protection or realization upon any collateral securing the amounts due and obligations of Tenant under the Lease. In the event that any payment in respect of any Obligations is rescinded or must otherwise be returned for any reason whatsoever, Guarantor shall remain liable under this Guaranty in respect of such Obligations as if such payment had not been made.

Guarantor agrees that a Landlord may at any time and from time to time, either before or after the maturity thereof, without notice to or further consent of Guarantor, extend the time of payment of, or performance of, or renew, any of the Obligations, and may also make any agreement with Tenant or with any other party to or person liable on any of the Obligations, or interested therein, for the extension, renewal, payment, compromise, waiver, discharge or release thereof, in whole or in part, or for any amendment or modification of the terms thereof or of the Lease or any other agreement between Landlord and Tenant or any such other party or person, without in any way impairing, releasing or affecting the liabilities of Guarantor under this Guaranty.

Guarantor will not exercise any rights which it may acquire by way of subrogation until all of the Obligations to Landlord shall have been indefeasibly paid in full, or performed in its entirety. Any amount paid to Guarantor in violation of the preceding sentence shall be held in trust for the benefit of Landlord and shall forthwith be paid to Landlord to be credited and applied to the Obligations, whether matured or unmatured. Guarantor hereby subordinates any and all liabilities and indebtedness to Guarantor to the prior indefeasible payment in full of the Obligations.

This Guaranty shall remain in full force and effect and be binding upon Guarantor, its successors and assigns until all of the Obligations have been satisfied in full and the Lease shall have been terminated or fully performed. This Guaranty may not be modified, discharged or terminated orally or in any manner other than by an agreement in writing signed by Landlord and Guarantor. This is a continuing Guaranty relating to all Obligations, including any arising during any holdover term or arising under transactions renewing or extending the term of the Lease, changing the terms of any Obligations, or creating new or additional Obligations after prior Obligations have in whole or in part been satisfied, regardless of any lapse of time. If any of the present or future Obligations are guaranteed by persons, partnerships, corporations or other entities in addition to Guarantor, the death, release or discharge, in whole or in part, or the bankruptcy, liquidation or dissolution of one or more of them shall not discharge or affect the liabilities of Guarantor under this Guaranty. The obligations of Guarantor hereunder shall be additional to, and not in substitution for, any security or other guarantee or indemnity at any time existing in respect of Tenant’s obligations, liabilities and covenants under the Lease.

No failure on the part of Landlord to exercise, and no delay in exercising, any right, remedy or power under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise by Landlord of any right, remedy or power under this Guaranty preclude any other or future exercise of any right, remedy or power under this Guaranty. Each and every right, remedy and power granted to Landlord under this Guaranty or allowed it by law or by the Lease or any other agreement shall be cumulative and not exclusive of any other, and may be exercised by Landlord from time to time.

The liability of Guarantor is co-extensive with that of Tenant and also joint and several and this Guaranty shall be enforceable against Guarantor without the necessity of any suit or proceeding on Landlord’s part of any kind or nature whatsoever against Tenant and without the necessity of any notice of nonpayment, non-performance or non-observance or of any notice of acceptance of this Guaranty or of any other notice or demand to which Guarantor might otherwise be entitled, all of which Guarantor hereby expressly waives. In furtherance of the foregoing, Guarantor waives any right to require that an action be brought against Tenant or any other person to require that resort be had to any security or to any deposit or credit in favor of Tenant or any other person. In the event of a default under the Lease, Landlord shall have the right to enforce its rights, powers and remedies thereunder or hereunder, in any order, and all rights, powers and remedies available to Landlord in such event shall be non-exclusive and cumulative of all other rights, powers and remedies provided thereunder or hereunder or by law or in equity.

Landlord may at any time and from time to time without notice to or consent of Guarantor and without impairing or releasing the obligations of Guarantor hereunder: (a) take or fail to take any action of any kind in respect of any security for any obligation, covenant or liability of Tenant to Landlord, (b) exercise or refrain from exercising any rights against Tenant or others, (c) compromise or subordinate any obligation or liability of Tenant to Landlord including any security therefor, (d) consent to the assignment by Tenant of its interest in the Lease, or (e) consent to any other matter or thing under or relating to the Lease. Guarantor waives trial by jury in any action, proceeding or counterclaim, involving any matters whatsoever arising out of or in any way connected with the Guaranty. Guarantor agrees to reimburse Landlord for the costs and attorney’s fees incurred by reason of Landlord having to enforce this Guaranty.

Guarantor represents and warrants to Landlord that (a) the Lease has been duly authorized, executed and delivered by Tenant and is a legal, valid and binding instrument enforceable against Tenant in accordance with its terms, and (b) this Guaranty has been duly authorized, executed and delivered by Guarantor and is a legal, valid and binding instrument enforceable against Guarantor in accordance with its terms.

Guarantor may not assign its rights nor delegate its obligations under this Guaranty, in whole or in part, without prior written consent of Landlord, and any purported assignment or delegation absent such consent is void. This Guaranty shall remain in full force and effect notwithstanding (a) any assignment or transfer by Tenant of its interest in the Lease (in which case this Guaranty shall apply, from and after such assignment or transfer, to all of the obligations, liabilities and covenants of the assignee or transferee under the Lease), or (b) any assignment or transfer by Landlord of its interest in the Lease (in which case Guarantor’s obligations under this Guaranty shall inure to the benefit of Landlord’s assignee or transferee), in each case irrespective of whether Guarantor has notice of or consents to any such assignment or transfer.

Guarantor warrants and represents to Landlord that any and all financial statements heretofore delivered by Guarantor to Landlord are true and correct in all respects as of the date hereof.

Guarantor jointly and severally waives any and all homestead and exemption rights which they may have under or by virtue of the Constitution or the laws of the United States of America or of any state as against this Guaranty, any renewal hereof, or any obligations represented hereby, and does jointly and severally transfer, convey and assign to Landlord a sufficient amount of such homestead exemption as may be allowed, including such homestead or exemption as may be set apart in bankruptcy, to pay all amounts due hereunder in full, with all costs of collection, and does hereby direct any trustee in bankruptcy having possession of such homestead or exemption to deliver to Landlord a sufficient amount of property or money set apart as exempt to pay the obligations guaranteed hereby, or any renewal thereof, and does hereby, jointly and severally, appoint Landlord the attorney-in-fact for each of then, to claim any and all homestead exemptions allowed by law.

Guarantor hereby agrees that it will make no transfer, sale, conveyance, encumbrance, or hypothecation of any part of its property unless said transfer, sale, conveyance, encumbrance, or hypothecation is for a good and fair consideration.

This Guaranty may not be changed orally, and no obligation of Guarantor can be released or waived by Landlord or any officer or agent of Landlord, except by a writing signed by a duly authorized officer of Landlord and bearing the seal of Landlord. This Guaranty shall be irrevocable by Guarantor until all obligations and undertakings of Tenant under, by reason of, or pursuant to the Lease have been completely performed. If more than one individual or entity comprises Guarantor, then all individual and entities comprising Guarantor are and shall each be jointly and severally liable for the due and proper performance of Guarantor’s duties and obligations arising under or in connection with this Guaranty.

This Guaranty shall in no event be impaired by any change which may arise by reason of the death of Tenant or Guarantor, if individuals, or by reason of the dissolution of Tenant or Guarantor, if Tenant or Guarantor is a corporation or a partnership. The obligations under this Guaranty of two or more parties shall be joint and several. The use of the singular herein shall include the plural.

If any provision of this Guaranty or the application thereof shall be invalid or unenforceable to any extent, the remainder of this Guaranty and the application of such provisions shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

The obligations of Tenant under the Lease to execute and deliver estoppel statements and financial statements, as therein provided, shall be deemed to also require Guarantor hereunder to do and provide the same relative to Guarantor.

This Guaranty is assignable by Landlord, and any assignment hereof or any transfer or assignment of the Lease or portions thereof by Landlord shall operate to vest in any such assignee all rights and powers herein conferred upon and granted to Landlord.

All capitalized terms not otherwise defined in this Guaranty shall have the meaning set forth for same in the Lease.

THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF GEORGIA WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. GUARANTOR AND LANDLORD JOINTLY AND SEVERALLY AGREE TO THE EXCLUSIVE JURISDICTION OF COURTS LOCATED IN THE STATE OF GEORGIA, UNITED STATES OF AMERICA, OVER ANY DISPUTES ARISING OR RELATING TO THIS GUARANTY.

Guarantor acknowledges its address and will notify Landlord of any changes thereto.

[SIGNATURE PAGE FOLLOWS.]

IN WITNESS WHEREOF, this Guaranty Agreement has been executed and delivered as of the date and year first above written.

GUARANTOR:

LUVU BRANDS, INC. a Florida corporation

By: /s/ Louis S. Friedman____(SEAL)

Name: Louis S. Friedman

Title: President and CEO

Exhibit F

Maintenance Requirements

The following shall be included a preventative maintenance/service contract for servicing all heating and air conditioning systems within the Premises, with service to be performed on a quarterly basis.

• Inspect belts for wear and tension, adjust or replace as necessary;

• Lubricate all moving parts, as necessary;

• Inspect and adjust all temperature and safety controls;

• Check refrigeration system for leaks and operation;

• Check refrigeration system for moisture;

• Inspect compressor oil level and crank case heaters;

• Check head pressure, suction  pressure and oil pressure;

• Inspect air filters, replace when necessary and change return air filters;

• Check space conditions;

• Check condensate drain pan, drain line and drain pump reservoirs to ensure they are clean and free from debris;

• Add new anti-algae pan tablets to drain pan & pump reservoir;

• Flush all condensate drain lines & test drainage flow;

• Test condensate safety switches operation;

• Inspect and adjust all valves;

• Check and adjust dampers;

• Run machine through complete cycle; and

• Report any system deficiencies and submit repair proposals.

Exhibit G

Form of Landlord’s Waiver and Consent

LANDLORD’S WAIVER AND CONSENT

The undersigned is the owner of the tract, piece or parcel of land described as:

Approximately 133,000 square feet of floor space known as 2745 Bankers Industrial Drive, Gwinnett, DeKalb, Georgia. (the “Premises”).

The Premises are now being occupied by One Up Innovations, Inc. (“Debtor”) as lessee. The undersigned understands that Advance Financial Corporation (“AFC”) desires to make a loan, extend credit or otherwise make a financial accommodation to Debtor (the “Loan”) and that Debtor will grant to AFC a security interest in Debtor’s present and future inventory (including, but not limited to, raw materials, work in process, unshipped merchandise, returned goods, goods held in trust for customers and finished goods) and other personal property of Debtor (including, but not limited to, machinery, tools, parts trade fixtures, and equipment (said inventory and other property being collectively referred to herein as “Collateral”) to secure the Loan and any and all other liabilities of Debtor to AFC, however created, arising or evidenced, whether direct or indirect, absolute or contingent, primary or secondary, now or hereafter arising, or due or to become due (collectively the “Liabilities”). The undersigned understands that AFC is willing to make the Loan only if the undersigned enters into this Waiver and Consent.

Now, THEREFORE, intending to be legally bound, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the undersigned agrees as follows:

1.       The undersigned agrees that any present or future claim of AFC against the Collateral shall be superior to any present or future lien, claim or right of the undersigned, whether arising by agreement, by statute or otherwise.

2.       The undersigned waives all right of levy, sale or distrait for non-payment of past, present or future rent, and all other claims and demands of every kind, against the Collateral. This waiver shall continue so long as any of the Liabilities are owed to AFC and such Liabilities are secured by the Collateral.

3.       The undersigned agrees that any or all of the Collateral may be affixed to the Premises, that the Collateral is to remain personal property regardless of how it is affixed to the Premises, and that title to the Collateral shall remain in Debtor (or its legal representatives, successors, agents or assigns) until all Liabilities which are secured by the Collateral have been paid to AFC.

4.       The undersigned further agrees that AFC or its assignees may enter the Premises at any time during the term of Debtor’s lease of the Premises with the undersigned to inspect or remove any or all of the Collateral from the Premises whenever AFC deems it necessary or appropriate to do so to protect AFC’s interest therein, with reasonable notice to the undersigned if Debtor is not occupying. Notice can be provided via email to: Adam Richards at arichards@reliant-re.com.

AFC agrees and stipulates that it shall be responsible and shall pay for any and all damages caused, directly or indirectly, by the removal of any Collateral from the Premises by AFC or its employees, agents or independent contractors. AFC agrees to pay the undersigned such amount of damages within ten (10) days after receipt of an invoice therefor.

5.       AFC may amend, waive, or assign the agreements pertaining to the Liabilities in whole or in part, or change the time or manner of payment of any of the Liabilities, without notifying the undersigned and without affecting the validity of this Waiver and Consent. AFC shall notify the undersigned if the Landlord’s Waiver and Consent is assigned to another entity.

6.       All of AFC’s rights and privileges under this Waiver and Consent shall inure to the benefit of AFC’s successors and assigns.

7.       This agreement shall not be recorded against the title of the Premises.

8.       If Debtor vacates the Premises, AFC shall remove all Collateral from the Premises within thirty (30) days of notice of Debtor’s vacating the Premises, however, AFC shall pay to the undersigned rent, and other charges due under the Lease of the Premises, prorated daily, calculated at the Debtor’s contractual rate, from the eleventh (11th) day from such notice until the day the Collateral is removed from the Premises. In no event, however, shall AFC have the right to access the Premises after the aforementioned thirty (30) day period.

9. AFC shall not hold public auction or sale at the Premises of the Collateral.

Witness the hand(s) and seal(s) of this undersigned this 2nd day of November 2020.

Signed, sealed and delivered this ___ day of __________, 2020, in the presence of:	if a company: Goodson Land Partners, LLC Name of Limited Liability Company
Witness	By: /s/ Adam K. Richards
	Title: Manager
Notary Public
	Attest:___________________________
	Title:____________________________
	(Seal)

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:  November 12, 2020	/s/ Louis S. Friedman
	Louis S. Friedman
	Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Ronald P. Scott, 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:  November 12, 2020	/s/ Ronald P. Scott
	Ronald P. Scott
	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 September 30, 2020 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:  November 12, 2020	/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 September 30, 2020 as filed with the Securities and Exchange Commission (the Report”), I, Ronald P. Scott, 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:  November 12, 2020	/s/ Ronald P. Scott
	Ronald P. Scott
	Chief Financial Officer (Principal Financial and Accounting Officer)

XML

Cover - shares	3 Months Ended
	Sep. 30, 2020	Nov. 12, 2020
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2020
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2020
Current Fiscal Year End Date	--06-30
Entity Registrant Name	Luvu Brands, Inc.
Entity Central Index Key	0001374567
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		73,652,596

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Current assets:
Cash and cash equivalents	$ 932	$ 1,152
Accounts receivable, net	1,039	1,135
Inventories, net	2,186	1,985
Prepaid expenses	90	55
Total current assets	4,247	4,327
Equipment, property and leasehold improvements, net	914	938
Finance lease assets	34
Operating lease assets	85	165
Other assets	17	17
Total assets	5,297	5,447
Current liabilities:
Accounts payable	2,422	2,435
Current debt	1,814	2,007
Current portion of PPP loan	666	482
Other accrued liabilities	538	623
Operating lease liability	102	199
Total current liabilities	5,542	5,746
Noncurrent liabilities:
Long-term debt	264	361
PPP loan	430	614
Total noncurrent liabilities	694	975
Total liabilities	6,236	6,721
Commitments and contingencies (See Note 16)
Stockholders deficit:
Common stock, $0.01 par value, 175,000,000 shares authorized, 73,452,596 shares issued and outstanding at September 30, 2020 and June 30, 2020	735	735
Additional paid-in capital	6,153	6,147
Accumulated deficit	(7,827)	(8,156)
Total stockholders deficit	(939)	(1,274)
Total liabilities and stockholders deficit	5,297	5,447
Preferred Stock
Stockholders deficit:
Preferred stock, 5,700,000 shares authorized, $0.0001 par value none issued and outstanding
Series A Preferred Stock
Stockholders deficit:
Series A Convertible Preferred stock, 4,300,000 shares authorized $0.0001 par value, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000 at September 30, 2020 and June 30, 2020

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Preferred stock - par value	$ 0.0001	$ 0.0001
Preferred stock - shares authorized	10,000,000	10,000,000
Common stock- par value	$ 0.01	$ 0.01
Common stock- shares authorized	175,000,000	175,000,000
Common stock- shares issued	73,452,596	73,452,596
Common stock- shares outstanding	73,452,596	73,452,596
Preferred Stock
Preferred stock - par value	$ 0.0001	$ 0.0001
Preferred stock - shares authorized	5,700,000	5,700,000
Preferred stock - shares issued
Preferred stock - shares outstanding
Series A Preferred Stock
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

XML

Condensed Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Income Statement [Abstract]
Net Sales	$ 5,367	$ 4,094
Cost of goods sold	3,879	2,957
Gross profit	1,488	1,137
Operating expenses:
Advertising and promotion	69	80
Other selling and marketing	267	318
General and administrative	664	586
Depreciation and amortization	52	40
Total operating expenses	1,052	1,024
Operating income	436	113
Other expense:
Interest expense and financing costs	(107)	(158)
Total other expense	(107)	(158)
Income (loss) from operations before income taxes	329	(45)
Provision for income taxes
Net income (loss)	$ 329	$ (45)
Net income (loss) per share: Basic	$ 0.00	$ (0.00)
Net income (loss) per share: Diluted	$ 0.00	$ (0.00)
Shares used in calculation of net income (loss) per share: Basic	73,452,596	73,452,596
Shares used in calculation of net income (loss) per share: Diluted	76,034,134	73,452,596

XML

Condensed Consolidated Statements of Changes in Stockholders Deficit - USD ($) $ in Thousands	Series A Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance (in shares) at Jun. 30, 2019	4,300,000	73,452,596
Beginning Balance at Jun. 30, 2019		$ 735	$ 6,126	$ (9,016)	$ (2,155)
Stock-based compensation			5		5
Net Income (Loss)				(45)	(45)
Ending Balance (in shares) at Sep. 30, 2019	4,300,000	73,452,596
Ending Balance at Sep. 30, 2019		$ 735	6,131	(9,061)	(2,195)
Beginning Balance (in shares) at Jun. 30, 2020	4,300,000	73,452,596
Beginning Balance at Jun. 30, 2020		$ 735	6,147	(8,156)	(1,274)
Stock-based compensation			6		6
Net Income (Loss)				329	329
Ending Balance (in shares) at Sep. 30, 2020	4,300,000	73,452,596
Ending Balance at Sep. 30, 2020		$ 735	$ 6,153	$ (7,827)	$ (939)

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
OPERATING ACTIVITIES:
Net income (loss)	$ 329	$ (45)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	52	40
Stock based compensation expense	6	5
Provision for bad debt	(1)
Amortization of operating lease asset	80	72
Change in operating assets and liabilities:
Accounts receivable	97	72
Inventories	(201)	(202)
Prepaid expenses and other assets	(35)	9
Accounts payable	(13)	108
Accrued compensation	(93)	(64)
Accrued expenses and interest	6	(4)
Operating lease liability	(97)	(86)
Net cash provided by (used in) operating activities	130	(95)
INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements	(27)	(8)
Net cash used in investing activities	(27)	(8)
FINANCING ACTIVITIES:
Repayment of term note-shareholder		(49)
Repayment of unsecured note payable	(154)	(209)
Proceeds from unsecured note payable		300
Net cash provided by line of credit	45	1
Borrowings of credit card advance		250
Repayment of credit card advance	(56)	(152)
Repayments of secured notes payable	(125)	(70)
Repayment of unsecured line of credit	(3)	(3)
Payments on equipment notes	(28)	(32)
Principal payments on capital leases	(2)	(6)
Net cash (used in) provided by financing activities	(323)	30
Net decrease in cash and cash equivalents	(220)	(73)
Cash and cash equivalents at beginning of period	1,152	649
CASH AND CASH EQUIVALENTS AT END OF PERIOD	932	576
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Purchases of equipment with equipment notes	35
Operating lease asset obtained in exchange for operating lease liability		448
Cash paid during the period for: Interest	$ 106	157
Cash paid during the period for: Income taxes

XML

Organization and Nature of business

3 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

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 sensuality and intimacy; 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 virgin and re-purposed polyurethane foam. These products are sold through the Company’s websites, online mass merchants and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum compressed to save on shipping and reduce our carbon footprint. In March, 2020, the Company began producing personal face masks under the Avana brand in response to the COVID-19 pandemic with shipments beginning in April. In April, 2020, the Company also began producing and selling isolation gowns.

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 condensed 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 three months ended September 30, 2020 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, 2020 as filed with the Securities and Exchange Commission (the “SEC”) on October 1, 2020 (the “2020 10-K”).

XML

Going Concern

3 Months Ended

Sep. 30, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Going Concern

NOTE 2. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. As of September 30, 2020 the Company has an accumulated deficit of approximately $7.8 million and a working capital deficit of approximately $1.3 million. This raises substantial doubt about its ability to continue as a going concern.

In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations.  Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase sales, gross profits and our gross profit margin. To that end, we evaluated various options for increasing the throughput of our compressed foam products and during the first quarter of fiscal 2018, we purchased new foam compression equipment for installation during the second quarter of fiscal 2018. These actions have yielded higher factory throughput at a lower cost of goods sold. However, these operational improvements have been more than offset by rising wages and raw material costs. We also plan to continue to manage discretionary expense levels to be better aligned with current and expected revenue levels. We estimate that the operational and strategic growth plans we have identified over the next twelve months will, at a minimum, require approximately $150,000 of funding, of which we estimate will be provided by debt financing and, to a lesser extent, cash flow from operations as well as cash on hand.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.  However, management cannot provide any assurances that the Company will be successful in accomplishing these plans.  The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Although we have three separate brands with diverse channels of distribution, the continued COVID-19 pandemic may negatively impact our business operations and the operations of our suppliers and customers as a result of quarantines, facility closures and travel and logistics restrictions. There is substantial uncertainty regarding the duration and degree of COVID-19’s continued effects over time. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic or recurrence thereof, timing of development and deployment of an effective vaccine, governmental, business and individuals' actions in response to the pandemic and the impact on economic activity including the possibility of recession or financial market instability.

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Summary of Significant Accounting Policies

3 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

NOTE 3. 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 condensed 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 condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s 2020 10-K.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Significant estimates in these consolidated financial statements include estimates of: income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves; share-based compensation; and useful lives for depreciation and amortization.  Actual results could differ materially from these estimates.   

Revenue Recognition   

We record revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of our revenue is generated by fulfilling orders for the purchase of manufactured products and product purchased for resale to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which we are responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill our promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. We have elected to exclude sales, use and similar taxes from the measurement of the transaction price.  The impact of this policy election is insignificant, as it aligns with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts.  Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer. 

Deferred revenues

Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. Deferred revenues primarily relate to gift cards purchased, but not used, prior to the end of the fiscal period. Our total deferred revenue as of June 30, 2020 was $14,898 and was included in “Other accrued liabilities” on our consolidated balance sheets. The deferred revenue balance as of September 30, 2020 was $15,204.

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 September 30, 2020 and June 30, 2020.

	September 30, 2020			June 30, 2020
	(unaudited)
	(in thousands)
Accounts receivable	$	1,050		$	1,135
Allowance for doubtful accounts		(1	)		—
Allowance for discounts and returns		(10	)		—
Total accounts receivable, net	$	1,039		$	1,135

Inventories and Inventory Reserves

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

Concentration of Credit Risk

The Company maintains its cash accounts with banks located in Georgia.  The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank.  The Company had bank balances on deposit at September 30, 2020 that exceeded the balance insured by the FDIC by $681,658.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During the three month ended September 30, 2020, we purchased 32% of total inventory purchases from one vendor.

During the fiscal year ended June 30, 2020, we purchased 33 % of total inventory purchases from one vendor.

As of September 30, 2020 two of the Company’s customers represent 43% and 15% of the total accounts receivables compared to 38%, 16% and 16% of the total accounts receivable, respectively, as of June 30, 2020. Sales to (and through) Amazon accounted for 28% of our net sales during the three months ended September 30, 2020 and 33% of our net sales during the three months ended September 30, 2019.

Fair Value of Financial Instruments

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

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

The Company measures the fair value of its assets and liabilities under the guidance of 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 $5,000 at September 30, 2020 and $5,000 at June 30, 2020. Advertising expense for the three months ended September 30, 2020 and 2019 was $68,530 and $79,868, respectively.

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $29,225 and $28,673 for the three months ended September 30, 2020 and 2019, respectively. Research and development costs are included in general and administrative expense.

Property and Equipment

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

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently.

Impairment or Disposal of Long Lived Assets

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by Financial Accounting Standards Board (“FASB”) ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at September 30, 2020.

Operating Leases

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amended the lease to expire on December 31, 2020. The rent expense under this lease for the three months ended September 30, 2020 and 2019 was $88,120 and $88,120, respectively. Subsequent to September 30, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two months of rent abatement totaling $103,230. 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. (See Note 19, Subsequent Events).

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

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

	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		% Change
	(in thousands)
Net Sales by Channel:
Direct	$	1,458	$	1,144		27	%
Wholesale	$	3,783	$	2,871		32	%
Other	$	126	$	79		59	%
Total Net Sales	$	5,367	$	4,094		31	%

	Three Months Ended			Margin			Three Months Ended			Margin	%
	September 30, 2020			%			September 30, 2019			%	Change
	(in thousands)						(in thousands)
Gross Profit by Channel:
Direct	$	760			52	%	$	540		47%		41	%
Wholesale	$	982			26	%	$	808		28%		22	%
Other	$	(254	)		(202	)%	$	(211	)	(267)%		(20	)%
Total Gross Profit	$	1,488			28	%	$	1,137		28%		31	%

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.

Recently adopted 

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for fiscal years beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. We adopted ASU 2016-13 and ASU 2019-11 effective July 1, 2020. The impact of adoption of these standards on our condensed consolidated financial statements was not material.

In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted. We adopted ASU 2018-13 effective July 1, 2020. The impact of adoption of this standard on our condensed consolidated financial statements was not material.

Not yet adopted

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods. ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company plans to adopt the standard as of July 1, 2021 and is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

Net Income (Loss) Per Share

In accordance with ASC 260, “Earnings Per Share”, basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period plus the effect of stock options using the treasury stock method. Common equivalent shares outstanding as of September 30, 2019, which consists of options and convertible preferred stock, have been excluded from the diluted net loss per common share calculation for the three months ended September 30, 2019 because they are anti-dilutive.

The total potential dilutive securities as of September 30, 2020 and 2019 are as follows:

	2020		2019
Convertible Preferred Stock		4,300,000		4,300,000
Stock options		4,400,000		4,200,000
Total		8,700,000		8,500,000

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 Long-Lived Assets

3 Months Ended

Sep. 30, 2020

Property, Plant and Equipment [Abstract]

Impairment of Long-Lived Assets

NOTE 4. 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 September 30, 2020 or June 30, 2020.

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Inventories, net

3 Months Ended

Sep. 30, 2020

Inventory Disclosure [Abstract]

Inventories, net

NOTE 5. INVENTORIES, NET

Inventories are stated at the lower of cost (which approximates first-in, first-out) or net realizable value. Net realizable value is defined as sales price less cost to dispose and a normal profit margin.  Inventories consisted of the following: 

	September 30, 2020			June 30, 2020
		(unaudited)
	(in thousands)
Raw materials	$	1,085		$	992
Work in process		270			234
Finished goods		972			900
Total inventories		2,327			2,126
Allowance for inventory reserves		(141	)		(141	)
Total inventories, net of allowance	$	2,186		$	1,985

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Equipment and Leasehold Improvements

3 Months Ended

Sep. 30, 2020

Property, Plant and Equipment [Abstract]

Equipment and Leasehold Improvements

NOTE 6. 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:

	September 30, 2020			June 30, 2020			Estimated Useful Life
		(unaudited)
	(in thousands)
Factory equipment	$	2,657		$	2,646		2-10 years
Computer equipment and software		1,099			1,087		5-7 years
Office equipment and furniture		205			205		5-7 years
Leasehold improvements		463			463		10 years
Project in process		8			3
Subtotal		4,432			4,404
Accumulated depreciation		(3,518	)		(3,466	)
Equipment and leasehold improvements, net	$	914		$	938

Depreciation expense was $52,452 and $40,139 for the three months ended September 30, 2020 and 2019, respectively.

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment occurred during the three months ended September 30, 2020.

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Other Accrued Liabilities

3 Months Ended

Sep. 30, 2020

Payables and Accruals [Abstract]

Other Accrued Liabilities

NOTE 7. OTHER ACCRUED LIABILITIES

Other accrued liabilities at September 30, 2020 and June 30, 2020:  

	September 30, 2020		June 30, 2020
		(unaudited)
	(in thousands)
Accrued compensation	$	377	$	468
Accrued expenses and interest		161		155
Other accrued liabilities	$	538	$	623

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Current and Long-term Debt Summary

3 Months Ended

Sep. 30, 2020

Debt Disclosure [Abstract]

Current and Long-term Debt Summary

NOTE 8. CURRENT AND LONG-TERM DEBT SUMMARY

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

	September 30, 2020		June 30, 2020
		(unaudited)
Current debt:	(in thousands)
Unsecured lines of credit (Note 13)	$	45	$	48
Line of credit (Note 12)		1,050		1,005
Short-term unsecured notes payable (Note  9)		434		489
Current portion of equipment notes payable (Note 16)		95		102
Current portion secured notes payable (Note 14)		66		191
Current portion of leases payable (Note 16)		8		—
Credit card advance (net of discount) (Note 11)		—		56
Notes payable – related party (Note 10)		116		116
Total current debt		1,814		2,007
Long-term debt:
Unsecured notes payable (Note 9)		100		200
Equipment lease payable		25		—
Equipment note payable (Note 16)		139		161
Total long-term debt	$	264	$	361

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Unsecured Notes Payable

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Unsecured Notes Payable

 NOTE 9. UNSECURED NOTES PAYABLE

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

	September 30, 2020		June 30, 2020
		(unaudited)
Current debt:	(in thousands)
20% Unsecured note, bi-weekly principal and interest, due September 18, 2020 (1)	$	—	$	75
20% Unsecured note, bi-weekly principal and interest, due February 19, 2021 (2)		134		214
20% Unsecured note, interest only, due May 1, 2021 (3)		200		200
20% Unsecured note, interest only, due July 31, 2021 (5)		100		—
Total current debt		434		489
Long-term debt:
20% Unsecured note, interest only, due October 31, 2021 (4)		100		100
20% Unsecured note, interest only, due July 31, 2021 (5)		—		100
Total long-term debt		100		200
Total unsecured notes payable	$	534	$	689

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

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

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

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

(5) Unsecured note payable for $100,000 to an individual, with interest at 20% payable monthly; principal due in full on July 31, 2013; extended to July 31, 2019; then extended by the holder to July 31, 2021. Personally guaranteed by principal stockholder.

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Note Payable - Related Party

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Note Payable - Related Party

NOTE 10. NOTES PAYABLE - RELATED PARTY

Related party notes payable at September 30, 2020 and June 30, 2020 consisted of the following:

	September 30, 2020			June 30, 2020
		(unaudited)
	(in thousands)
Unsecured note payable to an officer, with interest at 4.25%, due on demand	$	40		$	40
Unsecured note payable to an officer, with interest at 4.25%, due on demand		76			76
Total unsecured notes payable		116			116
Less: current portion		(116	)		(116	)
Long-term unsecured notes payable	$	—		$	—

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Credit Card Advances

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Credit Card Advances

NOTE 11. CREDIT CARD ADVANCES

On October 12, 2018, OneUp entered into an agreement with Power Up Lending Group, Ltd. (“Power Up”) whereby Power Up agreed to loan OneUp and Foam Labs a total of $250,000 from Power Up. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms for this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after the funding date. A .5% loan origination fee was deducted, and the Company received net proceeds of $248,750. This loan was repaid in full on August 6, 2019. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

On January 29, 2019, the Company borrowed an additional $300,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $345,000 which includes a one-time finance charge of $45,000, approximately ten months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $297,000. This loan was repaid in full on June 16, 2020. This loan was guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

On August 28, 2019, the Company borrowed an additional $250,000 from Power Up against its future credit card receivables. Terms for this loan calls for a repayment of $290,000 which includes a one-time finance charge of $40,000, approximately ten months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $247,500. This loan was repaid in full on September 16, 2020. This loan was guaranteed by the Company and was personally guaranteed by the Company’s CEO and controlling shareholder (see Note 17).

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Line of Credit

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Line of Credit

NOTE 12. LINE OF CREDIT

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp and OneUp’s wholly owned subsidiary, Foam Labs entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital.  The term of the agreement was one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility was 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 were charged interest at a rate of 2.5% over the lenders Index Rate.  In addition there was a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month.

On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,000,000 to include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% (as of September 30, 2020, the interest rate was 6.25%) and the Monthly Service Fee was changed to .5% per month.

On December 9, 2015, the credit agreement with Advance Financial Corporation was amended to increase the asset based line of credit to $1,200,000 to include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. All other terms of the credit facility remain the same.

On November 27, 2018, the credit agreement with Advance Financial Corporation was amended to increase the Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $500,000 or 125% of the eligible accounts receivable loan. All other terms of the credit facility remain the same.

The Company’s CEO, 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 18).  On September 30, 2020, the balance owed under this line of credit was $1,050,490.  As of September 30, 2020, 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

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Unsecured Line of Credit

NOTE 13. UNSECURED LINES OF CREDIT 

The Company has drawn a cash advance on one unsecured line of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit was $44,972 at September 30, 2020 and $47,619 at June 30, 2020.

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Secured Note Payable

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Secured Note Payable

NOTE 14. SECURED NOTE PAYABLE

On June 11, 2019, the Company entered into an agreement with a secured lender, whereby the lender agreed to loan OneUp a total of $150,000. After partial repayment of this loan, in November, 2019 the Company borrowed an additional $33,000. Repayment of this note is by 78 weekly payments of $2,298, beginning November 13, 2019. On September 30, 2020, the balance owed under this note payable was $65,839. This note payable is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On June 28, 2019, the Company entered into an agreement with Amazon.com, Inc. (“Amazon”), whereby Amazon agreed to loan OneUp a total of $302,000. Repayment of this note is by 12 monthly payments of $26,301, which includes interest at 8.22%. This loan was repaid in full on August 3, 2020. The Company had granted Amazon a security interest in certain assets of the Company.

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PPP Loan

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

PPP Loan

NOTE 15. PPP LOAN

On April 26, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1,096,200 made to the Company under the Payroll Protection Plan ("PPP"). The PPP is a liquidity facility program established by the U.S. government as part of the CARES Act in response to the negative economic impact of the COVID-19 outbreak. The PPP Loan to the Company is being administered by Ameris Bank. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months. Beginning November 26, 2020, seven months from the date of the PPP Note, the Company is required to make monthly payments of principal and interest in the amount of $61,691.

The PPP Loan is a forgivable loan to the extent proceeds are used to cover qualified documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement period (as amended) following loan funding. For the loan to be forgiven, the Company is required to formally apply for forgiveness, and potentially, required to pass an audit that it met the eligibility qualifications of the loan. Within 150 days from the application, the Company will be notified whether or not the loan is forgiven.

In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain contingency. Accordingly, the Company recorded the proceeds of the PPP Loan of $1,096,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness is reasonably certain. The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e. all conditions for forgiveness are met).

Future minimum payments required at maturity under the Company’s outstanding short term notes, secured line of credit, unsecured line of credit, credit cards loans, short term related party notes and PPP loan at September 30, 2020 are as follows:

Fiscal Years Ending June 30,		(in thousands)
	2021 (nine months)		2,377
	2022		530
	Total	$	2,907

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Commitments and Contingencies

3 Months Ended

Sep. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

NOTE 16. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases it facilities under non-cancelable operating leases expiring at the end of 2020. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities were recognized at July 1, 2019 based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate based on the information available. At September 30, 2020, the weighted average remaining lease term is 1.3 years and the weighted average discount rate is 20%. Supplemental balance sheet information related to leases at September 30, 2020 is as follows:

Operating leases	Balance Sheet Classification	(in thousands)
Right-of-use assets	Operating lease right-of-use assets, net	$	85
Current lease liabilities	Operating lease obligations	$	102
Non-current lease liabilities	Long-term operating lease obligations		—
Total lease liabilities		$	102

Maturities of lease liabilities at September 30, 2020 are as follows: 

Payments	(in thousands)
2021 (nine months)	$	105
Total undiscounted lease payments		105
Less: present value discount		(3	)
Total lease liability balance	$	102

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 $530,682. These assets are included in the fixed assets listed in Note 6 - 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 September 30, 2020:  

Years ending June 30,	(in thousands)
2021 (nine months)		88
2022		82
2023		60
2024		39
2025		2
Future Minimum Note Payable Payments	$	271
Less Amount Representing Interest		(37	)
Present Value of Minimum Note Payable Payments		234
Less Current Portion		(95	)
Long-Term Obligations under Equipment Notes Payable	$	139

Employment Agreements

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. 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 our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

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Related Party Transaction

3 Months Ended

Sep. 30, 2020

Related Party Transactions [Abstract]

Related Party Transaction

NOTE 17. RELATED PARTY TRANSACTIONS

The Company has a subordinated note payable to the wife of the Company’s CEO (Louis Friedman) and majority shareholder in the amount of $76,000. Interest on the note during the three months ended September 30, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $623. The accrued interest on the note as of September 30, 2020 was $32,051. This note is subordinate to all other credit facilities currently in place.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the note during the three months ended September 30, 2020 was accrued by the Company at the prevailing prime rate (which is currently 3.25%) and totaled $328. The accrued interest on the note as of September 30, 2020 was $11,418. This note is subordinate to all other credit facilities currently in place.

The Company’s CEO, Louis Friedman, has personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note 12 – Line of Credit).  In addition, Luvu Brands has provided its corporate guarantees of the credit facility.  On September 30, 2020, the balance owed under this line of credit was $1,050,490.

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 9). Repayment of the promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, 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 9). Repayment of the promissory note is personally guaranteed by the Company’s CEO and majority shareholder, 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 9). Mr. Friedman personally guaranteed the repayment of the loan obligation.

The loans from Power Up (see Note 12) to OneUp are guaranteed by the Company (including OneUp and Foam Labs) and are personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman. Power Up is controlled by Curt Kramer, who also controls Hope Capital, Inc.(“HCI”). As last reported to us, HCI owns 7.5% of our common stock.

The Company has drawn a cash advance on one unsecured lines of credit that is in the name of the Company and Louis S. Friedman. The terms of this unsecured line of credit calls for monthly payments of principal and interest, with interest at 8%. The aggregate amount owed on the unsecured line of credit was $44,972 at September 30, 2020 and $47,619 at June 30, 2020. The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On March 1, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due March 1, 2020. This loan was repaid in full on February 19, 2020 (see Note 9). The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On April 26, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due April 24, 2020. A portion of the note proceeds were used to satisfy the balance due on the July 30, 2018 note payable and the remaining proceeds of $227,721 are for working capital purposes. This loan was repaid in full on April 26, 2020 (see Note 9). The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On June 11, 2019, the Company entered into an agreement with a secured lender, whereby the lender agreed to loan OneUp a total of $150,000. After partial repayment of this loan, in November, 2019 the Company borrowed an additional $33,000. Repayment of this note is by 78 weekly payments of $2,298, beginning November 13, 2019. On September 30, 2020, the balance owed under this note payable was $65,839. This note payable is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

On September 23, 2019, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due September 18, 2020. This loan was repaid in full September 18, 2020. The loan was personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

On November 27, 2019 the Company entered into an agreement with OnDeck, whereby OnDeck agreed to loan OneUp a total of $200,000. Terms for this loan calls for a repayment of $234,000 which includes a one-time finance charge of $34,000, approximately nine months after the funding date. A 1% loan origination fee was deducted, and the Company received net proceeds of $198,000. This note payable was fully paid in August 2020. This loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder.

On February 21, 2020, the Company borrowed $300,000 from two individual shareholders with interest at 20% on an unsecured note payable, principal and interest paid bi-weekly with the final payment due February 19, 2021. The lenders deducted an original issue discount of 2% and the balance due on the March 1, 2019 note payable of $12,677 and the remaining proceeds of $281,323 are for working capital purposes. On September 30, 2020, the balance owed under this note payable was $134,249 (see Note 9). The loan is personally guaranteed by the Company’s CEO and majority shareholder, Louis S. Friedman.

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Stockholders Equity

3 Months Ended

Sep. 30, 2020

Equity [Abstract]

Stockholders Equity

NOTE 18. STOCKHOLDERS’ EQUITY

Options

At September 30, 2020, the Company had the 2015 Stock Option Plan (the “2015 Plan”), which is a shareholder-approved and under which 5,000,000 shares are reserved for issuance under the 2015 Plan until such Plan terminates on August 31, 2025.

Under the 2015 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2015 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of September 30, 2020, the number of shares available for issuance under the 2015 Plan was 600,000.

The following table summarizes the Company’s stock option activities during the three months ended September 30, 2020:

	Number of Shares Underlying Outstanding Options		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Intrinsic Value
Options outstanding as of June 30, 2020		4,250,000		1.7 years	$	.02	$	624,700
Granted		150,000		4.8 years		.16		—
Exercised		—		—		—		—
Forfeited or expired		—		—		—		—
Options outstanding as of September 30, 2020		4,400,000		1.6 years		.03	$	584,200
Options exercisable as of September 30, 2020		3,050,000		.9 years		.02	$	427,100

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 $0.16 for such day. 

There were 150,000 stock options granted during the three months ended September 30, 2020 and 200,000 stock options granted during the three months ended September 30, 2019. The value assumptions related to options granted during the three months ended September 30, 2020, were as follows:

	Three Months  Ended September 30, 2020			Three Months  Ended September 30, 2019
Exercise Price:		$.15 - $.17		$	.03
Volatility:		469% - 470%			407	%
Risk Free Rate:		.25	%		1.81	%
Vesting Period:		4 years			4 years
Forfeiture Rate:		0	%		0	%
Expected Life		4.1 years			4.1 years
Dividend Rate		0	%		0	%

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

			Outstanding Options						Exercisable Options
Exercise Prices			Number of Shares		Remaining Life  (Years)		Weighted Average  Price		Number of Shares			Weighted Average  Price
	$	.01 to .03		4,050,000		1.4	$	.02		2,950,000	$	.02
	$	.034 to .05		200,000		2.8	$	.05		100,000	$	.05
	$	.15 to .17		150,000		4.8	$	.15		-	$	-
Total stock options				4,400,000		1.6	$	.03		3,050,000	$	.02

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 month periods ended September 30, 2020 and 2019 are based on awards ultimately expected to vest, and is reduced for estimated forfeitures.

The following table summarizes stock option-based compensation expense by line item in the Condensed Consolidated Statements of Operations, all relating to the Plans: 

As of September 30, 2020, the Company’s total unrecognized compensation cost was $47,081 which will be recognized over the weighted average vesting period of two years.

	Three Months Ended September 30,
	2020		2019
	(in thousands)
Other Selling and Marketing	$	1	$	1
General and Administrative		5		4
Total	$	6	$	5

Share Purchase Warrants

As of September 30, 2020 and 2019, there were no share purchase warrants outstanding.

Common Stock

The Company’s authorized common stock was 175,000,000 shares at September 30, 2020 and June 30, 2020.  Common shareholders are entitled to dividends if and when declared by the Company’s Board of Directors, subject to preferred stockholder dividend rights. At September 30, 2020, the Company had reserved the following shares of common stock for issuance:

	September 30,
	2020
Shares of common stock reserved for issuance under the 2015 Plan		5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock		4,300,000
Total shares of common stock equivalents		9,300,000

Preferred Stock

On February 18, 2011, the Company filed an amendment to its Articles of Incorporation, effective February 9, 2011, authorizing the issuance of preferred stock and the Company now has 10,000,000 authorized shares of preferred stock, par value $.0001 per share, of which 4,300,000 shares have been designated and issued as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into one share of common stock and has a liquidation preference of $.2325 ($1,000,000 in the aggregate). Liquidation payments to the preferred holders have priority and are made in preference to any payments to the holders of common stock. In addition, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Shares issued and outstanding at the time of such vote. At each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including the election of directors, holders of Series A Convertible Preferred Shares shall vote together with the holders of common shares as a single class.

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Subsequent Events

3 Months Ended

Sep. 30, 2020

Subsequent Events [Abstract]

Subsequent Events

NOTE 19. – SUBSEQUENT EVENTS

On November 2, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two months of rent abatement totaling $103,230. Under the new lease, the monthly rent on the facility is $51,615 with annual escalations of 3% with the final two months of rent at $61,605. In addition, the Company will pay the landlord a 2% property management fee. Under the new facilities lease, the estimated operating lease asset and operating lease liability on the commencement date will total $2,580,611 and $2,683,841, respectively.

On October 15, 2020, the Company entered into an equipment finance agreement for the purchase of a new CNC foam contouring system from a European supplier. At a total cost of $325,000, the equipment finance agreement calls for 60 payments of $6,266 to the finance company.

Subsequent to September 3, 2020, 200,000 stock options granted to an employee were exercised in exchange for a cash payment of $2,500.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Basis of Presentation

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 condensed 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 condensed financial statements and notes should be read in conjunction with the Company’s consolidated financial statements contained in the Company’s 2020 10-K.

Use of Estimates

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Significant estimates in these consolidated financial statements include estimates of: income taxes; tax valuation reserves; allowances for doubtful accounts; inventory valuation and reserves; share-based compensation; and useful lives for depreciation and amortization.  Actual results could differ materially from these estimates.   

Revenue Recognition

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

Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. Deferred revenues primarily relate to gift cards purchased, but not used, prior to the end of the fiscal period. Our total deferred revenue as of June 30, 2020 was $14,898 and was included in “Other accrued liabilities” on our consolidated balance sheets. The deferred revenue balance as of September 30, 2020 was $15,204.

Cost of Goods Sold

Cost of Goods Sold

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

Cash and Cash Equivalents

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

 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 September 30, 2020 and June 30, 2020.

	September 30, 2020			June 30, 2020
	(unaudited)
	(in thousands)
Accounts receivable	$	1,050		$	1,135
Allowance for doubtful accounts		(1	)		—
Allowance for discounts and returns		(10	)		—
Total accounts receivable, net	$	1,039		$	1,135

Inventories and Inventory Reserves

Inventories and Inventory Reserves

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

Concentration of Credit Risk

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 September 30, 2020 that exceeded the balance insured by the FDIC by $681,658.  Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During the three month ended September 30, 2020, we purchased 32% of total inventory purchases from one vendor.

During the fiscal year ended June 30, 2020, we purchased 33 % of total inventory purchases from one vendor.

As of September 30, 2020 two of the Company’s customers represent 43% and 15% of the total accounts receivables compared to 38%, 16% and 16% of the total accounts receivable, respectively, as of June 30, 2020. Sales to (and through) Amazon accounted for 28% of our net sales during the three months ended September 30, 2020 and 33% of our net sales during the three months ended September 30, 2019.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

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

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

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

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $5,000 at September 30, 2020 and $5,000 at June 30, 2020. Advertising expense for the three months ended September 30, 2020 and 2019 was $68,530 and $79,868, respectively.

Research and Development

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $29,225 and $28,673 for the three months ended September 30, 2020 and 2019, respectively. Research and development costs are included in general and administrative expense.

Property and Equipment

Property and Equipment

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

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently.

Impairment or Disposal of Long Lived Assets

Impairment or Disposal of Long Lived Assets

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by Financial Accounting Standards Board (“FASB”) ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined that there was no impairment at September 30, 2020.

Operating Leases

Operating Leases

On July 23, 2014, the Company entered into an agreement with its landlord to extend the facilities lease by five years. The previous ten year lease was to expire on December 31, 2015. The agreement amended the lease to expire on December 31, 2020. The rent expense under this lease for the three months ended September 30, 2020 and 2019 was $88,120 and $88,120, respectively. Subsequent to September 30, 2020, the Company entered into an agreement with its landlord on a new lease for the current facilities for six years and two months. The new lease includes two months of rent abatement totaling $103,230. 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. (See Note 19, Subsequent Events).

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

Segment Information

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

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

	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		% Change
	(in thousands)
Net Sales by Channel:
Direct	$	1,458	$	1,144		27	%
Wholesale	$	3,783	$	2,871		32	%
Other	$	126	$	79		59	%
Total Net Sales	$	5,367	$	4,094		31	%

	Three Months Ended			Margin			Three Months Ended			Margin	%
	September 30, 2020			%			September 30, 2019			%	Change
	(in thousands)						(in thousands)
Gross Profit by Channel:
Direct	$	760			52	%	$	540		47%		41	%
Wholesale	$	982			26	%	$	808		28%		22	%
Other	$	(254	)		(202	)%	$	(211	)	(267)%		(20	)%
Total Gross Profit	$	1,488			28	%	$	1,137		28%		31	%

Recent accounting pronouncements

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.

Recently adopted 

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for fiscal years beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. We adopted ASU 2016-13 and ASU 2019-11 effective July 1, 2020. The impact of adoption of these standards on our condensed consolidated financial statements was not material.

In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted. We adopted ASU 2018-13 effective July 1, 2020. The impact of adoption of this standard on our condensed consolidated financial statements was not material.

Not yet adopted

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods. ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company plans to adopt the standard as of July 1, 2021 and is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

Net Income (Loss) Per Share

Net Income (Loss) Per Share

In accordance with ASC 260, “Earnings Per Share”, basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period plus the effect of stock options using the treasury stock method. Common equivalent shares outstanding as of September 30, 2019, which consists of options and convertible preferred stock, have been excluded from the diluted net loss per common share calculation for the three months ended September 30, 2019 because they are anti-dilutive.

The total potential dilutive securities as of September 30, 2020 and 2019 are as follows:

	2020		2019
Convertible Preferred Stock		4,300,000		4,300,000
Stock options		4,400,000		4,200,000
Total		8,700,000		8,500,000

Income Taxes

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

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)

3 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Allowance for Doubtful Accounts

	September 30, 2020			June 30, 2020
	(unaudited)
	(in thousands)
Accounts receivable	$	1,050		$	1,135
Allowance for doubtful accounts		(1	)		—
Allowance for discounts and returns		(10	)		—
Total accounts receivable, net	$	1,039		$	1,135

Segment Information

	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		% Change
	(in thousands)
Net Sales by Channel:
Direct	$	1,458	$	1,144		27	%
Wholesale	$	3,783	$	2,871		32	%
Other	$	126	$	79		59	%
Total Net Sales	$	5,367	$	4,094		31	%

	Three Months Ended			Margin			Three Months Ended			Margin	%
	September 30, 2020			%			September 30, 2019			%	Change
	(in thousands)						(in thousands)
Gross Profit by Channel:
Direct	$	760			52	%	$	540		47%		41	%
Wholesale	$	982			26	%	$	808		28%		22	%
Other	$	(254	)		(202	)%	$	(211	)	(267)%		(20	)%
Total Gross Profit	$	1,488			28	%	$	1,137		28%		31	%

Net Income (Loss) per share

	2020		2019
Convertible Preferred Stock		4,300,000		4,300,000
Stock options		4,400,000		4,200,000
Total		8,700,000		8,500,000

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Inventories, net (Tables)

3 Months Ended

Sep. 30, 2020

Inventory Disclosure [Abstract]

Inventories

	September 30, 2020			June 30, 2020
		(unaudited)
	(in thousands)
Raw materials	$	1,085		$	992
Work in process		270			234
Finished goods		972			900
Total inventories		2,327			2,126
Allowance for inventory reserves		(141	)		(141	)
Total inventories, net of allowance	$	2,186		$	1,985

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Equipment and Leasehold Improvements (Tables)

3 Months Ended

Sep. 30, 2020

Property, Plant and Equipment [Abstract]

Equipment and Leasehold Improvements

	September 30, 2020			June 30, 2020			Estimated Useful Life
		(unaudited)
	(in thousands)
Factory equipment	$	2,657		$	2,646		2-10 years
Computer equipment and software		1,099			1,087		5-7 years
Office equipment and furniture		205			205		5-7 years
Leasehold improvements		463			463		10 years
Project in process		8			3
Subtotal		4,432			4,404
Accumulated depreciation		(3,518	)		(3,466	)
Equipment and leasehold improvements, net	$	914		$	938

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Other Accrued Liabilities (Tables)

3 Months Ended

Sep. 30, 2020

Payables and Accruals [Abstract]

Accrued Liabilities

	September 30, 2020		June 30, 2020
		(unaudited)
	(in thousands)
Accrued compensation	$	377	$	468
Accrued expenses and interest		161		155
Other accrued liabilities	$	538	$	623

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Current and Long-term Debt Summary (Tables)

3 Months Ended

Sep. 30, 2020

Debt Disclosure [Abstract]

Current and Long-term Debt Summary

	September 30, 2020		June 30, 2020
		(unaudited)
Current debt:	(in thousands)
Unsecured lines of credit (Note 13)	$	45	$	48
Line of credit (Note 12)		1,050		1,005
Short-term unsecured notes payable (Note  9)		434		489
Current portion of equipment notes payable (Note 16)		95		102
Current portion secured notes payable (Note 14)		66		191
Current portion of leases payable (Note 16)		8		—
Credit card advance (net of discount) (Note 11)		—		56
Notes payable – related party (Note 10)		116		116
Total current debt		1,814		2,007
Long-term debt:
Unsecured notes payable (Note 9)		100		200
Equipment lease payable		25		—
Equipment note payable (Note 16)		139		161
Total long-term debt	$	264	$	361

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Unsecured Notes Payable (Tables)

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Unsecured Notes Payable

	September 30, 2020		June 30, 2020
		(unaudited)
Current debt:	(in thousands)
20% Unsecured note, bi-weekly principal and interest, due September 18, 2020 (1)	$	—	$	75
20% Unsecured note, bi-weekly principal and interest, due February 19, 2021 (2)		134		214
20% Unsecured note, interest only, due May 1, 2021 (3)		200		200
20% Unsecured note, interest only, due July 31, 2021 (5)		100		—
Total current debt		434		489
Long-term debt:
20% Unsecured note, interest only, due October 31, 2021 (4)		100		100
20% Unsecured note, interest only, due July 31, 2021 (5)		—		100
Total long-term debt		100		200
Total unsecured notes payable	$	534	$	689

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Note Payable - Related Party (Tables)

3 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Note Payable - Related Party

	September 30, 2020			June 30, 2020
		(unaudited)
	(in thousands)
Unsecured note payable to an officer, with interest at 4.25%, due on demand	$	40		$	40
Unsecured note payable to an officer, with interest at 4.25%, due on demand		76			76
Total unsecured notes payable		116			116
Less: current portion		(116	)		(116	)
Long-term unsecured notes payable	$	—		$	—

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PPP Loan (Tables)

3 Months Ended

Sep. 30, 2020

Banking and Thrift, Interest [Abstract]

Future minimum payments

Fiscal Years Ending June 30,		(in thousands)
	2021 (nine months)		2,377
	2022		530
	Total	$	2,907

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Commitments and Contingencies (Tables)

3 Months Ended

Sep. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

Operating Leases

Operating leases	Balance Sheet Classification	(in thousands)
Right-of-use assets	Operating lease right-of-use assets, net	$	85
Current lease liabilities	Operating lease obligations	$	102
Non-current lease liabilities	Long-term operating lease obligations		—
Total lease liabilities		$	102

Maturities of lease liabilities at September 30, 2020 are as follows: 

Payments	(in thousands)
2021 (nine months)	$	105
Total undiscounted lease payments		105
Less: present value discount		(3	)
Total lease liability balance	$	102

Equipment Notes Payable

Years ending June 30,	(in thousands)
2021 (nine months)		88
2022		82
2023		60
2024		39
2025		2
Future Minimum Note Payable Payments	$	271
Less Amount Representing Interest		(37	)
Present Value of Minimum Note Payable Payments		234
Less Current Portion		(95	)
Long-Term Obligations under Equipment Notes Payable	$	139

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Stockholders Equity (Tables)

3 Months Ended

Sep. 30, 2020

Equity [Abstract]

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, 2020		4,250,000		1.7 years	$	.02	$	624,700
Granted		150,000		4.8 years		.16		—
Exercised		—		—		—		—
Forfeited or expired		—		—		—		—
Options outstanding as of September 30, 2020		4,400,000		1.6 years		.03	$	584,200
Options exercisable as of September 30, 2020		3,050,000		.9 years		.02	$	427,100

Assumptions

	Three Months  Ended September 30, 2020			Three Months  Ended September 30, 2019
Exercise Price:		$.15 - $.17		$	.03
Volatility:		469% - 470%			407	%
Risk Free Rate:		.25	%		1.81	%
Vesting Period:		4 years			4 years
Forfeiture Rate:		0	%		0	%
Expected Life		4.1 years			4.1 years
Dividend Rate		0	%		0	%

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
	$	.01 to .03		4,050,000		1.4	$	.02		2,950,000	$	.02
	$	.034 to .05		200,000		2.8	$	.05		100,000	$	.05
	$	.15 to .17		150,000		4.8	$	.15		-	$	-
Total stock options				4,400,000		1.6	$	.03		3,050,000	$	.02

Stock options compensation expense

	Three Months Ended September 30,
	2020		2019
	(in thousands)
Other Selling and Marketing	$	1	$	1
General and Administrative		5		4
Total	$	6	$	5

Common stock equivalents

	September 30,
	2020
Shares of common stock reserved for issuance under the 2015 Plan		5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock		4,300,000
Total shares of common stock equivalents		9,300,000

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Nature of Business (Details Narrative)	3 Months Ended
	Sep. 30, 2020
Nature Of Business
Concentration Risk (percent)	10.00%

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Going Concern (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Accumulated deficit	$ (7,827)	$ (8,156)
Working Capital Deficit	1,300
Operational and Strategic growth plans
Finances required	$ 150

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Summary of Significant Accounting Policies (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Jun. 30, 2020
Accounting Policies [Abstract]
Deferred Revenue	$ 14		$ 15
Prepaid Advertising	5		$ 5
Advertising Expense	68	$ 79
New product development	$ 29	$ 28

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Summary of Significant Accounting Policies - Allowance for Doubtful Accounts (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Accounting Policies [Abstract]
Accounts receivable	$ 1,050	$ 1,135
Allowance for doubtful accounts	(1)
Allowance for discounts and returns	(10)
Accounts receivable, net	$ 1,039	$ 1,135

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Summary of Significant Accounting Policies - Segment Information (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Net Sales	$ 5,367	$ 4,094
Gross profit	$ 1,488	$ 1,137
% Change in Sales	31.00%
Gross Profit Margin	28.00%	28.00%
% Change in Gross Profit	31.00%
Direct [Member]
Net Sales	$ 1,458	$ 1,144
Gross profit	$ 760	$ 540
% Change in Sales	27.00%
Gross Profit Margin	52.00%	47.00%
% Change in Gross Profit	41.00%
Wholesale [Member]
Net Sales	$ 3,783	$ 2,871
Gross profit	$ 982	$ 808
% Change in Sales	32.00%
Gross Profit Margin	26.00%	28.00%
% Change in Gross Profit	22.00%
Other [Member]
Net Sales	$ 126	$ 79
Gross profit	$ (254)	$ (211)
% Change in Sales	31.00%
Gross Profit Margin	(202.00%)	(267.00%)
% Change in Gross Profit	(20.00%)

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Summary of Significant Accounting Policies - Net Income (Loss) per share (Details) - shares	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Anti-dilutive Securities	8,700,000	8,500,000
Convertible Preferred Stock [Member]
Anti-dilutive Securities	4,300,000	4,300,000
Stock options [Member]
Anti-dilutive Securities	4,400,000	4,200,000

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Concentrations (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Jun. 30, 2020
Concentration Risk [Line Items]
FDIC Insured	$ 250
Exceed FDIC	$ 681
Concentration Risk (percent)	10.00%
Supplier Concentration Risk [Member] | Suppliers #1[Member]
Concentration Risk [Line Items]
Concentration Risk Supplier	1		1
Concentration Risk (percent)	32.00%		33.00%
Customer Concentration Risk [Member]
Concentration Risk [Line Items]
Concentration Risk Accounts Receivable	43%		38%
Customer Concentration Risk [Member] | Amazon [Member]
Concentration Risk [Line Items]
Concentration Risk Net Sales	28%	33%
Customer Concentration Risk #2 [Member]
Concentration Risk [Line Items]
Concentration Risk Accounts Receivable	15%		16%
Customer Concentration Risk #3 [Member]
Concentration Risk [Line Items]
Concentration Risk Accounts Receivable			16%

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Opearting Leases (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Nov. 02, 2020
Operating Leased Assets [Line Items]
Rental abatement	$ 103
New monthly rent	51
Current monthly rent			$ 61
Facility [Member]
Operating Leased Assets [Line Items]
Rent Expense	$ 88	$ 88

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Inventories, net - Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Inventory Disclosure [Abstract]
Raw materials	$ 1,085	$ 992
Work in Process	270	234
Finished Goods	972	900
Total inventories	2,327	2,126
Allowance for inventory reserves	(141)	(141)
Total inventories, net of allowance	$ 2,186	$ 1,985

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Equipment and Leasehold Improvements - Equipment and Leasehold Improvements (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Property and Equipment, gross	$ 4,432	$ 4,404
Accumulated depreciation	(3,518)	(3,466)
Property and Equipment, net	914	938
Factory equipment [Member]
Property and Equipment, gross	2,657	2,646
Computer equipment and software [Member]
Property and Equipment, gross	1,099	1,087
Office equipment and furniture [Member]
Property and Equipment, gross	205	205
Leasehold improvements [Member]
Property and Equipment, gross	463	463
Projects in process [Member]
Property and Equipment, gross	$ 8	$ 3

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Equipment and Leasehold Improvements, Net (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Property, Plant and Equipment [Line Items]
Depreciation expense	$ 52	$ 40
Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	2
Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	10
Computer equipment and software [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	5
Computer equipment and software [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	7
Office equipment and furniture [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	5
Office equipment and furniture [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	7
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Depreciation life	10

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Other Accrued Liabilities - Accrued Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Payables and Accruals [Abstract]
Accrued compensation	$ 377	$ 468
Accrued expenses and interest	161	155
Other accrued liabilities	$ 538	$ 623

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Current and Long-term Debt Summary - Current and Long-term Debt Summary (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Current debt:
Unsecured lines of credit (Note 13)	$ 45	$ 48
Line of credit (Note 12)	1,050	1,005
Short-term unsecured notes payable (Note 9)	434	489
Current portion of equipment notes payable (Note 16)	95	102
Current portion secured notes payable (Note 14)	66	191
Current portion of leases payable (Note 16)	8
Credit card advance (net of discount) (Note 11)		56
Notes payable- related party (Note 10)	116	116
Total current debt	1,814	2,007
Long-term debt:
Unsecured notes payable (Note 9)	100	200
Equipment lease payable	25
Equipment note payable (Note 16)	139	161
Total long-term debt	$ 264	$ 361

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Unsecured Notes Payable (Details Narrative) (USD $) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020
Debt Instrument [Line Items]
Short-term unsecured notes payable	$ 434	$ 489
Long-term unsecured notes payable	100	200
Unsecured notes payable	534	689
Note 1 [Member]
Debt Instrument [Line Items]
Note Face Amount	$ 300
Interest Rate	20.00%
Date of Maturity	Sep. 18, 2020
Short-term unsecured notes payable		75
Note 2 [Member]
Debt Instrument [Line Items]
Note Face Amount	$ 300
Interest Rate	20.00%
Date of Maturity	Feb. 19, 2021
Short-term unsecured notes payable	$ 134	214
Note 3 [Member]
Debt Instrument [Line Items]
Note Face Amount	$ 200
Interest Rate	20.00%
Date of Maturity	May 01, 2021
Short-term unsecured notes payable	$ 200	200
Long-term unsecured notes payable	200
Note 4 [Member]
Debt Instrument [Line Items]
Note Face Amount	$ 100
Interest Rate	20.00%
Date of Maturity	Oct. 31, 2021
Long-term unsecured notes payable	$ 100	100
Note 5 [Member]
Debt Instrument [Line Items]
Note Face Amount	$ 100
Interest Rate	20.00%
Date of Maturity	Jul. 31, 2021
Long-term unsecured notes payable	$ 100
Unsecured notes payable		$ 100

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Unsecured Notes Payable (Details Narrative) (USD $) (Parenthetical) - Note 2 [Member] $ in Thousands	3 Months Ended
	Sep. 30, 2020 USD ($)
Proceeds used to payoff other debts	$ 12
Proceeds from note payable - working capital	$ 281

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Short-term Notes Payable-Related Party (Details Narrative) (USD $) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Short-term Debt [Line Items]
Unsecured notes payable	$ 116	$ 116
Note 1 [Member]
Short-term Debt [Line Items]
Interest Rate	4.25%
Unsecured notes payable	$ 40	40
Note 2 [Member]
Short-term Debt [Line Items]
Interest Rate	4.25%
Unsecured notes payable	$ 76	$ 76

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Credit Card Advance (Details Narrative) - Credit Card Advance [Member] - USD ($) $ in Thousands	2 Months Ended	7 Months Ended	15 Months Ended
	Aug. 29, 2019	Jan. 29, 2019	Oct. 12, 2018
Credit Card Advance	$ 250	$ 300	$ 250
Repayment Amount	290	345	290
Finance charge	40	45	40
Net proceeds from advance	$ 247	$ 297	$ 248

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Line of Credit (Details Narrative) - USD ($) $ in Thousands			5 Months Ended	12 Months Ended	17 Months Ended
	Sep. 04, 2013	May 24, 2011	Nov. 27, 2018	Jun. 30, 2019	Dec. 05, 2015	Sep. 30, 2020	Jun. 30, 2020
Line of Credit Facility [Line Items]
Line of credit						$ 1,050	$ 1,005
Line of Credit [Member]
Line of Credit Facility [Line Items]
Date issued		May 24, 2011
Line of credit, limit	$ 1,000	$ 750			$ 1,200
Collateral	lesser of $300,000 or 75% of the eligible accounts receivable loan	85% of eligible accounts receivable			lesser of $300,000 or 75% of the eligible accounts receivable loan
Interest Rate Description	prime rate plus 3%	2.5% over the lenders Index Rate		82.5%
Lenders Index Rate	6.25%
Monthly Service Fee	0.50%	1.25%
Invetory Advance [Member]
Line of Credit Facility [Line Items]
Collateral			125% of the eligible accounts receivable loan
Inventory advance					$ 500

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Unsecured Line of Credit (Details Narrative) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Notes to Financial Statements
Unsecured lines of credit	$ 45	$ 48
Interest rate	800.00%

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Secured Note Payable (Details Narrative) $ in Thousands	3 Months Ended
	Sep. 30, 2020 USD ($)
Secured Lender [Member]
Note Face Amount	$ 150
Payments	$ 2
Frequency of payments	78 weekly payments
Proceeds from secured notes payable	$ 33
Secured notes payable	66
Amazon [Member]
Note Face Amount	$ 302
Interest Rate	8.22%
Payments	$ 26

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PPP Loan (Details Narrative) $ in Thousands	3 Months Ended
	Sep. 30, 2020 USD ($)
Banking and Thrift, Interest [Abstract]
Borrowings under PPP Loan	$ 1,096
Monthly payments	$ 61

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PPP Loan - Future minimum payments (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Sep. 30, 2020	Jun. 30, 2022	Jun. 30, 2021
PPP Loan [Member]
Payments		$ 530	$ 2,377
PPP Loan Total [Member]
Payments	$ 2,907

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Commitments and Contingencies - Operating Leases (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020
Operating Leases
Operating lease assets	$ 85	$ 165
Operating lease liability	102	$ 199
Employment Agreements
Officer Salary	150
Factory equipment [Member]
Equipment Leases
Equipment lease	$ 530
Factory equipment [Member] | Minimum [Member]
Equipment Leases
Interest rates	8.90%
Factory equipment [Member] | Maximum [Member]
Equipment Leases
Interest rates	11.30%

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Commitments and Contingencies - Future minimum operarting lease payments (Details) (USD $) $ in Thousands	Sep. 30, 2020 USD ($)
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
2021	$ 105
Total undiscounted lease payments	105
Less: present value discount	(3)
Total minimum lease payments	$ 102

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Commitments and Contingencies - Future minimum equipment lease payments (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Jun. 30, 2020
Commitments And Contingencies - Future Minimum Equipment Lease Payments
2021	$ 88
2022	82
2023	60
2024	39
2025	2
Future Minimum Lease Payments	271
Less Amount Representing Interest	(37)
Present Value of Minimum Lease Payments	234
Less Current Portion	(95)	$ (102)
Long-Term Obligations under Leases Payable	$ 139	$ 161

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Related Party Transactions (Details Narrative)	3 Months Ended
	Sep. 30, 2020 USD ($)
Shareholder Wife Note [Member]
Related Party Transaction [Line Items]
Issue Date	Jun. 30, 2010
Note Face Amount	$ 76,000
Interest Rate	3.25%
Acrrued Interest	$ 32,000
Interest Expense	$ 623,000
October 30, 2010 Note [Member]
Related Party Transaction [Line Items]
Issue Date	Oct. 30, 2010
Note Face Amount	$ 40,000
Interest Rate	3.25%
Acrrued Interest	$ 11,000
Interest Expense	$ 328,000
July 20, 2011 Note [Member]
Related Party Transaction [Line Items]
Issue Date	Jul. 20, 2011
Note Face Amount	$ 100,000
Interest Payment	$ 1,000
Interest Rate	20.00%
Date of Maturity	Jul. 31, 2012
Extended Date of Maturity	Jul. 31, 2021
October 31, 2013 [Member]
Related Party Transaction [Line Items]
Issue Date	Oct. 31, 2013
Note Face Amount	$ 100,000
Interest Payment	$ 1,000
Frequency	monthly
Interest Rate	20.00%
Date of Maturity	Oct. 31, 2014
Extended Date of Maturity	Oct. 31, 2021
May 1, 2012 Note [Member]
Related Party Transaction [Line Items]
Issue Date	May 01, 2012
Note Face Amount	$ 200,000
Interest Rate	20.00%
Date of Maturity	May 01, 2013
Extended Date of Maturity	May 01, 2021
March 1, 2019 [Member]
Related Party Transaction [Line Items]
Note Face Amount	$ 300,000
Interest Rate	20.00%
Date of Maturity	Mar. 01, 2020
April 26, 2019 [Member]
Related Party Transaction [Line Items]
Note Face Amount	$ 300,000
Interest Rate	20.00%
Date of Maturity	Apr. 26, 2020
Proceeds from note payable - working capital	$ 227,000
September 23, 2019 [Member]
Related Party Transaction [Line Items]
Note Face Amount	$ 300,000
Interest Rate	20.00%
Date of Maturity	Sep. 18, 2020
OnDeck [Member]
Related Party Transaction [Line Items]
Issue Date	Nov. 27, 2019
Note Face Amount	$ 200,000
Interest Payment	234,000
Secured notes payable	34,000
Proceeds from note payable - related party	$ 198,000

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Stockholders Equity (Details Narrative)	Sep. 30, 2020 shares
Equity [Abstract]
Shares of common stock reserved for issuance under the 2015 Plan	5,000,000
Options, available for issurance	600,000

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Stockholders Equity - Stock option activites (Details) $ / shares in Units, $ in Thousands	3 Months Ended
	Sep. 30, 2020 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Number of Options | shares	4,250,000
Options, Granted | shares	150,000
Options, Exercised | shares
Options, Forefeited or expired | shares
Number of Options | shares	4,400,000
Ending,Number of Options, exercisable | shares	3,050,000
Weighted Average Remaining Contractual Life (Years)
Beginning, Weighted Average Remaining Contractual Life, outstanding	1 year 255 days 12 hours
Weighted Average Remaining Contractual Life, outstanding - granted	4 years 292 days
Weighted Average Remaining Contractual Life, outstanding - cancelled
Ending, Weighted Average Remaining Contractual Life, outstanding - granted	1 year 219 days
Weighted Average Remaining Contractual Life, exercisable	328 days 12 hours
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Weighted Average Exercise Price, outstanding | $ / shares	$ 0.02
Weighted Average Exercise Price, Granted | $ / shares	.16
Weighted Average Exercise Price, Exercised | $ / shares
Weighted Average Exercise Price, Forfeited or expired | $ / shares
Weighted Average Exercise Price, outstanding | $ / shares	0.03
Weighted Average Exercise Price, exercisable | $ / shares	$ .02
Aggregate Intrinsic Value
Aggregate Intrinsic Value, outstanding, beginning | $	$ 624,700
Aggregate Intrinsic Value, outstanding, ending | $	584,200
Aggregate Intrinsic Value, exercisable | $	$ 427,100

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Stockholders Equity - Assumptions (Details) - $ / shares	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Jun. 30, 2020
Exercise Price			$ .03
Volatility		407.00%
Risk Free Rate	0.25%	1.81%
Vesting Period	4 years	4 years
Forfeiture Rate	0.00%	0.00%
Expected Life	4 years 32 days 20 hours 24 minutes	4 years 32 days 20 hours 24 minutes
Dividend Rate	0.00%	0.00%
Minimum [Member]
Exercise Price	$ .15
Volatility	469.00%
Maximum [Member]
Exercise Price	$ .17
Volatility	470.00%

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Stockholders Equity - Weighted average stock options (Details) - $ / shares	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020
Outstanding Options[Abstract]
Number of shares	4,400,000	4,250,000
Remaining Life (Years)	1 year 6 months
Weighted Average Price	$ .03
Exercisable Options [Abstract]
Number of Shares	3,050,000
Weighted Average Exercise Price	$ .02
.01 to .03 [Member]
Exercise price range, lower range (in dollars per share)	.01
Exercise price range, upper range (in dollars per share)	$ .03
Outstanding Options[Abstract]
Number of shares	4,050,000
Remaining Life (Years)	1 year 4 months
Weighted Average Price	$ .02
Exercisable Options [Abstract]
Number of Shares	2,950,000
Weighted Average Exercise Price	$ .02
.034 to .05 [Member]
Exercise price range, lower range (in dollars per share)	.034
Exercise price range, upper range (in dollars per share)	$ .05
Outstanding Options[Abstract]
Number of shares	200,000
Remaining Life (Years)	2 years 8 months
Weighted Average Price	$ .05
Exercisable Options [Abstract]
Number of Shares	100,000
Weighted Average Exercise Price	$ .05
.15 to .17 [Member]
Exercise price range, lower range (in dollars per share)	.15
Exercise price range, upper range (in dollars per share)	$ .17
Outstanding Options[Abstract]
Number of shares	150,000
Remaining Life (Years)	4 years 8 months
Weighted Average Price	$ .15
Exercisable Options [Abstract]
Number of Shares
Weighted Average Exercise Price

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Stockholders Equity - Stock options compensation expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items]
Stock-based compensation expense	$ 6	$ 5
Unrecognized compensation costs	$ 47
Wieghted Average Vesting Period	2 years
Other Selling and Marketing [Member]
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items]
Stock-based compensation expense	$ 1	1
General and Adminstrative [Member]
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items]
Stock-based compensation expense	$ 5	$ 4

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Stockholders Equity - Common stock equivalents (Details)	Sep. 30, 2020 shares
Equity [Abstract]
Shares of common stock reserved for issuance under the 2015 Plan	5,000,000
Shares of common stock issuable upon conversion of the Preferred Stock	4,300,000
Total shares of common stock equivalents	9,300,000

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Stockholders Equity (Details) - USD ($) $ / shares in Units, $ in Thousands	Feb. 11, 2011	Sep. 30, 2020	Jun. 30, 2020
Common stock- shares authorized		175,000,000	175,000,000
Preferred stock - par value		$ 0.0001	$ 0.0001
Preferred stock - shares authorized		10,000,000	10,000,000
Series A Convertible Preferred Stock [Member]
Preferred stock - par value	$ 0.0001	$ 0.0001	$ 0.0001
Preferred stock - shares authorized	4,300,000	4,300,000	4,300,000
Preferred stock - liquidation preference, per share	$ 0.2325
Preferred stock - liquidation preference	$ 1	$ 1,000	$ 1,000
Voting rights	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.

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Subsequent Events (Details Narrative) - USD ($) $ in Thousands	Oct. 15, 2020	Nov. 02, 2020
Subsequent Events [Abstract]
Operating lease asset		$ 2
Operating lease liability		$ 2
Equipment finance agreement	$ 325
Number of payment	60 payments
Payments	$ 6
Stock options granted	200,000
Proceeds from stock options	$ 2,500