| 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 financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”). Use of Estimates The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the United States 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 Net revenue is measured based on the amount
of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous
experience and management’s evaluation). Outbound shipping charged to customers is recognized at the time the related merchandise
revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost
of revenues. Net revenues exclude sales and other similar taxes collected from customers. A description of our principal revenue generating
activities is as follows:
· E-commerce revenues - consumer products sold through our online and telephonic channels. Revenue is recognized when control
of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due on the date of
shipment.
· Wholesale revenues - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of
the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms are typically
30 days from the date control over the product is transferred to the customer.
· Retail revenues - consumer products sold through our retail store. Revenue is recognized when control of the goods is transferred
to the customer, at the point of sale, at which time payment is received. The Company accounts for revenue in accordance
with Topic 606 which was adopted at the beginning of fiscal year 2019 using the modified retrospective method. The comparative
information has not been restated and continues to be reported under the accounting standards in effect for those periods. The
Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial. The
adoption of these standards did not have a material impact on the Company's condensed consolidated statements of operations during
the year ended June 30, 2019. Refer to Note 3 – Segment Information for disclosure of disaggregated 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,
2018 was $13,324 and was included in “Accrued expenses” on our consolidated balance sheets. The deferred revenue balance
as of June 30, 2019 was $14,198. Cost of Goods Sold Cost of goods sold includes raw material, labor,
manufacturing overhead, and royalty expense. Shipping and Handling Costs We include fees earned on the shipment of our
products to customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold. 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 The allowance for doubtful accounts reflects
management's best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance
based on historical experience, specifically identified nonpaying accounts and other currently available evidence. The Company
reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days. Account
balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery
is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. The following is a summary
of Accounts Receivable as of June 30, 2019 and June 30, 2018.
June 30, June 30,
(in thousands)
Accounts receivable $ 850 $ 687
Allowance for doubtful accounts (20 ) (24 )
Allowance for discounts and returns — (6 )
Total accounts receivable, net $ 830 $ 657 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 cash balances on deposit at June 30, 2019 and 2018 that exceeded the balance insured
by the FDIC by $134,016 and $191,101, respectively. Accounts receivable are typically unsecured and are derived from revenue earned
from customers primarily located in North America and Europe. During 2019, we purchased 37% of total inventory
purchases from one vendor. During 2018, we purchased 17% of total inventory
purchases from one vendor. As of June 30, 2019 and 2018, one of the
Company’s customers (Amazon) represents 50% and 54% of the total accounts receivables, respectively. Sales to (and through)
Amazon accounted for 34% of our net sales during the year ended June 30, 2019 and 33% of our sales for the year ended June 30,
2018. Fair Value of Financial Instruments At June 30, 2019 and 2018, 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 ASC 820, Fair Value Measurements and Disclosures 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
· Level 2
· Level 3 The valuation techniques
that may be used to measure fair value are as follows: A. Market approach B. Income approach C. Cost approach 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 $1,500
at June 30, 2019 and $13,040 at June 30, 2018. Advertising expense for the years ended June 30, 2019 and 2018 was
$356,154 and $404,436, respectively. Research and Development Research and development expenses for new products
are expensed as they are incurred. Expenses for new product development (included in general and administrative expense)
totaled $123,478 for the year ended June 30, 2019 and $150,742 for the year ended June 30, 2018. 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
which 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. 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 lease amendment was effective August 1, 2014 and
included a four-month rental abatement in the amount of $117,660. In exchange for the rental abatement, the Company agreed to make
improvements to the facility totaling $123,505 within six months of August 1, 2014. As of June 30, 2019, the Company has completed
$101,776 of the leasehold improvements. Under the lease amendment, the monthly rent on the facility was $29,415 per month, beginning
on December 1, 2014. Beginning January 1, 2015, the monthly rent increases annually with the final year of the lease at $35,123
per month. The rent expense under this lease for the years ended June 30, 2019 and 2018 was $352,479 in each year. The Company also leases certain equipment under
operating leases, as more fully described in Note 16 - Commitments and Contingencies Segment Information We have identified three reportable sales channels:
Direct, Wholesale Other Direct Wholesale Wholesale Other Direct The following is a summary of sales results
for the Direct, Wholesale Other
Year Ended Year Ended %
(in thousands)
Net Sales by Channel:
Direct $ 4,929 $ 5,326 (7 )%
Wholesale $ 11,757 $ 10,718 10 %
Other $ 317 $ 382 (17 )%
Total Net Sales $ 17,003 $ 16,426 4 %
Year Ended Margin Year Ended Margin %
June 30, 2019 % June 30, 2018 % Change
(in thousands)
Gross Profit by Channel:
Direct $ 2,229 45 % $ 2,400 45 % (7)%
Wholesale $ 3,077 26 % $ 3,097 29 % (1)%
Other $ (882 ) (278 )% $ (702 ) (183 )% (26)%
Total Gross Profit $ 4,424 26 % $ 4,795 29 % (8)%
Recent accounting pronouncements From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by
the Company as of the specified effective date. Recently adopted In May 2014, the FASB
issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which creates a single,
comprehensive revenue recognition model for all contracts with customers. Under this ASU and subsequently issued amendments, an
entity should recognize revenue to reflect the transfer of promised goods or services to customers at an amount that the entity
expects to be entitled to in exchange for those goods and services. ASU 2014-9 may be adopted either retrospectively or on a modified
retrospective basis. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The
Company adopted the standard for its 2019 fiscal year. The impact of adopting the standard was not material. Not yet adopted
In February 2016, the FASB issued
ASU No. 2016-12, Leases, which requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for
the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new guidance
also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures
include qualitative and quantitative information. This amendment is effective for the Company's fiscal year ending June 2020 with
early adoption permitted. The adoption of ASU 2016-02 will have an impact on the consolidated balance sheet as the Company will
record assets and obligations primarily related to our facility. The Company has estimated that the adoption of this guidance
will result in an operating lease liability of approximately $545,000 being recorded on July 1, 2019 which is calculated based
on the present value of the remaining minimum rental payments using discount rates as of the effective date. The Company also
has estimated the corresponding right to use asset of approximately $448,000, based upon the operating lease liability adjusted
for deferred rent, unamortized initial direct costs, liabilities associated with lease termination costs and impairment of right-of-use
assets. The adoption is expected to be done on a modified retrospective basis with no adjustments made to periods prior to July
1, 2019. The Company does not expect a material impact on the consolidated statement of income or statement of cash flows. In August 2018, the FASB
issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement. As part of the FASB's disclosure framework project, it has eliminated, amended and added disclosure requirements for
fair value measurements. Entities will no longer be required to disclose the amount of, and reasons for, transfers between Level
1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the
valuation processes for Level 3 fair value measurements. Public companies will be required to disclose the range and weighted average
used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for public entities
for annual and interim periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of any interim
or annual reporting period. The Company does not believe it will materially impact the disclosures. 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 FASB
Accounting Standards Codification No. 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. Common equivalent shares outstanding
as of June 30, 2019, which consists of options and convertible preferred stock, have been excluded from the diluted net loss
per common share calculation for the year ended June 30, 2019 because they are anti-dilutive. The total potential dilutive
securities as of June 30, 2019 and 2018 are as follows:
2019 2018
Convertible Preferred Stock 4,300,000 4,300,000
Stock options 4,050,000 5,065,000
Total 8,350,000 9,365,000 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. At June 30, 2019, we carried a valuation allowance of $3.0 million against our net deferred
tax 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. |
