NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Basis of Presentation

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp and Foam Labs. Intercompany accounts and transactions have been eliminated in consolidation. During fiscal 2026, the Company determined that fees charged by Amazon online marketplace for order fulfillment, storage and related logistics services had been presented as a reduction of net sales in fiscal 2025. These fees are paid in exchange for distinct fulfillment and logistics services that the marketplace provides to the Company and are recorded as an operating expense. Accordingly, the fiscal 2025 comparative amounts have been revised to increase net sales and gross profit by $1,163,648 and to increase selling expense and total operating expenses by the same amount. Management evaluated the misstatement, including the quantitative and qualitative factors described in SEC Staff Accounting Bulletin No. 99, and concluded that it was not material to the fiscal 2025 consolidated financial statements. The revision had no effect on income from operations, net loss, net loss per share, total assets, total liabilities, shareholders’ equity or cash flows for any period presented. Certain other 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”).

The effect of the revision on the consolidated statement of operations for the year ended June 30, 2025 is as follows (in thousands):

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

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. We sell certain products directly to consumers through third-party online marketplaces, including Amazon. We have evaluated these arrangements and determined that we are the principal, as we control the products before they are transferred to the customer, are primarily responsible for fulfilling the promise to provide the products, bear inventory risk, and have discretion in establishing pricing. Accordingly, revenue from these sales is recognized on a gross basis. Marketplace, referral, commission, fulfillment, shipping, and related fees associated with certain online sales are included in other selling and marketing expenses and are not netted against net sales. Prior period amounts have been reclassified to conform to the current period presentation. The reclassification had no impact on operating income (loss), net income (loss), or cash flows.

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, 2026 and June 30, 2025 was $ 69,339 and $1,700, respectively, and was included in “Other accrued liabilities” on our consolidated balance sheets.

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 Credit Loss

The allowance for credit losses reflects management’s estimate of expected credit losses over the contractual life of the accounts receivable balance, measured in accordance with ASC 326. The Company determines the allowance based on historical loss experience, specifically identified nonpaying accounts, and current conditions as of the balance sheet date. The Company reviews its allowance for credit losses monthly, focusing on significant individual past due balances over 90 days. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

The following is a summary of Accounts Receivable as of June 30, 2026 and June 30, 2025.

The Company estimates expected credit losses on trade receivables and contract assets in accordance with ASC 326, Financial Instruments – Credit Losses. Effective July 1, 2025, the Company adopted Accounting Standards Update (ASU) 2025-05, Financial Instruments—Credit Losses (Topic 326): Practical Expedient and Accounting Policy Election for Estimating Expected Credit Losses, and elected the practical expedient permitted therein.

Under this expedient, the Company assumes that current economic conditions as of the balance sheet date remain unchanged over the life of the financial assets. This approach simplifies the estimation of expected credit losses by removing the requirement to forecast future economic conditions for assets with contractual maturities of one year or less.

As of June 30, 2026, the Company had net accounts receivable totaling $1.85 million. Based on historical loss experience and current conditions, the Company had an allowance for credit losses of $18,000. The Company believes this estimate reasonably reflects expected losses given the short-term nature of the asset and the stability of current economic conditions.

The Company will continue to monitor credit risk and adjust its allowance methodology as necessary. No significant changes to the allowance methodology were made during the fiscal year.

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 of 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 two 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, 2026 and 2025 that exceeded the balance insured by the FDIC by $943,647 and $545,634, respectively. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in North America and Europe.

During 2026, we purchased 23% of total inventory purchases from one vendor.

During 2025, we purchased 27% of total inventory purchases from one vendor.

As of June 30, 2026, two of the Company’s customers represent 47% and 11% of the total accounts receivables, respectively. As of June 30, 2025, two of the Company’s customers represent 19% and 15% of the total accounts receivable, respectively. Sales to (and through) Amazon accounted for 36% and 34% of our net sales during each of the years ended June 30, 2026 and June 30, 2025 respectively.

Fair Value of Financial Instruments

At June 30, 2026 and 2025, 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, 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:

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 when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $0 on June 30, 2026, and $0 on June 30, 2025. Advertising expense for the years ended June 30, 2026, and 2025 was $957,274 and $950,071, 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 $147,641 for the year ended June 30, 2026 and $167,252 for the year ended June 30, 2025.

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 November 7, 2025, the Company entered into an agreement with its landlord on a lease for its then current facilities for 56 months, beginning November 7, 2025. The lease includes four months of rent abatement totaling $333,000 beginning March 1, 2027. Under the lease, the monthly rent on the facility will be $58,053 with annual escalations of 3% to February 2027 at $61,605. From March 1, 2027, the monthly rent will increase to $83,250 with 3.5% annual increases with the final 4 months of the lease ending at $92,241. In addition, the Company will pay the landlord proportional share of project expenses and taxes estimated at $23,421 per month. The rent expense for the years ended June 30, 2026 and June 30, 2025 was $728,419 and $652,752 respectively.

Under ASC 842, which was adopted July 1, 2019, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company elected not to recognize leases with a term less than one year on its balance sheet. Operating lease right-of-use (ROU) assets and their corresponding lease liabilities are recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

In accordance with the guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.) Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, the Company elected the practical expedient to not separate lease and non-lease components. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense. 

The Company also leases certain equipment under operating leases, as more fully described in NOTE 13 - Commitments and Contingencies.

Segmentation Information

The Company has identified two reportable sales segmentations: Direct to Consumer and Wholesale. Direct to Consumer includes product sales through the Company’s three e-commerce sites. Wholesale includes Liberator, Jaxx, and Avana branded products sold to distributors and retailers, purchased products sold to retailers, and private label items sold to other resellers. The Company’s chief operating decision maker (“CODM”) is Louis Friedman, the Company’s Chief Executive Officer. The CODM uses the segment information presented below to allocate resources and make investment decisions for each segment.

Information as to the operations of the Company’s reportable segments is set forth below.

Recent accounting pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies issue new accounting pronouncements that are adopted by the Company as of the specified effective date. The Company has adopted ASU 2023-07 regarding business segmentation reporting and ASU2023-09.

Net Loss Per Share

In accordance with FASB Accounting Standards Codification No. 260, “Earnings Per Share”, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net income available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period.

The total potential dilutive securities as of June 30, 2026 and 2025 are as follows:

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 determining 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, 2026, we carried a valuation allowance of $1.9 million against our gross 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.