Luvu Brands, Inc. 10-Q

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, 2023 September 30, 2022 Net Sales 100.0 % 100.0 % Cost Of Goods Sold 75.8 % 76.5 % Gross Margin 24.2 % 23.4 % Operating Expenses 24.7 % 16.3 % Income from operations -0.5 % 7.3 % The following table represents the net sales and percentage of net sales by product type: Three Months Ended (unaudited) (Dollars in thousands) September 30, 2023 September 30, 2022 Net Sales: Liberator $ 3,324 54 % $ 5,107 63 % Jaxx 1,799 29 % 1,781 22 % Avana 531 9 % 554 7 % Products purchased for resale 249 4 % 315 4 % Other 224 4 % 302 4 % Total Net Sales $ 6,126 100 % $ 8,059 100 % Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Net sales . Sales for the three months ended September 30, 2023 were approximately $6,126,000, a 24% decrease from the comparable prior year period. The major components of net sales, by product, are as follows: · Liberator sales - Sales of Liberator branded products decreased $1,784,000, or 35%, during the quarter from the comparable prior year period, due primarily to lower sales through the Company’s e-commerce sites including: Liberator.com, Amazon and third-party e-tailers. Note that the 2022 sales of Liberator products increased largely due to product placement and exposure on the popular Netflix show How to Build a Sex Room”. · Jaxx sales – Jaxx product sales increased 1% from the prior year first quarter to $1,799,000 · Avana sales – Net sales of Avana products decreased 4% during the quarter from the comparable prior year quarter to $531,000. Sales of this product line have been impacted by lower-priced competitive products in the marketplace, production constraints which resulted in longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair. · Products purchased for resale – This product category decreased by 21%, or $66,000, from the prior year first quarter due to lower sales of certain products through our e-commerce website, Liberator.com. 24 Table of Contents Gross margin . Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs, royalties and depreciation. Gross profit margin, as a percentage of sales, increased to 24.2 from 23.4% in the prior year first quarter. Gross profit decreased to $1,483,000 from $1,886,000 in the prior year first quarter. Operating expenses . Total operating expenses for the three months ended September 30, 2023 were approximately 24.7% of net sales, or approximately $1,515,000, compared to 16% of net sales, or approximately $1,310,000, for the same period in the prior year. The change was a primary the result of higher than expected operating expenses. Other income (expense) . Interest expense during the first quarter increased slightly from approximately ($84,000) in fiscal 2023 to approximately ($96,000) in fiscal 2024. The decrease was primarily due to higher average borrowing 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) 2023 2022 (Unaudited) Cash flow data: Cash provided by operating activities $ 172 $ 617 Cash used in investing activities $ (32 ) $ (21 ) Cash provided by financing activities $ (43 ) $ (107 ) As of September 30, 2023, our cash and cash equivalents totaled $1,137,581, compared to $1,347,790 in cash and cash equivalents as of September 30, 2022. 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 $171,000 during the three months ended September 30, 2023 compared to $617,000 net cash provided by operating activities in the three months ended September 30, 2022. The primary components of the cash provided by operating activities in the current year is the decrease in Inventory of $146,000 and increase in Accrued Compensation of $155,000, offset in part by a net loss of 125,000 an increase in accounts receivable of $119,000. 25 Table of Contents Investing Activities Cash used in investing activities in the three months ended September 30, 2023 was $32,000 and related to the purchase and installation of certain production equipment during the period. Financing Activities Cash used by financing activities during the three months ended September 30, 2023 of $43,000 was primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes. Inflation During fiscal 2023, we experienced increases in various raw material costs and increases in labor and transportation costs. These cost pressures have not stabilized and we anticipate they will continue to increase throughout the fiscal 2024, although there is no assurance this will occur. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease. Non-GAAP Financial Measures Reconciliation of net income to Adjusted EBITDA for the three months ended September 30, 2023 and 2022: (Dollars in thousands) Three months ended September 30, 2023 2022 Net income (loss) $ (126 ) $ 492 Plus interest expense, net 94 84 Plus depreciation and amortization expense 99 87 Plus stock-based compensation 6 12 Adjusted EBITDA $ 73 $ 675 As used herein, Adjusted EBITDA represents net income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation expense. We have excluded the non-cash expenses and stock-based compensation, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income of the Company or net cash provided by operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and non-cash charges for stock-based compensation expense. Off-Balance Sheet Arrangements We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 30, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Critical accounting policies The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, accounts receivable allowances and impairment of long-lived assets. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing in this report. 26 Table of Contents Recent accounting pronouncements The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the unaudited condensed consolidated accompanying financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.