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 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 Consolidated Financial Statements. Three Months Ended (unaudited) March 31, 2024 March 31, 2023 Net Sales 100.0 % 100.0 % Cost Of Goods Sold 72.3 % 74.4 % Gross Margin 27.7 % 25.6 % Operating Expenses 27.0 % 20.1 % Income from operations 0.7 % 5.5 % Nine Months Ended (unaudited) March 31, 2024 March 31, 2023 Net Sales 100.0 % 100.0 % Cost Of Goods Sold 73.2 % 74.0 % Gross Margin 26.8 % 26.0 % Operating Expenses 25.9 % 18.4 % Income from operations 0.9 % 7.5 % The following table represents the net sales and percentage of net sales by product type: Three Months Ended (unaudited) (Dollars in thousands) March 31, 2024 March 31, 2023 Net Sales: Liberator $ 3,442 58 % $ 4,488 65 % Jaxx 1,419 24 % 1,220 18 % Avana 681 12 % 646 9 % Products purchased for resale 258 4 % 272 4 % Other 123 2 % 277 4 % Total Net Sales $ 5,923 100 % $ 6,903 100 % Nine Months Ended (unaudited) (Dollars in thousands) March 31, 2024 March 31, 2023 Net Sales: Liberator $ 10,656 57 % $ 14,452 63 % Jaxx 5,032 27 % 5,089 22 % Avana 1,901 10 % 1,742 7 % Products purchased for resale 796 4 % 957 4 % Other 450 2 % 858 4 % Total Net Sales $ 18,835 100 % $ 23,098 100 % 23 Table of Contents Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 Net sales . Sales for the three months ended March 31, 2024 were $5,922,760, a 14% 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 $1,045,617, or 23%, during the quarter from the comparable prior year period, due primarily to lower sales through the Company’s e-commerce site, Liberator.com, and Amazon. Sales through Liberator.com, and Amazon primarily decreased due to weakening of the market and increase competition from knock off products. · Jaxx sales – Jaxx product sales increased $198,884 or 16% from the prior year third quarter to $1,418.929. The increase was primarily due to the addition of new products and increased customer base that continue to perform well. · Avana sales – Net sales of Avana products increased 5% during the quarter from the comparable prior year third quarter to $681,427. The increase was primarily due the addition of new customers. · Products purchased for resale – This product category decreased by 5%, or $13,550, from the prior year quarter due to lower sales of certain products through our e-commerce website, Liberator.com. The decrease was primarily due to continued weakening of the adult market. 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 27.7% from 25.6% in the prior year quarter. Gross profit decreased to $1,639,143 from 1,768,890 in the prior year quarter. The 7% percent decrease was primarily due to the decrease in net sales and inflationary pressures on raw materials and shipping costs. Operating expenses . Total operating expenses for the three months ended March 31, 2024 were approximately 27% of net sales, or approximately $1,599,450 compared to 20% of net sales, or $1,386,315, for the same period in the prior year. The increase on a percentage and cash basis was primarily due to the decrease in net sales and increase in marketing expenses in advertising to support sales. Other income (expense) . Interest expense during the three months ending March 31, 2024 increased slightly from ($89,858) in fiscal 2023 to ($133,936) during the three months fiscal 2024. Nine Months Ended March 31, 2024 Compared to Nine Months Ended March 31, 2023 Net sales . Sales for the nine months ended March 31, 2024 were $18,834,616, an 18% 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 $3,795,690, or 26%, during the nine months from the comparable prior year period, due primarily to lower sales through the Company’s e-commerce site, Liberator.com, and Amazon. Sales through Liberator.com, and Amazon primarily decreased due to weakening of the market and increased competition in the market. · Jaxx sales – Jaxx product sales decreased $56,846 or 1% from the prior year nine months to $5,031,978,. The increase was primarily due to the addition of new products and increased customer base that continue to perform well. · Avana sales – Net sales of Avana products increased 9% during the quarter from the comparable prior year nine months to $1,901,000. The increase was primarily due the addition of new customers. · Products purchased for resale – This product category decreased by 17%, or $162,000, from the prior year nine month due to lower sales of certain products through our e-commerce website, Liberator.com. The decrease was primarily due to continued weakening of the market. 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 26.8% from 26.0% in the prior year nine months. Gross profit decreased to $5,039,494 from $6,001,000 in the prior year nine months. The 16% percent decrease was primarily due to the decrease in net sales and inflationary pressures on raw materials and shipping costs. Operating expenses . Total operating expenses for the nine months ended March 31, 2024 were approximately 26% of net sales, or $4,878,000 compared to 18% of net sales, or approximately $4,259,000, for the same period in the prior year. The increase on a percentage and cash basis was primarily due to the decrease in net sales and increase in marketing expenses in advertising to support sales. Other income (expense) . Interest expense during the nine months increased slightly from approximately ($262,000) in fiscal 2023 to approximately ($322,000) during the nine months fiscal 2024. 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 changes 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: Nine Months Ended March 31, (Dollars in thousands) 2024 2023 (Unaudited) Cash flow data: Cash provided by operating activities $ 333 $ 906 Cash used in investing activities $ (52 ) $ (113 ) Cash provided by financing activities $ (249 ) $ (299 ) As of March 31, 2024, our cash and cash equivalents totaled $1,072,772, compared to $1,352,619 in cash and cash equivalents as of March 31, 2023. 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 $333,000 during the nine months ended March 31, 2024 compared to $906,000 net cash provided by operating activities in the nine months ended March 31, 2023. The primary components of the cash provided by operating activities in the current year is the decrease in Inventory of $733,000 and increase in Accrued Compensation of $171,000, offset in part by a net loss of $191,000 and increase in accounts receivable of $247,000. 25 Table of Contents Investing Activities Cash used in investing activities in the nine months ended March 31, 2024 was $52,000 and related to the purchase and installation of certain production equipment during the period. Financing Activities Cash used by financing activities during the nine months ended March 31, 2024 of $249,000 was primarily attributable to the repayment of the unsecured notes payable and payments made on equipment notes. Inflation During fiscal 2024, 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 be impactful 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 nine months ended March 31, 2024 and 2023: (Dollars in thousands) Nine months ended March 31, 2024 2023 Net income (loss) $ (191 ) $ 1,480 Plus interest expense, net 322 262 Plus depreciation and amortization expense 307 264 Plus stock-based compensation 10 34 Adjusted EBITDA $ 448 $ 2,040 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 March 31, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. 26 Table of Contents Critical accounting policies The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, accounts receivable allowances and impairment of long-lived assets. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited consolidated financial statements appearing in this report. 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 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.