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 the Company’s Interim Unaudited Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows the table should be read in conjunction with the Company’s Interim Unaudited Consolidated Financial Statements. Three Months Ended (unaudited) September 30, 2024 September 30, 2023 Net sales 100 % 100 % Cost of goods sold 74 % 74 % Gross profit 26 % 26 % Operating Expenses 28 % 26 % Income from operations (2 )% 0 % The following table represents the net sales and percentage of net sales by product type: Three Months Ended (unaudited) (Dollars in thousands) September 30, 2 024 September 30, 2023 Net Sales: Liberator $ 3,110 54 % $ 3,324 54 % Jaxx 1,820 32 % 1,799 29 % Avana 485 8 % 531 9 % Products purchased for resale 210 4 % 249 4 % Other 131 2 % 224 4 % Total Net Sales $ 5,756 100 % $ 6,126 100 % 25 Table of Contents Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 Net sales . Sales for the three months ended September 30, 2024, were approximately $5,756,000, a 6% 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 $214,000, or 6%, during the quarter from the comparable prior year period, due primarily to lower sales through our wholesale channels. Weaker consumer sentiment continues to drag the sector. · Jaxx sales – Jaxx product sales increased 1% from the prior year first quarter to $1,820,000. We continue to develop our marketing efforts into the special education market, which offsets the decline in the competitive online market place. · Avana sales – Net sales of Avana products decreased 9% during the quarter from the comparable prior year quarter to $485,000. 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 16%, or $39,000, from the prior year first quarter due to lower sales of certain products through our e-commerce website, Liberator.com. We believe our focus on expanding our online third party drop ship business will return this channel to growth. 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% from 26% in the prior year first quarter. Gross profit decreased to $1,517,000 from $1,582,000 in the prior year first quarter. Operating expenses . Total operating expenses for the three months ended September 30, 2024 were approximately 28% of net sales, or approximately $1,639,000, compared to 26% of net sales, or approximately $1,614,000, for the same period in the prior year. Other income (expense) . Interest expense during the first quarter decreased from approximately ($96,000) in the first quarter of fiscal 2024 to approximately ($89,000) in the first quarter of fiscal 2025. The decrease was primarily due to the reduction in notes payable. Net Loss. For the three months ended September 30, 2024, we had a net loss of $210,000 as compared to a net loss of $126,000 for the three months ended September 30, 2023. The increase in net loss was primarily due to the decrease in Liberator product sales. 26 Table of Contents Variability of Results The Company has 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 the Company’s control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which it operates and sells. A portion of the Company’s 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 the Company’s 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. The Company 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 the Company’s cash flows: Three Months Ended September 30 , Cash flow data: 2024 2023 (Unaudited) (Dollars in thousands) Cash provided by operating activities $ 132 $ 171 Cash used in investing activities $ (1 ) $ (32 ) Cash provided by financing activities $ (91 ) $ (43 ) As of September 30, 2024, the Company’s cash and cash equivalents totaled $1,067,862, compared to $1,132,317 in cash and cash equivalents as of September 30, 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. The Company’s principal sources of liquidity are the Company’s cash flow that the Company generates from its operations, availability of borrowings under its line of credit and cash raised through debt financings. Operating Activities Net cash provided by operating activities was $132,000 during the three months ended September 30, 2024 compared to $171,000 net cash provided by operating activities in the three months ended September 30, 2023. The primary components of the cash provided by operating activities in the current year is the decrease in Inventory of $283,000 offset in part by an increase in accounts receivable of $137,000. Investing Activities Cash used in investing activities in the three months ended September 30, 2024 and September 30, 2023 was $1,000 and $32,000, respectively, related to the purchase of computer equipment and the installation of certain production equipment during the periods. Financing Activities Cash used by financing activities during the three months ended September 30, 2024 and September 30, 2023 of $91,000 and $43,000 respectively, primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes. 27 Table of Contents Non-GAAP Financial Measures Reconciliation of net income to Adjusted EBITDA for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 (in thousands) Net loss $ (210 ) $ (126 ) Plus interest expense, financing costs and income tax 89 96 Plus depreciation and amortization expense 109 99 Plus stock-based compensation expense 9 (6 ) Adjusted EBITDA $ (3 ) $ 63 As used herein, Adjusted EBITDA represents net income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation expense. The Company has 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 the Company believes 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 The Company does not use off-balance sheet arrangements with unconsolidated entities or related parties, nor does it use other forms of off-balance sheet arrangements. Accordingly, the Company’s liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 30, 2024, the Company 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. The Company also has adopted other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding the Company’s results, which are described in Note 2 to its 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 The Company does not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that the Company’s exposure to market risk associated with other financial instruments is not material. 28 Table of Contents