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 Six Months Ended December 31, December 31, 2024 2023 2024 2023 (unaudited) (unaudited) Net sales 100 % 100 % 100 % 100 % Cost of goods sold 72 % 73 % 73 % 73 % Gross profit 28 % 27 % 27 % 27 % Operating Expenses 24 % 25 % 26 % 26 % Income from operations 4 % 2 % 1 % 1 % The following table represents the net sales and percentage of net sales by product type: Three Months Ended (unaudited) (Dollars in thousands) December 31, 2024 December 31, 2023 Net Sales: Liberator $ 4,235 59 % $ 3,890 57 % Jaxx 2,023 28 % 1,814 27 % Avana 548 8 % 689 10 % Products purchased for resale 244 3 % 288 4 % Other 136 2 % 105 2 % Total Net Sales $ 7,186 100 % $ 6,786 100 % Six Months Ended (unaudited) (Dollars in thousands) December 31, 2024 December 31, 2023 Net Sales: Liberator $ 7,345 57 % $ 7,214 56 % Jaxx 3,842 30 % 3,613 28 % Avana 1,032 8 % 1,220 9 % Products purchased for resale 455 4 % 537 4 % Other 267 1 % 328 3 % Total Net Sales $ 12,941 100 % $ 12,912 100 % Three Months Ended December 31, 2024 Compared to Three Months Ended December 31, 2023 Net sales . Sales for the three months ended December 31, 2024, were approximately $7,186,000, a 6% increase from the comparable prior year period. The major components of net sales, by product, are as follows: · Liberator sales - Sales of Liberator branded products increased $345,000, or 9%, during the quarter from the comparable prior year period, due primarily to stronger sales through our liberator.com website. · Jaxx sales – Jaxx product sales increased 12% from the prior year second quarter to $2,023,000. We continue to develop our marketing efforts into the special education market and expand our product assortment. · Avana sales – Net sales of Avana products decreased 20% during the quarter from the comparable prior year second quarter to $548,000. 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. · Products purchased for resale – This product category decreased by 15%, or $44,000, from the prior year second 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, and royalties. For the three months ending December 31, 2024 gross profit margin, as a percentage of sales, increased to 28% from 27% in the same period in the prior year. Gross profit increased to $1,982,000 from $1,818,000 in the prior year second quarter. Operating expenses . Total operating expenses for the three months ended December 31, 2024 were approximately 24% of net sales, or approximately $1,691,000, compared to 25% of net sales, or approximately $1,664,000, for the same period in the prior year. 24 Table of Contents Other income (expense) . Interest expense during the second quarter decreased from approximately ($98,000) in the second quarter of fiscal 2024 to approximately ($94000) in the second quarter of fiscal 2025. The decrease was primarily due to the reduction in notes payable. Net Income. For the three months ended December 31, 2024, we had a net profit of $193,000 as compared to a net profit of $29,000 for the three months ended December 31, 2023. The increase in net income was due to the increase in sales and the reduction in production costs which provided an increase in the gross margin for the period. Six Months Ended December 31, 2024 Compared to the Six Months Ended December 31, 2023 Net sales . Sales for the six months ended December 31, 2024, were approximately $12,941,000, a 0.2% increase from the comparable prior year period. The major components of net sales, by product, are as follows: · Liberator sales - Sales of Liberator branded products increased $131,000, or 2%, during the six month from the comparable prior year period, due primarily to stronger sales through our liberator.com website but were slightly offset by a decline in our wholesale accounts. · Jaxx sales – Jaxx product sales increased 6% from the prior year six month to $3,842,000. We continue to develop our marketing efforts into the special education market and expand our product assortment. · Avana sales – Net sales of Avana products decreased 15% during the six months from the comparable prior year period to $1,032,000. 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. · Products purchased for resale – This product category decreased by 15%, or $82,000, from the prior year six months due to lower sales of certain products through our e-commerce website, Liberator.com. 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, and royalties. For the six months ending December 31, 2024 gross profit margin, as a percentage of sales, increased to 27% from 26% in the same period in the prior year. Gross profit increased to $3,497,000 from $3,400,000 in the prior year comparable six month period. Operating expenses . Total operating expenses for the six months ended December 31, 2024 were approximately 26% of net sales, or approximately $3,329,000, compared to 25% of net sales, or approximately $3,278,000, for the same period in the prior year. Reduction in advertising expense was offset by an increase in personnel related expenses. Other income (expense) . Interest expense during the six months ended December 31, 2024 decreased to approximately ($185000) from approximately ($188,000) in the same period from the prior year. The decrease was primarily due to the reduction in notes payable. Net loss. For the six months ended December 31, 2024, we had a net loss of $17,000 as compared to a net loss of $97,000 for the six months ended December 31, 2023. The reduction in net loss was due to the increase in sales and the reduction in production costs which provided an increase in the gross margin for the period. 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. 25 Table of Contents Liquidity and Capital Resources The following table summarizes the Company’s cash flows: Six Months Ended December 31 , Cash flow data: 2024 2023 (Unaudited) (Dollars in thousands) Cash provided by operating activities $ 363 $ 370 Cash used in investing activities $ (3 ) $ (39 ) Cash used in financing activities $ (39 ) $ (159 ) As of December 31, 2024, the Company’s cash and cash equivalents totaled $1,349,285, compared to $1,213,068 in cash and cash equivalents as of December 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. 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 $363,000 during the six months ended December 31, 2024 compared to $370,000 net cash provided by operating activities in the three months ended December 31, 2023. The primary components of the cash provided by operating activities in the current year is the increase in Accrued expenses and payroll of $107,000 and a reduction in operation lease costs of $151,000. Inventory reserves were reduced by $49,000 for the period. Investing Activities Cash used in investing activities in the six months ended December 31, 2024 was $3,000 compared to a use of $39,000 during the six months ended December 31, 2023. This is due to the disposal of a forklift during the six months ended December 31, 2024. No replacement forklift is needed at this time. Financing Activities Cash used by financing activities during the three months ended December 31, 2024 and December 31, 2023 of $39,000 and $159,000 respectively, primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes. Non-GAAP Financial Measures Reconciliation of net income to Adjusted EBITDA for the three and six months ended December 31, 2024 and 2023: Three Months Ended December 31, Six Months Ended December 31, 2024 2023 2024 2023 (in thousands) (in thousands) Net income (loss) $ 193 $ 29 $ (17 ) $ (97 ) Plus interest expense, financing costs and income tax 92 126 181 188 Plus depreciation and amortization expense 108 104 217 203 Plus stock-based compensation expense 9 14 18 5 Adjusted EBITDA $ 402 $ 273 $ 399 $ 299 26 Table of Contents 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 December 31, 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.