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 Nine Months Ended March 31, March 31, 2025 2024 2025 2024 (unaudited) (unaudited) Net sales 100 % 100 % 100 % 100 % Cost of goods sold 73 % 72 % 73 % 73 % Gross profit 27 % 28 % 27 % 27 % Operating Expenses 27 % 27 % 26 % 26 % Income from operations 0 % 1 % 1 % 1 % The following table represents the net sales and percentage of net sales by product type: Three Months Ended (unaudited) (Dollars in thousands) 31-Mar-25 31-Mar-24 Net Sales: Liberator $ 3,869 66 % $ 3,442 58 % Jaxx 1,145 20 % 1,419 24 % Avana 518 9 % 681 12 % Products purchased for resale 225 4 % 259 4 % Other 89 1 % 122 2 % 1 Total Net Sales $ 5,846 100 % $ 5,923 100 % Nine Months Ended (unaudited) (Dollars in thousands) 31-Mar-25 31-Mar-24 Net Sales: Liberator $ 11,214 60 % $ 10,656 57 % Jaxx 4,987 27 % 5,032 27 % Avana 1,551 8 % 1,901 10 % Products purchased for resale 680 4 % 796 4 % Other 355 1 % 450 2 % Total Net Sales $ 18,787 100 % $ 18,835 100 % Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 Net sales . Sales for the three months ended March 31, 2025, were approximately $5,846,000, a 1% 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 increased $427,000, or 12%, during the quarter from the comparable prior year period, due primarily to stronger sales through our liberator.com website. · Jaxx sales —Jaxx product sales decreased 19% from the prior year's third quarter to $1,145,000. Increased competition from low-cost international manufacturers eroded our sales at several online retailers. We are increasing our sourcing efforts to reduce our raw materials costs from new vendors. · Avana sales – Net sales of Avana products decreased 24% during the quarter from the comparable prior year third quarter to $518,000. 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. We have reduced marketing spend on this brand as it was not profitable and reallocated those funds to support the Liberator and Jaxx brands. · Products purchased for resale – This product category decreased by 13%, to $225,000, from the prior year third 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. 26 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, and royalties. For the three months ending March 31, 2025 gross profit margin, as a percentage of sales, decreased to 27% from 28% in the same period in the prior year. Gross profit decreased to $1,603,000 from $1,639,000 for the previous year's third quarter. Operating expenses . Total operating expenses for the three months ended March 31, 2025 were approximately 27% of net sales, or approximately $1,604,000, compared to 27% of net sales, or approximately $1,600,000, for the same period in the prior year. Other income (expense) . Interest expense during the third quarter decreased to approximately ($87,000) in the third quarter of fiscal 2025 from approximately ($133,000) in the third quarter of fiscal 2024. The decrease was primarily due to the reduction in notes payable. Net Income. For the three months ended March 31, 2025, we had a net loss of ($88,000) as compared to a net loss of ($94,000) for the three months ended March 31, 2024. The reduction in net loss was due to the decrease in interest expense for the period. Nine months Ended March 31, 2025 Compared to the Nine months Ended March 31, 2024 Net sales . Sales for the nine months ended March 31, 2025, were approximately $18,787,000, a 0.3% 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 increased $558,000, or 5%, during the nine months 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 decreased 1% from the prior year's nine period to $4,987,000. 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 18% during the nine months from the comparable prior year period to $1,551,000. 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 $116,000, from the prior year nine 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 nine months ending March 31, 2025 gross profit margin, as a percentage of sales, increased to 27% from 27% in the same period in the prior year. Gross profit increased to $5,100,000 from $5,039,000 in the prior year comparable nine month period. Operating expenses . Total operating expenses for the nine months ended March 31, 2025 were approximately 26% of net sales, or approximately $4,933,000, compared to 26% of net sales, or approximately $4,878,000, for the same period in the prior year. Increases in facilities expenses and equipment repairs accounted for the majority of the additional expenses. Other income (expense) . Interest expense during the nine months ended March 31, 2025 decreased to approximately ($272,000) from approximately ($322,000) in the same period from the prior year. The decrease was primarily due to the reduction in notes payable. Net loss. For the nine months ended March 31, 2025, we had a net loss of $105,000 as compared to a net loss of $191,000 for the nine months ended March 31, 2024. The reduction in net loss was due to the decrease in sales and an increase in equipment maintenance costs.. 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. 27 Table of Contents Liquidity and Capital Resources The following table summarizes the Company’s cash flows: Nine months Ended March 31, Cash flow data: 2025 2024 (Unaudited) (Dollars in thousands) Cash provided by operating activities $ 203 $ 333 Cash used in investing activities $ (34 ) $ (52 ) Cash used in financing activities $ (87 ) $ (250 ) As of March 31, 2025, the Company’s cash and cash equivalents totaled $1,110,268, compared to $1,072,772 in cash and cash equivalents as of March 31, 2024. The impact of increased tariffs for raw materials and finished goods may have an adverse effect on the future cash position of the Company. Our direct exposure to tariff fees is limited, and we are sourcing goods and materials from lower tariff countries. However, indirectly, the goods and materials we purchase domestically may increase prices to us as tariffs impact them. Therefore, we may need to raise prices and offset this increase in the future. 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 $202,980 during the nine months ended March 31, 2025 compared to $333,193 net cash provided by operating activities in the nine months ended March 31, 2024. The primary components of the cash provided by operating activities in the current year are the increase in accounts payable of $312,000 and a increase in accounts receivables of $359,000. Accounts receivable increase was due to the merchant service provider establishing a $200,000 reserve on our credit card transactions. Investing Activities Cash used in investing activities in the nine months ended March 31, 2025 was $34,308 compared to a use of $52,212 during the nine months ended March 31, 2024. This is due to the disposal of a forklift during the nine months ended March 31, 2025. No replacement forklift is needed at this time. A replacement database server was purchased in March 2025 for approximately $29,000. Financing Activities Cash used by financing activities during the nine months ended March 31, 2025 and March 31, 2024 of $86,853 and $249,519 respectively, primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes. 28 Table of Contents Non-GAAP Financial Measures Reconciliation of net income to Adjusted EBITDA for the three and nine months ended March 31, 2025 and 2024: Three Months Ended Nine Months Ended March 31, March 31, 2025 2024 2025 2024 (in thousands) (in thousands) Net loss $ (88 ) $ (94 ) $ (105 ) $ (191 ) Plus interest expense, financing costs, and income tax 88 133 269 322 Plus depreciation and amortization expense 107 104 322 307 Plus stock-based compensation expense 9 6 26 11 Adjusted EBITDA $ 116 $ 149 $ 514 $ 449 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 March 31, 2025, 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. 29 Table of Contents 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 believes that the Company’s exposure to market risk associated with other financial instruments is not material.