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 September 30, 2025 2024 (unaudited) Net sales 100 % 100 % Cost of goods sold 72 % 74 % Gross profit 28 % 26 % Operating Expenses 29 % 28 % Income from operations (1 )% (2 )% Three Months Ended September 30, 2025 Compared to Three Months Ended September 30, 2024 Net sales . Sales for the three months ended September 30, 2025, were approximately $5,841,000, a 1.5% increase from the comparable prior year period. The major components of net sales by segment are as follows: · Direct sales – Sales through our branded websites increased $186,000, or 11%, during the quarter from the comparable prior year period, due primarily to stronger sales through our Jaxx website capturing more of the outdoor product category. · Wholesale sales —Sales through our wholesale customers decreased 3% from the prior year's first quarter to $3,886,000. Increased competition from low-cost international manufacturers eroded our sales at several online retailers. We continue to add more distribution points both domestically and internationally. 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 ended September 30, 2025 gross profit margin, as a percentage of sales, increased to 28% from 26% in the same period in the prior year. Gross profit increased to $1,656,000 from $1,517,000 for the previous year's first quarter due to lower costs for raw materials from international vendors. Operating expenses . Total operating expenses for the three months ended September 30, 2025 were approximately 29% of net sales, or approximately $1,671,000, compared to 28% of net sales, or approximately $1,639,000, for the same period in the prior year. Other income (expense) . Interest expense during the first quarter decreased to approximately ($116,000) in the first quarter of fiscal 2026 from approximately ($88,000) in the first quarter of fiscal 2025. The increase was primarily due to the issuance of notes payable during the three months ended September 30, 2025 to fund working capital and inventory needs. Net Income. For the three months ended September 30, 2025, we had a net loss of ($131,000) as compared to a net loss of ($210,000) for the three months ended September 30, 2024. The reduction in net loss was due to the increased gross profit that offset the increase in operating and interest expense. 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: Three months Ended September 30 , Cash flow data: 2025 2024 (Unaudited) (Dollars in thousands) Cash provided by operating activities $ 80 $ 132 Cash used in investing activities $ - $ (1 ) Cash provided by (used in) financing activities $ 3 $ (91 ) As of September 30, 2025, the Company’s cash and cash equivalents totaled $818,053, compared to $734,910 in cash and cash equivalents as of June 30, 2025 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 $80,000 during the three months ended September 30, 2025 compared to $132,000 net cash provided by operating activities in the three months ended September 30, 2024. The primary components of the cash provided by operating activities in the current year are the increase in accounts payable of $131,988 and an increase in accrued payroll of $186,213. This was mostly offset by an increase in inventory of $218,562. Increases in accrued payroll was due to timing of the quarter. Increases in inventory is due to larger deposits made for raw materials purchased from overseas vendors compared to June 30, 2025. Investing Activities Cash used in investing activities in the three months ended September 30, 2025 was $0 compared to a use of $1,000 during the three months ended September 30, 2024. Financing Activities Cash provided by (used in) financing activities during the three months ended September 30, 2025 and September 30, 2024 of $3,000 and $(91,000) respectively, primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes offset by the addition of secured notes payable. 26 Table of Contents Non-GAAP Financial Measures Reconciliation of net income to Adjusted EBITDA for the three ended September 30, 2025 and 2024: Three Months Ended September 30, 2025 2024 (in thousands) Net loss $ (131 ) $ (210 ) Plus interest expense, financing costs and income tax 116 88 Plus depreciation and amortization expense 88 109 Plus stock-based compensation expense 9 9 Adjusted EBITDA $ 82 $ (4 ) As used herein, Adjusted EBITDA represents net loss 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, 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. 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.