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, 2025 2024 2025 2024 (unaudited) (unaudited) Net sales 100 % 100 % 100 % 100 % Cost of goods sold 74 % 72 % 73 % 73 % Gross profit 26 % 28 % 27 % 27 % Operating Expenses 25 % 24 % 27 % 26 % Income from operations 1 % 4 % 0 % 1 % Three and Six Months Ended December 31, 2025 Compared to Three and Six Months Ended December 31, 2024 Net sales . Sales for the three and six months ended December 31, 2025, were approximately $6,900,000 and $12,700,000, respectively. For the three month period ended December 31, 2025, this was a 4.2% decline from the same period the prior year. For the six month period ended December 31, 2025, this was a 1.7% decline 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 $21,000, or 1%, during the three month ended December 31, 2025, from the comparable prior year period, due primarily to stronger sales through our Liberator website. For the six months ended December 31, 2025, our branded websites increased $210,000 or 5.1% compared to the same period the prior year. This was the result of increased marketing focus on higher return channels. · Wholesale sales —For the three months ended December 31, 2025, sales to our wholesale customers were $4,404,000, down 7% from the same period in the prior year. Our wholesale channels continue to experience significant competition from low-cost international manufacturers eroded our sales at several online retailers. We continue to add more distribution points both domestically and internationally. 25 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 and six months ended December 31, 2025 gross profit margin, as a percentage of sales, was 26% and 26% respectively. Compared to the same period in the prior year, this was a decline from 28% and 27%, respectively. For the three months ended December 31, 2025, gross profit reduced to approximately $1,800,000 from $1,980,000 in the prior year. For the six months ended December 31, 2025, gross profit decreased to approximately $,3454,000 from $3,97,000 Foin the prior year. The decline was related to increased freight and tariff costs. Operating expenses . Total operating expenses for the three months ended December 31, 2025 were approximately 25% of net sales, or approximately $1,705,271, compared to 24% of net sales, or approximately $1,691,142, for the same period in the prior year. For the six months ended December 31, 2025, operating expenses were $3,377,000, which is an increase of 1.4% compared to the same period in the prior year. This increase was mainly related to the change in rent expense related to the new operating lease. Other income (expense) . Interest expense increased to approximately ($136,000) in the second quarter of fiscal 2026 from approximately ($97,000) in the second quarter of fiscal 2025. The increase was primarily due to the issuance of notes payable during the three months ended December 31, 2025 to fund working capital and inventory needs. Net Income. For the three months ended December 31, 2025, we had a net loss of ($765,000) as compared to net income of $192,000 for the three months ended December 31, 2024. The increase is the loss is a result of recognition of the Deferred Tax Liability relating to the new operating lease for the manufacturing facility totaling $813,000. 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: Six months Ended December 31, Cash flow data: 2025 2024 (Unaudited) (Dollars in thousands) Cash provided by operating activities $ 365 $ 363 Cash used in investing activities $ (49 ) $ (3 ) Cash provided by (used in) financing activities $ 35 $ (39 ) As of December 31, 2025, the Company’s cash and cash equivalents totaled $1,085,613, 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. 26 Table of Contents 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 $365,000 during the six months ended December 31, 2025 compared to $363,000 net cash provided by operating activities in the six months ended December 31, 2024. The primary components of the cash provided by operating activities in the current year are the decrease in accounts receivable of $116,964 and decrease in Inventory of $ 234,174. This was mostly offset by decrease in accounts payable of $162,510 and an increase in accrued payroll of $62,393. Increases in accrued payroll was due to timing of the quarter. Investing Activities Cash used in investing activities in the six months ended December 31, 2025 was $49,270 compared to a use of ($4,000) during the six months ended December 31, 2024. The company entered into a loan with Navitas for purchasing Factory equipment – Sander Forklift. Financing Activities Cash provided by (used in) financing activities during the six months ended December 31, 2025 and December 31, 2024 of $35,000 and $(39,000) 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. Non-GAAP Financial Measures Reconciliation of net income to Adjusted EBITDA for the three and six months ended December 31, 2025 and 2024: Three Months Ended December 31, 2025 2024 (in thousands) Net income (loss) $ (765 ) $ 193 Plus interest expense, financing costs and income tax 137 92 Plus depreciation and amortization expense 97 108 Plus stock-based compensation expense 9 9 Plus income tax provision 813 0 Adjusted EBITDA $ 291 $ 402 Six Months Ended December 31, 2025 2024 (in thousands) Net income (loss) $ (897 ) $ (18 ) Plus interest expense, financing costs and income tax 254 181 Plus depreciation and amortization expense 184 217 Plus stock-based compensation expense 18 17 Plus income tax provision 813 0 Adjusted EBITDA $ 372 $ 397 27 Table of Contents 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 December 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. 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.