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, 2026 2025 2026 2025 (unaudited) (unaudited) Net sales 100 % 100 % 100 % 100 % Cost of goods sold 72 % 73 % 73 % 73 % Gross profit 28 % 27 % 27 % 27 % Operating Expenses 25 % 27 % 25 % 26 % Income from operations 3 % 0 % 2 % 1 % Three and Nine Months Ended March 31, 2026 Compared to Three and Nine Months Ended March 31, 2025 Net sales . Sales for the three and nine months ended March 31, 2026, were approximately $6,500,000 and $19,200,000, respectively. For the three month period ended March 31, 2026, this was a 12% increase from the same period the prior year. For the nine month period ended March 31, 2026, this was a 2.6% 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 $367,000, or 19.5%, during the three month ended March 31, 2026, from the comparable prior year period, due primarily to stronger sales through our Liberator website. For the nine months ended March 31, 2026, our branded websites increased $577,000 or 9.5% 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 March 31, 2026, sales to our wholesale customers were $4,304,000, up 8.4% from the same period in the prior year. Our wholesale channels continue to experience significant competition from low-cost international manufacturers which eroded our sales at several online retailers. We continue to add more distribution points both domestically and internationally. This strategy has shown effective in addressing these adverse market conditions. For the nine month period ending March 31, 2026, sales in this channel were down 1% to $12.6 million compared to the same period in the prior year. 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 nine months ended March 31, 2026 gross profit margin, as a percentage of sales, was 28% and 27% respectively. For the three and nine months ended March 31, 2025, gross margin was 27% and 27%, respectively. We have been able to maintain Gross Margin, even though shipping costs and tariff costs have increased this fiscal year, due to the change in sale channel mix and improved raw material sourcing from international vendors. Operating expenses . Total operating expenses for the three months ended March 31, 2026 were approximately 25% of net sales, or approximately $1,609,000 compared to 27% of net sales, or approximately $1,603,000 for the same period in the prior year. For the nine months ended March 31, 2026, operating expenses were $4,895,000, which is a decrease of 0.8% compared to the same period in the prior year. Reductions in headcount and other overhead expenses were somewhat offset by the increase in rent expense related to the new operating lease. 25 Table of Contents Other income (expense) . Interest expense increased to approximately ($102,000) in the third quarter of fiscal 2026 from approximately ($87,500) in the third quarter of fiscal 2025. The increase was primarily due to the issuance of short term notes payable during the nine months ended March 31, 2026 to fund working capital and inventory needs. Net Income. For the three months ended March 31, 2026, we had a net income of $174,000 as compared to net loss of ($86,650) for the three months ended March 31, 2025. The increase in net income is a result of stronger sales, improved gross margin, and minimal increase in operating expenses. For the nine months ended March 31, 2026, the company had a net loss of ($724,000) compared to a net loss of ($104,000) for the same period in the prior year. The increase in net loss was due to the recognition of a deferred tax liability related to the new operating lease entered into in November 2025 for the manufacturing facility. 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: Nine months Ended March 31, Cash flow data: 2026 2025 (Unaudited) (Dollars in thousands) Cash provided by operating activities $ 690 $ 203 Cash used in investing activities $ (109 ) $ (34 ) Cash used in financing activities $ (86 ) $ (87 ) As of March 31, 2026, the Company’s cash and cash equivalents totaled $1,229,719, 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 During the nine months ended March 31, 2026, net cash provided by operating activities was $690,000 compared to the nine months ended March 31, 2025 in which net cash provided by operating activities was $203,000. The primary components of the cash provided by operating activities in the current year are the decrease in Inventory of $ 246,119. This was mostly offset by decrease in accounts payable of $122,583 and an increase in accrued payroll of $225,500. Increase in accrued payroll was due to timing of the quarter. 26 Table of Contents Investing Activities Cash used in investing activities in the nine months ended March 31, 2026 was $109,000 compared to a use of $34,000 during the nine months ended March 31, 2025. The company entered into a finance lease and an equipment loan for purchasing factory equipment, one for $29,350 and one for $21,812, respectively. Financing Activities Cash provided by (used in) financing activities during the nine months ended March 31, 2026 and March 31, 2025 of $(86,000) and $(87,000) respectively is 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 nine months ended March 31, 2026 and 2025: Three Months Ended March 31 2026 2025 (in thousands) Net income (loss) $ 174 $ (88 ) Plus interest expense, financing costs and income tax 103 88 Plus depreciation and amortization expense 81 107 Plus stock-based compensation expense 8 9 Plus income tax provision (49 ) 0 Adjusted EBITDA $ 317 $ 116 Nine Months Ended March 31 2026 2025 (in thousands) Net loss $ (724 ) $ (105 ) Plus interest expense, financing costs and income tax 358 269 Plus depreciation and amortization expense 265 322 Plus stock-based compensation expense 25 26 Plus income tax provision 764 0 Adjusted EBITDA $ 688 $ 512 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. 27 Table of Contents 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, 2026, 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.