LUVU 10-K & 10-Q changes, risk factors and insider trading

We have been adversely affected by theincreases effectsin ofraw import tariffsmaterial and weakshipping economiccosts conditions.related to increases in fuel cost.

ImportWe tariffshave experienced increased raw material and shipping costs as higher fuel costs, including those associated with the war in Iran, have raised transportation, logistics, and supplier costs across our supply chain. These increases have adversely affected our overall cost structure, liquidity, business, financial condition, and results of operationsoperations. byWe increasing our overall cost structure, and such effects will be further exacerbated if we arewere unable to achievefully commensurateabsorb these higher costs through operating efficiencies or other cost-reduction measures and, as a result, were forced to pass a portion of these increased costs on to customers through higher selling prices. Additional increases in thefuel, pricesraw wematerial, chargelabor, or shipping costs, or any supply shortages or related disruptions, could further increase our customers. Uncertainty in the economy has resulted in,costs and may continue to result in, higher capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates, and other similar effects. As a result, we have experienced and may continue to experience, cost increases. In addition, poor economic and market conditions, including a potential recession, may negatively impact market sentiment, decreasing theaffect demand for our products, whichmarket would adversely affect oursentiment, operating incomeincome, and results of operations. If we are unable to take effective measures in a timely manner to mitigate thethese impactcost of inflation, as well as a potential recession,pressures, our business, financial condition, and results of operations could be adversely affected.

We are dependent on our manufacturerssuppliers and do not have supply agreements with our manufacturers. Events adversely affecting our suppliers, manufacturers and contractors would adversely affect us.

Net Sales. Net sales remainedgrew nearly flat5.8% in fiscal 20252026 compared to fiscal 2024.2025. Our Direct to Consumer segment rose by $1.1$0.1 million, or 16%,2%, compared to FY2024,fiscal 2025, while our Wholesale segment declinedrose by $1$1.3 million.million or 8%. Wholesale increase was related to the continued increase in our dropship network. The direct sales channel includes consumer sales via our three websites. The growthincrease in this segment was driven by new marketing efforts onfrom social media influencers and influencerpay promotionsper on Liberator.com, along with higher sales through Jaxxbeanbags.com.click. The decreaseincrease in wholesale sales was due to weakerhigher demand from our brick-and-mortar customersInternational and aggressive,new low-pricecustomers. productsFiscal from2025 Chinesenet manufacturerssales soldhave viabeen Amazon.increased by $1,163,648 for third-party marketplace fulfillment fees now recorded in selling expense, as described in Note 2, and the growth rates above are presented on that comparable basis.

Gross profit. Gross profit, derived from net sales less thanthe cost of product sales, includes the cost of materials, direct labor, manufacturing overhead, and depreciation. Total gross profit as a percentage of sales for the year ended June 30, 2025,2026, decreasedincreased to 26%31.5% from 27%29.5% in the prior year. Gross profit dollars decreasedincreased to $6,469,682$8,613,562 from $6,526,367$7,633,516 in the prior year, representing a 1%12.8% decrease.increase. Fiscal 2025 gross profit and gross margin as presented reflect the $1,163,648 revision described in Note 2, and both years are presented on a comparable basis. The Company increased the Inventory Reserve by $18,056$68,598 to $232,278$300,877 which negatively impacted the Gross Profit for the year. The Company also continued to implement cost reduction strategies such as sourcing more raw materials from China and India, reducing warehouse and production headcounts, and system improvements to better forecast inventory requirements. The impact of import tariffs on raw materials may offset some of the savings from lower cost manufacturers and may impact our gross margin in the future. Gross margin during fiscal 2026 was also negatively affected by higher fuel, freight and raw material costs arising from the armed conflict involving Iran, which began during our third fiscal quarter and disrupted shipping through the Middle East. Benchmark crude oil prices rose sharply during that period and have remained volatile through the date of this report. The cost reduction initiatives described above, offset these higher input costs during fiscal 2026, and gross margin improved notwithstanding the cost pressure. Because a substantial portion of our raw materials is sourced from Asia, a prolonged conflict, further disruption to Middle East shipping lanes, or a sustained increase in fuel prices could raise our inbound freight and raw material costs faster than we are able to offset them and could adversely affect our gross margin, operating results and liquidity in fiscal 2027.

Operating expenses. Excluding depreciation expense, total operating expenses for the year ended June 30, 2025,2026, were 25%27% of net sales, or $6,114,497,$7,386,273, compared to 24%28% of net sales, or $5,940,238,$7,274,981 for the year ended June 30, 2024.2025. The 3%1.5% increase in operating expenses from the prior year was primarily due to higher non-capitalizableselling facilitiesexpenses andrelated equipmentincreased repairs,payroll costs, partially offset by tighter cost controls for G&A expenses. Fiscal 2025 operating expenses include $1,163,648 of third-party marketplace fulfillment fees reclassified from net sales, as welldescribed asin personnel-relatedNote costs.2, so both years are presented on a comparable basis.

Other income (expense). Other expense decreasedincreased to ($378,696$446,861) from expense of ($411,165$378,696) in the prior fiscal year. Increase was due to short term loan interest expense.

Net Income/ (Loss). We had a net loss from operations of $448,659($245,718) or $(0.01$0.00) per diluted share, for the year ended June 30, 20252026 compared with net loss from operations of $398,602($448,659) or $(0.01)$0.00 per diluted share, for the year ended June 30, 20242025. The decrease in loss is due to decrease in net sales and increase inflat operating expenses related to facilities and equipmentincreased repairs,gross asprofit, wellwhich aswas administrativemostly headcountoffset relatedby costs.the tax impact of the new operating lease for the facility.

CashNet cash used in investing activities inwas ($29,000) for the year ended June 30, 2025,2026, wascompared primarilyto for a replacement database server purchased($41,000) in the period.prior Inyear. the year ended June 30, 2024, cashCash used fromin investing activities was relatedfor toexpansion of the purchasewoodworking ofequipment. To expand the woodworking capabilities, a forkliftglue machine $5,000, joiner and commercialplaner printer.$22,000.

We expect total capital expenditures for fiscal 20262027 to be less than $100,000, funded primarily by equipment loans and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit with Advance Financial Corporation. This includes capital expendituresexpenditure supporting our usual operations.

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 30, 2025,2026, we did not have any off-balancematerial sheetoff-balance-sheet arrangements,arrangements asthat definedhave, inor Itemare 303(reasonably likely to have, a)(4)(ii) material current or future effect on our financial condition, revenues or expenses, results of SECoperations, Regulationliquidity, S-K.cash requirements or capital resources.

Allowance for DoubtfulCredit AccountsLosses

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2025,2026, we carried a valuation allowance of $1.5$1.9 million against our netgross deferred tax assets.

In fiscal year 2025, we generated negative cash flow from operations, and in fiscal year 2024,2026, we generated positive cash flow from operations.operations compared to negative cash flow from operations in fiscal year 2025. If our long-term future results do not yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

As used herein, Adjusted EBITDA represents net income before interest income, interest expense and financing costs, depreciation, and stock-based compensation and income taxes expense. We have excluded the non-cash expensesdepreciation and stock-based compensation expenses asbecause they are non-cash expenses that do not reflect the cash-based operations of the Company.Company, and we have excluded interest income, interest expense and financing costs, and income taxes because they reflect our capital structure and tax position rather than our core operating performance. Adjusted EBITDA is a non-GAAP financial measure that 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 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 we believe 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 amortization and non-cash charges for stock-based compensation expense and loss on disposal of assets.

RisingContinued threats of international tariffs may have an adverse impact on our business.

We rely on suppliers for purchasing the raw materials used in the manufacture and production of our goods. In fiscal year 2025 and the sixnine months ending DecemberMarch 31, 2025,2026, approximately 20% and 16%,12%, respectively, of our materials were sourced from foreign suppliers, including 13% and 10% in fiscal year 2025 and the sixnine months ended DecemberMarch 31, 2025, respectively, from China. The Trump Administration has imposed steep tariffs on the import of goods from several countries from which we purchase raw materials and finished goods. This increase in tariffs could adversely affect our business and our results of operations. TheOn impositionFebruary of20, additional2026, the US Supreme Court ruled that major tariffs fluctuatesimposed dramatically, creating uncertainty in global markets. These tariffs apply directly to a small portion of our materials. As a result, we may be forced to implement price increases to adjust toby the higherTrump costsAdministration ofwere productionunlawful. The Company is evaluating applying for refunds through the Customers and saleBorder ofProtection ourportal. productsHowever, in the future, which carries the risk of reduced demand for such products, thus lowering sales and resulting revenue. Additionally,if future tariffs or any additional costs or restrictions are imposed on imported materials that may lead to an increase in our prices maywhich result in a loss of customers andcould harm our business.

Three and SixNine Months Ended DecemberMarch 31, 20252026 Compared to Three and SixNine Months Ended DecemberMarch 31, 20242025

Net sales. Sales for the three and sixnine months ended DecemberMarch 31, 2025,2026, were approximately $6,900,000$6,500,000 and $12,700,000,$19,200,000, respectively. For the three month period ended DecemberMarch 31, 2025,2026, this was a 4.2%12% declineincrease from the same period the prior year. For the sixnine month period ended DecemberMarch 31, 2025,2026, this was a 1.7%2.6% declineincrease from the comparable prior year period. The major components of net sales by segment are as follows:

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 sixnine months ended DecemberMarch 31, 20252026 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%,27% respectively. For the three and nine months ended DecemberMarch 31, 2025, gross profitmargin reducedwas 27% and 27%, respectively. We have been able to approximatelymaintain $1,800,000Gross fromMargin, $1,980,000even inthough theshipping 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 freightcosts and tariff costs.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 DecemberMarch 31, 20252026 were approximately 25% of net sales, or approximately $1,705,271,$1,609,000 compared to 24%27% of net sales, or approximately $1,691,142,$1,603,000 for the same period in the prior year. For the sixnine months ended DecemberMarch 31, 2025,2026, operating expenses were $3,377,000,$4,895,000, which is ana increasedecrease of 1.4%0.8% compared to the same period in the prior year. ThisReductions increasein washeadcount mainlyand relatedother tooverhead expenses were somewhat offset by the changeincrease in rent expense related to the new operating lease.

Other income (expense). Interest expense increased to approximately ($136,000$102,000) in the secondthird quarter of fiscal 2026 from approximately ($97,000$87,500) in the secondthird quarter of fiscal 2025. The increase was primarily due to the issuance of short term notes payable during the threenine months ended DecemberMarch 31, 20252026 to fund working capital and inventory needs.

Net Income. For the three months ended DecemberMarch 31, 2025,2026, 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 ($765,000$724,000) as compared to a net incomeloss of $192,000($104,000) for the threesame monthsperiod endedin Decemberthe 31,prior 2024.year. The increase isin thenet loss iswas adue resultto ofthe recognition of thea Deferreddeferred Taxtax Liabilityliability relatingrelated to the new operating lease entered into in November 2025 for the manufacturing facility totaling $813,000.facility.

As of DecemberMarch 31, 2025,2026, the Company’s cash and cash equivalents totaled $1,085,613,$1,229,719, compared to $734,910 in cash and cash equivalents as of June 30, 20252025. 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.

NetDuring the nine months ended March 31, 2026, net cash provided by operating activities was $365,000$690,000 duringcompared to the sixnine months ended DecemberMarch 31, 2025 comparedin to $363,000which net cash provided by operating activities inwas the six months ended December 31, 2024.$203,000. 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 $ 234,174.246,119. This was mostly offset by decrease in accounts payable of $162,510$122,583 and an increase in accrued payroll of $62,393.$225,500. IncreasesIncrease in accrued payroll was due to timing of the quarter.

Cash used in investing activities in the sixnine months ended DecemberMarch 31, 20252026 was $49,270$109,000 compared to a use of ($4,000)$34,000 during the sixnine months ended DecemberMarch 31, 2024.2025. The company entered into a finance lease and an equipment loan with Navitas for purchasing Factoryfactory equipmentequipment, –one Sanderfor Forklift.$29,350 and one for $21,812, respectively.

Cash provided by (used in) financing activities during the sixnine months ended DecemberMarch 31, 2026 and March 31, 2025 and December 31, 2024 of $35,000$(86,000) and $(39,00087,000) respectively,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.

Reconciliation of net income to Adjusted EBITDA for the three and sixnine months ended DecemberMarch 31, 20252026 and 20242025:

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 DecemberMarch 31, 2025,2026, the Company did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.