UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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(Mark One)



R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2011



£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 0-15491

PARLUX FRAGRANCES, INC.

(Exact Name of Registrant As Specified in Its Charter)



DELAWARE		22-2562955
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

5900 N. Andrews Avenue, Suite 500,

Fort Lauderdale, FL 33309

(Address of Principal Executive Offices) (Zip Code)

(954) 316-9008

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company	R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		February 8, 2012
Common Stock, $0.01 par value per share		20,769,362 shares

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PARLUX FRAGRANCES, INC.

TABLE OF CONTENTS



PART I
		Page
Item 1.	Financial Statements.	1

Item 2.	Management's Discussion And Analysis of Financial Condition and Results of Operations.	1

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	13

Item 4.	Controls and Procedures.	13

PART II
Item 1.	Legal Proceedings.	14

Item 1A.	Risk Factors.	14

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	15

Item 3.	Defaults Upon Senior Securities.	15

Item 4.	Removed and Reserved.	15

Item 5.	Other Information.	15

Item 6.	Exhibits.	16

	Signatures	38

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PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

See pages 17 to 37.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Parlux Fragrances, Inc. is engaged in the business of creating, designing, manufacturing, distributing and selling prestige fragrances and beauty related products marketed primarily through specialty stores, national department stores and perfumeries on a worldwide basis. The fragrance market is generally divided into a prestige group (distributed primarily through department and specialty stores) and a mass market group (primarily chain drug stores, mass merchandisers, smaller perfumeries and pharmacies). Our fragrance products are positioned primarily in the prestige group. We hold licenses or sublicenses to manufacture and distribute the designer fragrance brands of Paris Hilton, Jessica Simpson, Nicole Miller, Josie Natori, Queen Latifah, Marc Ecko, Rihanna, Kanye West, Vince Camuto, and Fred Hayman Beverly Hills.

For convenience and simplicity, in this report the terms “Parlux”, “the Company”, “us” and “we” means Parlux Fragrances, Inc. and its wholly-owned subsidiaries, Parlux S.A., a French company (“S.A.”), and Parlux Ltd., a New York corporation.

Effective December 19, 2011, the Company liquidated its wholly-owned subsidiary, Parlux, S.A. The Company is in the process of establishing a new wholly-owned subsidiary, Parlux SARL, a French company. The liquidation of Parlux, S.A. did not have a material effect on our accompanying unaudited Condensed Consolidated Financial Statements.

PENDING MERGER

As previously reported, on December 23 , 2011, the Company and Perfumania Holdings, Inc. (“Perfumania”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Parlux, Perfumania, and PFI Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Perfumania (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into Parlux with Parlux as the surviving company (the “Merger”). The Merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

At the effective time of the Merger (the “Effective Time”), each issued and outstanding share of Parlux common stock (other than shares held by Perfumania and its affiliates) will be canceled and automatically converted into the right to receive either (i) $4.00 in cash plus 0.20 shares of Perfumania common stock (the “Mixed Consideration”) or (ii) 0.533333 shares of validly issued, fully paid and non-assessable shares of Perfumania common stock (“Stock Consideration”). Parlux stockholders may elect whether they would prefer to receive Mixed Consideration or Stock Consideration, however, the maximum amount of cash that will be paid is $61,895,288 and the maximum amount of Perfumania common stock that will be issued is 5,919,052 shares, which amounts are subject to adjustment in certain circumstances provided in the Merger Agreement, including to reflect any issuance of Parlux shares due to the exercise of options, to adjust the maximum cash consideration for each share of Parlux stock as to which appraisal rights have been exercised, and for any shortfall of Parlux cash or cash equivalents at the Effective Time below a target amount calculated as provided in the Merger Agreement. As described under “Voting Agreements” below, certain stockholders of Parlux have agreed to elect to receive the Stock Consideration.

At the Effective Time, each option to purchase a share of Parlux common stock that is then outstanding will be assumed by Perfumania and converted into the right to purchase shares of Perfumania common stock with corresponding adjustments to the number of shares and the exercise price based upon the Stock Consideration exchange ratio, but otherwise will remain unchanged except that vesting of the options will be accelerated by one year and such options will vest upon termination of the option holder's employment within the twelve months following the Effective Time.

Each warrant to purchase Parlux common stock held by Glenn Gopman, a member of Parlux' Board of Directors, that is unexercised at the Effective Time will be automatically converted into a warrant to purchase a number of shares of Perfumania common stock equal to the product (rounded down to the nearest whole share) of (x) the number of shares of Parlux common stock subject to such warrant and (y) 0.533333, at an exercise price per share (rounded up to the nearest whole cent) equal to (1) the exercise price of such warrant divided by (2) 0.533333.

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Consummation of the Merger is subject to customary conditions, including, among others, (i) the approval of the Merger Agreement by the stockholders of Parlux, (ii) the approval by the stockholders of Perfumania of an increase in Perfumania's authorized common stock and of the issuance of shares of Perfumania's common stock pursuant to the Merger and the Merger Agreement, (iii) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) an increase in the size of the Perfumania Board of Directors to accommodate the appointment of all members of the Parlux Board to the Perfumania Board of Directors, (v) no event having occurred that would reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) on Parlux or Perfumania and (vi) Parlux stockholders shall have exercised their appraisal rights in connection with the Merger for no more than 7.5% of Parlux' common stock. On January 20, 2012, Perfumania filed a registration statement on Form S-4 with the SEC. This filing and its subsequent amendments contain a preliminary joint proxy statement for a special meeting of each company's shareholders to vote on the items described above. On January 9, 2012, Parlux and Perfumania submitted their Hart-Scott-Rodino filing with the U.S. Department of Justice for review under U.S. antitrust laws.

The Merger Agreement includes certain restrictions, limitations and prohibitions as to actions we may or may not take in the period prior to consummation of the Merger.

The Merger Agreement contains certain termination rights for both companies if the Merger Agreement is terminated and under specified circumstances we may be required to pay Perfumania $4.0 million or Perfumania may be required to pay us $4.0 million plus our out-of-pocket expenses up to $2.0 million.

Certain Parlux shareholders have filed class action lawsuits against Parlux and each of the members of Parlux' Board of Directors (See Note L to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion).

See Item 1A, “Risk Factors,” and Note A to the accompanying unaudited Condensed Consolidated Financial Statements for additional risks and information related to the Merger.

At this time, we do not anticipate modifying our business strategy as discussed below but we cannot predict the impact consummation of the Merger will have on our long-term strategy. The combined company's expected balance sheet and credit metrics are anticipated to enhance our growth opportunities and strategic options.

We do not expect the Merger to have a significant impact on our cash requirements and sources of liquidity during fiscal year 2012, except that we have incurred, through December 31, 2011, expenses of approximately $1.5 million in connection with the Merger. Pursuant to the Merger Agreement, only limited equity issuances through certain employee benefit plans and stock option plans are permitted. Additionally, the extent to which we can obtain financing through borrowings or debt issuances are also limited.

See Part I, Item 2 and Note G to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion of our relationship with Perfumania.

Forward-Looking Statements

Certain statements within this Quarterly Report on Form 10-Q, which are not historical in nature, including those that contain the words, “anticipate”; “believe”; “plan”; “estimate”; “expect”; “should”; “could”; “may”; “intend”; and other similar expressions, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve estimates, assumptions and uncertainties. Such statements are subject to known and unknown risks, uncertainties and other factors, or combination of factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors. Investors are cautioned that forward-looking statements involve such risks and uncertainties, which may affect our business and prospects, including economic, competitive, governmental, technological and other factors included in our filings with the Securities and Exchange Commission (“SEC”), including (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) the risks and uncertainties discussed under the headings “Risk Factors” and “Forward-Looking Statements” included in Part I, Item 1A. Risk Factors and Item 7 - Forward-Looking Statements, in our Annual Report on Form 10-K for the year ended March 31, 2011. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. We do not undertake any obligation to update the information herein, which speaks only as of this date. The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto

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appearing elsewhere in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Actual results could differ significantly from those estimates under different assumptions and conditions. We have included in our Annual Report on Form 10-K for the year ended March 31, 2011, a discussion of our most critical accounting policies, which are those that are most important to reflect our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We have not made any changes in these critical accounting policies, nor have we made any material change in any of the critical accounting estimates underlying these accounting policies, since the filing of our Annual Report on Form 10-K filing, discussed above.

Recent Accounting Update

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06 (“ASU No. 2010-06”), Improving Disclosure about Fair Value Measurements, under Topic 820, Fair Value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 (quoted prices in active markets for identical assets or liabilities) and 2 (significant other observable inputs), and activity in Level 3 (significant unobservable inputs). This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 new disclosures and clarification of existing disclosures is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for financial statements issued for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU No. 2010-06, as it relates to new disclosures and clarifications of existing disclosures, well as certain disclosures of activity in Level 3 fair value measurements, did not have a material impact on our consolidated financial statements.

Significant Trends

A significant number of new prestige fragrance products continue to be introduced on a worldwide basis. The beauty industry, in general, is highly competitive and consumer preferences often change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, fuels the growth of our industry. Department stores generally lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies introduce new products, which requires additional spending for development and advertising and promotional activities. Historically, the prestige fragrance business has been built on apparel designers, mostly European and American, and the business ebbs and flows with their success. In addition, a number of the new launches are with celebrities (mainly entertainers), which require substantial royalty commitments, whose careers and/or appeal could change drastically, both positively and negatively, based on a single event. If one or more of our new product introductions is unsuccessful, or the appeal of a celebrity that is tied to any of our fragrances brands diminishes, it could result in a substantial reduction in sales, profitability and operating cash flows.

Certain U.S. department store retailers have consolidated operations resulting in the closing of retail stores, as well as implementing various inventory control initiatives. The result of these consolidation efforts include lower inventories maintained by the retailers and higher levels of returns after each gift-giving holiday season. Store closings, inventory control initiatives, and the current global economic conditions may continue to adversely affect our sales in the short-term. In response to the above conditions, we implemented a number of cost reduction initiatives, beginning in fiscal year 2009, including a targeted reduction in staff, along with controlled advertising and promotional spending, and reduced our production levels. We continue to take steps to control our expenses by maintaining or reducing operating expenses, where feasible.

Since late 2008, U.S. department store retailers have experienced a major reduction in consumer traffic, resulting in decreased sales. In response, the retailers offered consumers deep discounts on most of their products. As is customary in the fragrance industry, these discounts, for the most part, were not offered on fragrances and cosmetics. This resulted in an overall reduction in net sales of these products.

Historically, as is the case for most fragrance companies, our sales have been influenced by seasonal trends generally related to holiday or gift-giving periods. Substantial sales often occur during the final month of each quarter. There can be no

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assurance that these sales trends will support planned objectives in future periods and may negatively affect our results in future periods.

In light of the continuing difficulties in the global economy, we have performed a quarterly review of our intangible long-lived assets. This review was based upon the estimated future undiscounted net cash flows for the remaining period of each license. Based upon our review, no impairment charges were deemed necessary as of December 31, 2011.

Our license with GUESS? expired on December 31, 2009, and was not renewed. During the nine-months ended December 31, 2010, we transferred $1.4 million ($0.2 million during the three-months ended December 31, 2010) of GUESS? brand inventory to GUESS? and/or its new fragrance licensee at its March 31, 2010, net carrying value. This transfer of inventory, along with the cost of sales for the brand, has been classified as "Sales-expired license" and "Cost of sales-expired license" in the accompanying unaudited Condensed Consolidated Statements of Operations for the three and nine-months ended December 31, 2010. There were no such inventory transfers during the three and nine-months ended December 31, 2011.

During the nine-months ended December 31, 2011, we launched the following fragrances:

•Jessica Simpson - I Fancy You (in June 2011)

•Vince Camuto -Vince Camuto Women (in August 2011)

•Paris Hilton - St. Moritz in the Passport Series (in September 2011)

•Rihanna - Rebelle (in December 2011)

•Marc Ecko - Marc Ecko Orange (in December 2011)

During the nine-months ended December 31, 2010, we launched the following fragrances:

•Nicole Miller - Nicole Miller (in April 2010)

•Paris Hilton - Tease (in June 2010)

•Jessica Simpson - Fancy Nights (in June 2010)

•Queen Latifah - Queen of Hearts (in July 2010)

•Paris Hilton - Paris, South Beach, Tokyo in the Passport Series (in December 2010)

Looking forward, we plan to continue to launch new brand name fragrances under our existing licenses and sublicenses during fiscal year 2013. As noted in our discussion on sales, below, excluding GUESS? brand net sales in fiscal 2010, our net sales for the nine-months ended December 31, 2011, increased 9%, as compared to the same prior year period.

It is always difficult to predict sales levels, and is even more difficult in a challenging economic environment. We continue to take steps to control our expenses by maintaining or reducing operating expenses, where feasible. We have returned to the basics of controlled, in-store promotional activity, and have significantly reduced the number of major new license introductions. In late January 2011, we launched our first Rihanna brand fragrance, Reb'l Fleur, initially focusing our spending on social media initiatives and an interactive viral video. In late December 2011, we launched our second Rihanna brand fragrance, Rebelle. To further support the sales promotion of our Rihanna brand fragrances, during the nine-months ended December 31, 2011, we spent approximately $11.5 million ($5.4 million for the three-months ended December 31, 2011) on the Rihanna brand fragrances in additional advertising and promotional expense, increasing our total advertising and promotional expense to $31.2 million, as compared to $24.4 million in the same prior year period ($12.0 million for the three-months ended December 31, 2011, as compared to $10.7 million in the same prior year period). During the three and nine-months ended December 31, 2011, we generated $13.0 million and $25.3 million, respectively, in Rihanna brand fragrances gross sales in our domestic market, to our related parties, and have expanded our sales in our international markets during the three-months ended December 31, 2011, as compared to $2.4 million during the same prior year three and nine-months periods.

Results of Operations

During the nine-months ended December 31, 2011, we experienced a 7% increase in overall net sales, as compared to the nine-months ended December 31, 2010. The increase was primarily due to gross sales from our Rihanna brand fragrances, Reb'l Fleur and Rebelle (which were launched in late January and late December 2011, respectively), of approximately $25.3 million, as compared to $2.4 million during the same prior year period, partially offset by the continued negative impact of the global economic climate, which resulted in a higher returns rate than had been expected from U.S. department stores. Additionally, due to the increased returns and the increase in advertising and promotional expenses, noted above, and a $1.5 million increase in general and administrative expenses primarily due to an increase in legal and other professional fees relating to the proposed Merger, we incurred a net loss of $(2.9) million for the nine-months ended December 31, 2011, as compared to

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net income of $1.1 million for the same prior year period, as further discussed below. For a discussion of the results for the three-months ended December 31, 2011, as compared to the same prior year period, see below.

Our license with GUESS? expired on December 31, 2009, and was not renewed. During the nine-months ended December 31, 2010, we transferred $1.4 million ($0.2 million during the three-months ended December 31, 2010) of GUESS? brand inventory to GUESS? and/or its new fragrance licensee at its March 31, 2010, net carrying value. This transfer of inventory, along with the cost of sales for the brand, has been classified as "Sales-expired license" and "Cost of sales-expired license" in the accompanying unaudited Condensed Consolidated Statements of Operation for the three and nine-months ended December 31, 2010. There were no such inventory transfers during the three and nine-months ended December 31, 2011. Excluding GUESS? brand net sales in the nine-months ended December 31, 2010, our net sales for the nine-months ended December 31, 2011, increased 9%, as compared to the same prior year period.

Our gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold, since we allocate a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses. Selling and distribution expenses for the nine-months ended December 31, 2011 and 2010, include $2.9 million and $2.7 million, respectively, ($1.0 million and $0.6 million for the three-months ended December 31, 2011 and 2010, respectively) relating to the cost of warehouse operations not allocated to inventories and other related distribution expenses (excluding shipping expenses which are recorded as cost of goods sold). A portion of these costs is allocated to inventory in accordance with US GAAP.

Comparison of the three and nine-month periods ended December 31, 2011, with the three and nine-month periods ended December 31, 2010.

Net Sales



	For the Three Months Ended December 31,						For the Nine Months Ended December 31,
	2011		2010		% Change*		2011		2010		% Change*
(in millions)
Domestic sales	$	10.3	$	12.4	(17	)%	$	32.9	$	29.0	14	%
International sales	8.4		6.9		22	%	28.2		22.2		27	%
Unrelated customer sales	18.7		19.3		(3	)%	61.1		51.2		19	%
Related parties sales	13.2		11.9		11	%	39.8		41.5		(4	)%
Sales – expired license	—		0.2		(100	)%	—		1.4		(100	)%
Total net sales	$	31.9	$	31.4	2	%	$	100.9	$	94.1	7	%

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* % change is based on unrounded numbers

During the three-months ended December 31, 2011, net sales increased 2% to $31.9 million, as compared to $31.4 million for the same prior year period.

During the nine-months ended December 31, 2011, net sales increased 7% to $100.9 million, as compared to $94.1 million for the same prior year period. The increase was primarily due to gross sales from our Rihanna brand fragrances, Reb'l Fleur and Rebelle, of approximately $25.3 million, offset by static sales in our other major brands and the planned phase-out of certain other brands licenses.

For the three-months ended December 31, 2011, net sales to unrelated customers, which represented 59% of our total net sales decreased 3% to $18.7 million, as compared to $19.3 million for the same prior year period. The decrease in net sales was primarily due to a decrease in sales in our domestic market. Net sales to the U.S. department store sector decreased 17% to $10.3 million for the three-months ended December 31, 2011, as compared to $12.4 million for the same prior year period, while net sales to international distributors increased 22% to $8.4 million from $6.9 million for the same prior year period. The decrease in net sales in our domestic market was primarily due to increased returns of holiday promotional gift sets and a decrease in gross sales of our Paris Hilton brand fragrances, partially offset by an increase in gross sales of our Rihanna brand fragrances and of our new Vince Camuto Women, brand fragrance. The increase in net sales to international distributors was primarily due to gross sales from our Rihanna brand fragrances, of approximately $3.7 million for the three-months ended December 31, 2011. International distributors have no rights to return merchandise.

For the nine-months ended December 31, 2011, net sales to unrelated customers, which represented 61% of our total

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net sales, increased 19% to $61.1 million, as compared to $51.2 million for the same prior year period. The increase was primarily due to an increase in sales in both our international and domestic markets. Net sales to the U.S. department store sector increased 14% to $32.9 million for the nine-months ended December 31, 2011, as compared to $29.0 million for the same prior year period, while net sales to international distributors increased 27% to $28.2 million from $22.2 million for the same prior year period. The increase in domestic and international net sales was primarily due to the increase in gross sales from our Rihanna and Marc Ecko brand fragrances, and from the launch in August 2011 of a new fragrance, Vince Camuto Women under our license with Vince Camuto.

For the three-months ended December 31, 2011, sales to related parties increased 11% to $13.2 million, as compared to $11.9 million for the same prior year period. The increase for the three-months ended December 31, 2011, is primarily due to an increase in gross sales to Jacavi Beauty Supply, LLC (“Jacavi”) a fragrance distributor, also classified as a related party. For the nine-months ended December 31, 2011, net sales to related parties decreased 4% to $39.8 million, as compared to $41.5 million for the same prior year period. The decrease for the nine-months ended December 31, 2011, was primarily due to a decrease in gross sales of our Paris Hilton brand fragrances to Perfumania, Inc., a wholly-owned subsidiary of Perfumania, which resulted in gross sales of $6.7 million and $25.1 million for the three and nine-months ended December 31, 2011, as compared to $8.5 million and $30.1 million in the same prior year periods. In addition to our sales to Perfumania, we had net sales of $3.7 million and $6.7 million for the three and nine-months ended December 31, 2011, to Jacavi, as compared to $0.7 million and $3.7 million for the three and nine-month same prior year periods. Management confers with our related parties on a periodic basis to establish current and future sales ordering schedules. See “Liquidity and Capital Resources” and Note G to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion of related parties.

Cost of Goods Sold and Gross Margin



	For the Three Months Ended December 31,								For the Nine Months Ended December 31,
	2011			2010			% Change*		2011			2010			% Change*
(in millions)
Unrelated customers	$	9.5		$	7.8		22	%	$	27.6		$	21.8		27	%
As a % of unrelated customers net sales	51		%	40		%			45		%	43		%
Related parties	6.2			5.2			21	%	19.3			19.5			(1	)%
As a % of related parties net sales	47		%	44		%			49		%	47		%
Cost of sales – expired license	—			0.2			(100	)%	—			1.4			(100	)%
As a % of expired license net sales	—		%	100		%			—		%	100		%
Total cost of goods sold	$	15.7		$	13.2		20	%	$	46.9		$	42.7		10	%
As a % of net sales	49		%	42		%			46		%	45		%
Gross Margin	$	16.2		$	18.2		(11	)%	$	54.0		$	51.4		5	%
As a % of net sales	51		%	58		%			54		%	55		%

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* % change is based on unrounded numbers

Our sales to U.S. department store customers generally have a higher margin than sales to international distributors. As is common in the industry, we offer international customers more generous discounts, which are generally offset by reduced advertising expenditures for those sales, as the international distributors are responsible for advertising and all selling and operating functions in their own territories. International distributors have no rights to return merchandise.

In addition, in accordance with US GAAP, certain promotional activities, such as gifts-with-purchase, are included in our cost of goods sold. As the timing and level of promotional activities vary based on product launches and the seasonality of major gift-giving holidays, we experience fluctuations in our cost of sales percentage and gross margins.

For the three-months ended December 31, 2011, our overall cost of goods sold increased as a percentage of net sales to 49%, as compared to 42% for the same prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties was 51% and 47%, respectively, for the three-months ended December 31, 2011, as compared to 40% and 44%, respectively, in the same prior year period. During the three-months ended December 31, 2011, the cost of sales to unrelated customers increased as a result of an increase in the percentage of promotional gift set sales (which generate lower margins) to U.S. department stores during the holiday season, and increased sales to international distributors, which generally have lower margins. During the three-months ended December 31, 2011, cost of goods sold to related parties increased as

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compared to the same prior year period, primarily due to an increase in sales of promotional sets and of certain slower-moving inventory at discounted rates, which provide a lower margin.

For the nine-months ended December 31, 2011, our overall cost of goods sold increased as a percentage of net sales to 46%, as compared to 45% for the same prior year period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties was 45% and 49%, respectively, for the nine-months ended December 31, 2011, as compared to 43% and 47%, respectively, in the same prior year period. During the nine-months ended December 31, 2011, the cost of goods sold to unrelated customers increased due to an increase of gifts-with-purchase of approximately $1.3 million, as compared to the same prior year period, coupled with a greater increase in international sales, which sales provide a lower margin. The gifts-with-purchase are used as enticements to promote the sales of our fragrance brands. The current period increase in shipments of gifts-with-purchases was in anticipation of the continued roll-out of our Rihanna brand fragrances, Reb'l Fleur and Rebelle, as well as support for our other products in preparation for the holiday season. During the nine-months ended December 31, 2011, cost of goods sold to related parties increased slightly primarily due to our overall product mix.

For the three-months ended December 31, 2011, our gross margin decreased 11% to $16.2 million from $18.2 million for the same prior year period, decreasing as a percentage of net sales to 51% from 58%. For the nine-months ended December 31, 2011, our gross margin increased 5% to $54.0 million from $51.4 million for the same prior year period, decreasing as a percentage of net sales to 54% from 55%. The decrease during the three and nine-months ended December 31, 2011, as compared to the same prior year periods, was primarily the result of the increase in cost of goods sold discussed above, and higher returns than anticipated from U.S. department stores.

Total Operating Expenses



	For the Three Months Ended December 31,								For the Nine Months Ended December 31,
	2011			2010			% Change*		2011			2010			% Change*
(in millions)
Advertising and promotional	$	12.0		$	10.7		13	%	$	31.2		$	24.4		28	%
As a % of net sales	38		%	34		%			31		%	26		%
Selling and distribution	3.1			2.8			11	%	9.5			9.1			4	%
As a % of net sales	10		%	9		%			9		%	10		%
Royalties	2.9			2.6			12	%	8.3			8.1			3	%
As a % of net sales	9		%	8		%			8		%	9		%
General and administrative	3.0			1.9			59	%	7.6			6.0			27	%
As a % of net sales	9		%	6		%			8		%	6		%
Depreciation and amortization	0.4			0.5			(23	)%	1.5			1.7			(10	)%
As a % of net sales	1		%	2		%			2		%	2		%
Total operating expenses	$	21.4		$	18.5		16	%	$	58.1		$	49.3		18	%
As a % of net sales	67		%	59		%			58		%	52		%

———————

* % change is based on unrounded numbers

During the three-months ended December 31, 2011, total operating expenses increased 16% to $21.4 million from $18.5 million in the same prior year period, increasing as a percentage of net sales to 67% from 59%. During the nine-months ended December 31, 2011, total operating expenses increased 18% to $58.1 million from $49.3 million in the same prior year period, increasing as a percentage of net sales to 58% from 52%. However, during the three and nine-months ended December 31, 2011, we incurred $1.0 million and $1.5 million, respectively, in onetime expenses relating to the proposed Merger. Therefore, certain individual components of our operating expenses discussed below experienced more significant changes than others.

Advertising and Promotional Expenses

For the three-months ended December 31, 2011, advertising and promotional expenses increased 13% to $12.0 million, as compared to $10.7 million for the same prior year period, increasing as a percentage of net sales to 38% from 34%. For the nine-months ended December 31, 2011, advertising and promotional expenses increased 28% to $31.2 million, as compared to $24.4 million for the same prior year period, increasing as a percentage of net sales to 31% from 26%. The

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increase in advertising and promotional expense for the three and nine-months ended December 31, 2011, was primarily due to a targeted increase of approximately $5.4 million and $11.5 million, respectively, in advertising and promotional activities to further support the sales promotion of our Rihanna brand fragrances, Reb'l Fleur and Rebelle. During the same prior year periods, we had targeted reductions in advertising and promotional costs and in-store representatives.

Selling and Distribution Costs

For the three-months ended December 31, 2011, selling and distribution costs increased 11% to $3.1 million, as compared to $2.8 million for the same prior year period, increasing as a percentage of sales to 10% from 9%. For the nine-months ended December 31, 2011, selling and distribution costs increased 4% to $9.5 million, as compared to $9.1 million for the same prior year period, decreasing as a percentage of net sales to 9% from 10%. For the three and nine-months ended December 31, 2011, the increase in selling and distribution costs was primarily due to an increase in sales travel-related expenses in both our domestic and international markets in connection with new product launches. During the same prior year periods, we had a decrease in sales personnel and the related benefits and insurance expenses in our domestic market.

Royalties

For the three-months ended December 31, 2011, royalties increased 12% to $2.9 million, as compared to $2.6 million for the same prior year period, increasing as a percentage of net sales to 9% from 8%. For the nine-months ended December 31, 2011, royalties increased 3% to $8.3 million, as compared to $8.1 million for the same prior year period, decreasing as a percentage of net sales to 8% from 9%. For the three and nine-months ended December 31, 2011, the increase in royalties, was primarily due to higher sales for certain brands, which resulted in contractual minimum royalty requirements being achieved, coupled with certain minimum payment requirements under contractual obligations. During the same prior year periods, the assignment of the worldwide exclusive licensing rights for the production and distribution of Paris Hilton sunglasses and the sublicensed international rights for the handbags continued to absorb a portion of the minimum royalty. We generated no sublicensing revenue in the three and nine-months ended December 31, 2011, as compared to $0.1 million and $0.3 million, respectively, for the same prior year periods, which has been recorded as a reduction in royalty expense.

General and Administrative Expenses

For the three-months ended December 31, 2011, general and administrative expenses increased 59% to $3.0 million, as compared to $1.9 million for the same prior year period, increasing as a percentage of net sales to 9% from 6%. For the nine-months ended December 31, 2011, general and administrative expenses increased 27% to $7.6 million, as compared to $6.0 million for the same prior year period, increasing as a percentage of net sales to 8% from 6%. The increase in general and administrative expenses for the three and nine-months ended December 31, 2011, was primarily due to onetime expenses of $1.0 million and $1.5 million, respectively, resulting from an increase in legal and other professional fees relating to the proposed Merger. In the same prior year periods, there was a decrease in personnel and the related benefits and insurance expenses.

Depreciation and Amortization

For the three-months ended December 31, 2011, depreciation and amortization decreased 23% to $0.4 million, as compared to $0.5 million for the same prior year period, decreasing as a percentage of net sales to 1% from 2%. For the nine-months ended December 31, 2011, depreciation and amortization decreased 10% to $1.5 million, as compared to $1.7 million for the same prior year period, remaining constant as a percentage of net sales at 2%. The decrease for the three and nine-months ended December 31, 2011, relates to lower amortization expense of molds and tooling, partially offset by an increase in intangible assets amortization resulting from the amortization of our Rihanna intangible asset (see Note E to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion), as compared to the same prior year period. On June 30, 2010, our XOXO license expired and was not renewed, and the fully amortized intangible asset was written-off.

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Operating (Loss) Income



	For the Three Months Ended December 31,								For the Nine Months Ended December 31,
	2011			2010			% Change*		2011			2010			% Change*
(in millions)
Operating (loss) income	$	(5.2	)	$	(0.3	)	(2,033	)%	$	(4.1	)	$	2.1		(296	)%
As a % of net sales	(16		)%	1		%			(4		)%	2		%
Net interest (expense and bank charges)/income	(0.2		)	(0.2		)	7	%	(0.6		)	(0.4		)	(44	)%
As a % of net sales	(1		)%	(1		)%			(1		)%	—		%
Foreign exchange gain	—			0.1			N/A		—			—			N/A
As a % of net sales	—		%	—		%			—		%	—		%
(Loss) income before income taxes	$	(5.4	)	$	(0.4	)	(1,128	)%	$	(4.7	)	$	1.7		(375	)%
As a % of net sales	(17		)%	(1		)%			(5		)%	2		%

———————

* % change is based on unrounded numbers

As a result of the factors discussed above, we incurred an operating loss of $(5.2) million and $(4.1) million for the three and nine-months ended December 31, 2011, as compared to an operating loss of $(0.3) million and operating income of $2.1 million, respectively, in the same prior year periods.

Net Interest Expense/Income

Net interest expense and bank charges were $0.2 million and $0.6 million for the three and nine-months ended December 31, 2011, as compared to $0.2 million and $0.4 million, respectively, for the same prior year periods. During the three and nine-months ended December 31, 2011 and 2010, we incurred loan monitoring and unused commitment fees relating to our credit facility with General Electric Capital Corporation ("GE Capital"), which are being amortized to expense over the life of the credit facility. The credit facility with GE Capital was executed on June 25, 2010 (see Note F to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion).

(Loss) Income Before Income Taxes, Taxes, and Net Income



	Three Months Ended December 31,								For the Nine Months Ended December 31,
	2011			2010			% Change*		2011			2010			% Change*
(in millions)
(Loss) income before income taxes	$	(5.4	)	$	(0.4	)	(1,128	)%	$	(4.7	)	$	1.7		(375	)%
As a % of net sales	(17		)%	(1		)%			(5		)%	2		%
Income tax (benefit) provision	(2.0		)	(0.1		)	1,128	%	(1.8		)	0.6			375	%
As a % of net sales	6		%	1		%			2		%	(1		)%
Net (loss) income	$	(3.4	)	$	(0.3	)	(1,128	)%	$	(2.9	)	$	1.1		(375	)%
As a % of net sales	(11		)%	(1		)%			(3		)%	1		%

———————

* % change is based on unrounded numbers

For the three and nine-months ended December 31, 2011, our loss before income taxes was $(5.4) million and $(4.7) million, respectively, as compared to a loss before income taxes of $(0.4) million and an income before income taxes of $1.7 million, respectively, for the same prior year periods. Our tax benefit/provision reflects an estimated effective tax rate of 38%. Actual tax benefit realized or provision incurred may be greater or less than amounts recorded, and such differences may be material (see Note J to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion).

As a result, we incurred a net loss of $(3.4) million and $(2.9) million, respectively, for the three and nine-months ended December 31, 2011, as compared to incurring a net loss of $(0.3) million and earning net income of $1.1 million,

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respectively, in the same prior year periods.

Liquidity and Capital Resources

Working capital was $91.8 million at December 31, 2011, as compared to $93.0 million at March 31, 2011, primarily due to the net loss during the nine-months ended December 31, 2011.

Cash Flows

Cash and cash equivalents increased by $2.5 million during the nine-months ended December 31, 2011, and increased by $2.7 million during the nine-months ended December 31, 2010.

Cash Flows from Operating Activities

During the nine-months ended December 31, 2011, net cash provided by operating activities was $2.8 million, as compared to $3.2 million during the same prior year period. The current year activity reflects an increase in inventories and accounts payable resulting from the preparation for our new product launches. The prior year activity reflects an increase in trade receivables from both related and unrelated parties primarily due to the timing of holiday sales during the period, partially offset by a decrease in income tax receivable resulting from tax refunds of $7.2 million received relating to March 31, 2010, federal and state income tax returns.

Cash Flows from Investing Activities

During the nine-months ended December 31, 2011, net cash used in investing activities was $0.4 million, as compared to $0.6 million during the same prior year period. The current year activities consist mainly of the purchases of molds and tooling, and warehouse and computer equipment, while the prior year activities consist mainly of the purchase of certain molds and tooling relating to the launches of our new brand fragrances.

Cash Flows from Financing Activities

During the nine-months ended December 31, 2011, net cash provided by financing activities was $0.1 million, as compared to $0.1 million during the same prior year period. The current year activity reflects proceeds of $0.1 million from the issuance of common stock resulting from the exercise of stock options, while the prior year activity reflects proceeds of $0.1 million from the issuance of common stock resulting from the exercise of stock options, and from the sale of common stock, by a major former stockholder, remitted to the Company as a recovery of short-swing profits recognized from the purchase and sales of our common stock.

Future Liquidity and Capital Resources Requirements

Our principal future uses of funds are for our working capital requirements, including new product launches, brand development, and advertising and promotional expenses, as well as expanding operations through acquisitions of and/or new licensing and sublicensing arrangements. In addition, we plan to use our funds for capital expenditures, within the specifications of our Loan Agreement ("Loan Agreement") with GE Capital, and to promote financial and operational success by attracting motivated talent and retaining key personnel. We have historically financed our working capital requirements primarily through internally generated operational funds, and, when necessary, through our credit facility. Our cash collections are primarily from our customers, based on customer sales and respective payment terms, which may be seasonal in nature.

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Our Ratios and Other Matters

As of December 31, 2011, and 2010, our ratios of the number of days sales in trade receivables and number of days cost of sales in inventory, on an annualized basis, were as follows:



	December 31,
	2011	2010
Trade receivables - Unrelated ^{(1) (3)}	86	83
Trade receivables - Related parties ⁽²⁾	93	102
Inventories ⁽³⁾⁽⁴⁾	268	274

———————


(1)	Calculated on gross trade receivables based on the number of days sales in trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of $7.9 million and $6.8 million in the 2011 and 2010, nine-month periods, respectively.


(2)	Based upon the seasonal nature of our sales to Perfumania, the calculation of number of days sales in trade receivables is based on the actual agings as of December 31, 2011, and 2010, respectively.


(3)	The calculation excludes the transition of the remaining GUESS? brand inventory and the trade receivables of its new fragrance licensee as of December 31, 2010.


(4)	The calculation is based upon ending inventories divided by the average daily cost of goods sold as calculated on a rolling twelve months' average.

During the nine-months ended December 31, 2011, the increase in the number of days sales in trade receivables for unrelated customers, as compared to the same prior year period, was primarily attributable to certain new product shipments to domestic customers occurring later in the quarter including the roll-out of Rihanna's new brand fragrance, Rebelle, in December 2011. Management closely monitors the Company’s activities with all customers, however, if one or more of our major customers were to default on their payables to the Company, it may have a material adverse effect on our overall sales and liquidity.

The number of days sales in trade receivables from Perfumania for the nine-months ended December 31, 2011, has decreased to 93 days, as compared to 102 days in the same prior year period. Perfumania's trade receivables generally exceed those of unrelated customers, primarily due to Perfumania’s seasonal cash flows.

We had net sales to Perfumania of $33.0 million and $37.9 million during the nine-months ended December 31, 2011 and 2010, respectively ($9.5 million and $11.2 million during the three-months ended December 31, 2011 and 2010, respectively). See Note G to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion of our relationship with Perfumania.

Any significant reduction in business with Perfumania as a customer of the Company would have a material adverse effect on our overall net sales. Perfumania’s inability to pay its account balance due to us at a time when it has a substantial unpaid balance could have a material adverse effect on our financial condition, results of operations, and liquidity. Management closely monitors the Company’s activity with Perfumania and holds periodic discussions with Perfumania’s management in order to review their anticipated payments for each quarter. Net trade accounts receivable owed by Perfumania to the Company totaled $10.6 million at December 31, 2011, and $12.7 million at March 31, 2011. Amounts due from Perfumania are non-interest bearing and were paid in accordance with the terms established by our Board of Directors. No allowance for credit loss has been recorded as of December 31, 2011. Management continues to closely monitor all developments with respect to its extension of credit to Perfumania.

In connection with the Merger Agreement, Parlux and Perfumania have agreed on a schedule that specifies the maximum monthly balances of payables that Perfumania is permitted to owe Parlux in the months leading up to a closing of the Merger.

In addition to our sales to Perfumania, we had net sales to Jacavi of $6.7 million and $3.7 million during the nine-months ended December 31, 2011 and 2010, respectively ($3.7 million and $0.7 million during the three-months ended December 31, 2011 and 2010, respectively). Sales to Jacavi are recorded as related party sales, as Jacavi’s managing member is Rene Garcia. Rene Garcia owns approximately 8.4% of the outstanding stock of Perfumania Holdings, Inc. as of December 31, 2011, and is one of the principals of Artistic Brands Development, LLC (“Artistic Brands”) (see Notes E and G

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to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion of our relationship with Artistic Brands). Net trade accounts receivable owed by Jacavi to the Company totaled $1.7 million at December 31, 2011, and $0 at March 31, 2011. Invoice terms to Jacavi range from 0 to 60 days. Management closely monitors all developments with respect to its extension of credit to Jacavi.

On June 14, 2010, certain persons related to Mr. Garcia, the Garcia Group, acquired 2,718,728 shares of our common stock and filed a Schedule 13G with the SEC on June 23, 2010. In that filing, the Garcia Group reported having beneficial ownership of a total of 2,995,527 shares, or approximately 14.7% of our outstanding shares as of June 14, 2010 (equivalent to 14.4% as of December 31, 2011), excluding warrants owned by the Garcia Group. See Notes E and G to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion. On March 4, 2011, the Garcia Group replaced their original joint filing by jointly filing a Schedule 13D. Other than the addition of certain warrants to purchase shares, which vested between the initial and subsequent filing dates, there were no changes in beneficial share ownership included in the updated joint filing.

The lead time for certain of our raw materials and components inventory (up to 180 days) requires us to maintain at least a three to six-month supply of some items in order to ensure timely production schedules. In addition, when we launch a new brand or Stock Keeping Unit (“SKU”), we frequently produce a six to nine-month supply to ensure adequate inventories if the new products exceed our forecasted expectations. Generally gross margins on our products outweigh the additional carrying costs. However, if future sales do not reach forecasted levels, it could result in excess inventories and may cause us to decrease prices to reduce inventory levels. See Note D to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion.

During the nine-months ended December 31, 2011, the number of days sales in inventory decreased to 268 days from 274 days. This analysis compares the ending inventory value to an estimated average daily cost of goods sold as calculated on a rolling twelve months' average. Although our inventory levels increased due to the production of our new Rihanna fragrance, Rebelle, the prior year's calculation was adjusted for the effect of the GUESS? license expiration, which resulted in an increase in the number of days in inventory in the prior year period. Inventory balances, as well as the number of days sales in inventory, are generally higher during our first and second quarters due to increased production in anticipation of the upcoming holiday gift-giving season. We anticipate that, as new licenses are signed, and new products are launched, our inventory levels will increase in relation to anticipated sales for our existing products, as well as any new products. We believe that the carrying value of our inventory at December 31, 2011, based on current conditions, is stated at the lower of cost or market and based upon projected sales, we also believe that all inventory will be utilized within the next twelve months.

Share Repurchases

Under our stock buy-back program authorized by our Board, we did not repurchase any shares of our common stock during the nine-months ended December 31, 2011 and 2010, or during the year ended March 31, 2011. As of December 31, 2011, we had 628,400 authorized shares remaining for repurchase under our stock buy-back program, subject to certain limitations. Our Loan Agreement restricts the ability of our subsidiaries to make distributions to us for the purpose of repurchasing our common stock, subject to certain exceptions. In addition, under the terms of the Merger Agreement, we agreed not to repurchase any shares of our common stock except pursuant to our stock options and warrants.

Our Debt

On June 25, 2010, we entered into a Loan Agreement with GE Capital. Pursuant to our Loan Agreement, we have a revolving credit facility that provides a credit line of up to $20.0 million. The term of the revolving credit facility under the Loan Agreement is two years. During the nine-months ended December 31, 2011 and 2010, we amortized $0.3 million and $0.2 million, respectively, of the deferred loan fees and incurred $0.3 million and $0.2 million, respectively, in loan monitoring and unused commitment fees (during the three-months ended December 31, 2011 and 2010, we amortized $0.1 million in each quarter, respectively, of the deferred loan fees and incurred $0.1 million in each quarter, respectively, in loan monitoring and unused commitment fees).

As of December 31, 2011, we met the minimum liquidity requirements under the Loan Agreement. See Note F to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion.

For a more detailed description of the terms of this Loan Agreement, please see “Management's Discussion and Analysis of Financial Condition and Results of Operations-Our Debt” on pages 38-41 of our Annual Report on Form 10-K for the year ended March 31, 2011.

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As of December 31, 2011, no amounts have been borrowed under the Loan Agreement and our availability under the Loan Agreement was $9.7 million.

Pursuant to the terms of the Merger Agreement, we may not incur any indebtedness, including, making borrowings, except for short-term borrowings other than through the Loan Agreement not to exceed $1.0 million; provided that we can borrow under the Loan Agreement if and to the extent Perfumania is not current with payments under a schedule that specifies the maximum monthly balances of payables that Perfumania is permitted to owe Parlux in the months leading up to a closing of the Merger.

During June 2011, we entered into an agreement with International Business Machines ("IBM") for computer equipment in the amount of $0.1 million which has been classified as a capital lease. We have an option to purchase the computer equipment at the end of the lease term for one dollar.

We believe that funds from operations will be sufficient to meet our current operating and seasonal needs through fiscal year 2012. In addition, the revolving credit facility will provide us the ability to maintain liquidity. However, if we were to expand operations through acquisitions, new licensing arrangements or both, we may need to obtain additional financing consistent with the terms of the Merger Agreement. There can be no assurances that we could obtain additional financing or what the terms of such financing, if available, would be. In addition, the current business environment may increase the difficulty of obtaining, and the cost of, additional financing, if necessary.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

During the quarter ended December 31, 2011, there have been no material changes in the information about our market risks, as set forth in Item 7A of our Annual Report on Form 10-K for the year ended March 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in internal control

Based on an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, there was no change in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during our last fiscal quarter, identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Litigation

For information regarding legal proceedings that could have a material adverse effect on our financial position or results of operations, see Note L to the accompanying unaudited Condensed Consolidated Financial Statements herein.

Other

To the best of our knowledge, there are no other proceedings threatened or pending against us, which, if determined adversely to us, would have a material effect on our financial position or results of operations and cash flows.

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2011, except as follows:

We may not realize the benefits of integrating our companies.

To be successful after the Merger, Perfumania will need to combine and integrate the operations of Parlux and Perfumania into one company. Integration will require substantial management attention and could detract attention from the day-to-day business of the combined company. Perfumania could encounter difficulties in the integration process, such as the need to revisit assumptions about reserves, future production, revenues, capital expenditures and operating costs, including synergies, the loss of key employees or commercial relationships or the need to address unanticipated liabilities. If Perfumania cannot integrate the Parlux and Perfumania businesses successfully, it may fail to realize the expected benefits of the Merger.

Business uncertainties and contractual restrictions while the Merger is pending may have an adverse effect on Parlux or Perfumania.

Uncertainty about the effect of the Merger on employees, suppliers, partners, regulators, potential licensors, and customers may have an adverse effect on Parlux or Perfumania. These uncertainties may impair Parlux' ability to attract, retain and motivate key personnel until the merger is consummated and could cause suppliers, customers and others that deal with Parlux to defer purchases or other decisions concerning Parlux or seek to change existing business relationships with Parlux. In addition, the Merger Agreement restricts both Parlux and Perfumania from making certain acquisitions and taking other specified actions without the other's approval. These restrictions could prevent either party from pursuing attractive business opportunities that may arise before the completion of the Merger.

Failure to complete the Merger or delays in completing the Merger could negatively affect Parlux' and Perfumania's stock prices and future businesses and operations.

If the merger is not completed for any reason, Parlux and Perfumania may be subject to a number of risks, including the following:


•	the separate companies will not realize the benefits expected from the Merger, including a potentially enhanced financial and competitive position;


•	the current market price of Parlux common stock or Perfumania common stock may reflect a market assumption that the Merger will occur and a failure to complete the Merger could result in a negative perception by the stock market of either company or both generally and a resulting decline in the market price of its or their common stock;


•	certain costs relating to the merger, including certain investment banking, financing, legal and accounting fees and expenses, must be paid even if the Merger is not completed, and Parlux or Perfumania may be required to pay substantial fees to the other party if the Merger Agreement is terminated under specified circumstances; and

•

there may be substantial disruption to each of Parlux' and Perfumania's business and distraction of each company's management and employees from day-to-day operations because matters related to the Merger (including integration planning) may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to Parlux or Perfumania, as applicable.

Delays in completing the Merger could exacerbate uncertainties concerning the effect of the Merger, which may have

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an adverse effect on the business following the merger and could defer or detract from the realization of the benefits expected to result from the Merger.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.



Exhibit #		Description
2.1		Agreement and Plan of Merger, dated as of December 23, 2011, among Parlux Fragrances, Inc., Perfumania Holdings, Inc. and PFI Merger Corp. (incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant on December 23, 2011)
4.1		Amendment to Warrant Certificates dated December 23, 2011
10.1		Voting Agreement, dated December 23, 2011, by and among Glenn Nussdorf, Stephen Nussdorf, Arlene Nussdorf, and Parlux Fragrances, Inc. (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on December 23, 2011)
10.2		Parlux Fragrances, Inc. Severance Policy, dated December 21, 2011(incorporated by reference from Exhibit 10.11 to the Current Report on Form 8-K filed by the registrant on December 23, 2011)
10.3		Amendment to Letter Agreement, dated December 23, 2011, among Artistic Brands Development, LLC, Rene Garcia and Parlux Fragrances, Inc.
10.4		Letter Agreement, dated December 23, 2011, among Parlux Fragrances, Inc., Artistic Brands Development, LLC, Rene Garcia and Perfumania Holdings, Inc.
10.5		Amendment, dated January 25, 2012, to Voting Agreement, dated December 23, 2011, by and among Glenn Nussdorf, Ruth Nussdorf and Perfumania Holdings, Inc.
31.1		Certification of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares and per share data)



	December 31, 2011			March 31, 2011
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	22,987		$	20,511
Trade receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $7,916 and $3,908, respectively	11,188			12,050
Trade receivables from related parties	12,314			12,708
Income tax receivable	323			122
Inventories	43,391			37,373
Prepaid promotional expenses, net	7,001			7,519
Prepaid expenses and other current assets, net	5,582			8,251
Deferred tax assets, net	7,378			5,460
TOTAL CURRENT ASSETS	110,164			103,994
Equipment and leasehold improvements, net	1,292			1,844
Trademarks and licenses, net	3,747			4,195
Deferred tax assets, net	687			687
Other	1,742			1,986
TOTAL ASSETS	$	117,632		$	112,706
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion	$	37		$	—
Accounts payable	15,862			8,637
Accrued expenses and income taxes payable	2,437			2,338
TOTAL CURRENT LIABILITIES	18,336			10,975
Borrowings, less current portion	59			—
TOTAL LIABILITIES	18,395			10,975
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2011 and March 31, 2011	—			—
Common stock, $0.01 par value, 40,000,000 shares authorized, and 30,438,339 and 30,397,789 shares issued at December 31, 2011 and March 31, 2011, respectively	304			304
Additional paid-in capital	107,046			106,629
Retained earnings	27,160			30,071
	134,510			137,004
Less 9,668,977 shares of common stock in treasury, at cost, at December 31, 2011 and March 31, 2011	(35,273		)	(35,273		)
TOTAL STOCKHOLDERS' EQUITY	99,237			101,731
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	117,632		$	112,706

See notes to condensed consolidated financial statements.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except number of shares and per share data)

(UNAUDITED)



	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Net sales:
Unrelated customers, including licensing fees of $19 and $56 for the three and nine-months ended December 31, 2011 and 2010, respectively	$	18,754		$	19,336		$	61,134		$	51,159
Related parties	13,207			11,864			39,763			41,508
Sales – expired license	—			197			—			1,423
	31,961			31,397			100,897			94,090
Cost of goods sold:
Unrelated customers	9,480			7,795			27,616			21,785
Related parties	6,255			5,171			19,290			19,495
Cost of sales – expired license	—			197			—			1,422
	15,735			13,163			46,906			42,702
Gross margin	16,226			18,234			53,991			51,388
Operating expenses:
Advertising and promotional	11,993			10,642			31,213			24,419
Selling and distribution	3,122			2,816			9,473			9,125
Royalties	2,912			2,591			8,256			8,041
General and administrative, including share-based compensation expense of $155 and $346 for the three and nine-months ended December 31, 2011, respectively, and $119 and $284 for the three and nine-months ended December 31, 2010, respectively	3,028			1,906			7,630			5,992
Depreciation and amortization	401			524			1,536			1,706
Total operating expenses	21,456			18,479			58,108			49,283
Operating (loss) income	(5,230		)	(245		)	(4,117		)	2,105
Other income (expense):
Interest income	20			4			41			13
Interest expense and bank charges	(204		)	(201		)	(616		)	(413		)
Foreign exchange (loss) gain	(4		)	1			(3		)	1
(Loss) income before income taxes	(5,418		)	(441		)	(4,695		)	1,706
Income tax (benefit) provision	(2,059		)	(168		)	(1,784		)	648
Net (loss) income	$	(3,359	)	$	(273	)	$	(2,911	)	$	1,058
(Loss) income per common share:
Basic	$	(0.16	)	$	(0.01	)	$	(0.14	)	$	0.05
Diluted	$	(0.16	)	$	(0.01	)	$	(0.14	)	$	0.05
Weighted average number of shares outstanding:
Basic	20,769,362			20,496,334			20,761,811			20,487,316
Diluted	20,769,362			20,496,334			20,761,811			20,574,513

See notes to condensed consolidated financial statements.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE-MONTHS ENDED DECEMBER 31, 2011

(In thousands, except number of shares)

(UNAUDITED)



	Common Stock									Treasury Stock
	Number of Shares	Par Value		Additional Paid-In Capital			Retained Earnings			Number of Shares	Cost			Total
BALANCE at March 31, 2011	30,397,789	$	304	$	106,629		$	30,071		9,668,977	$	(35,273	)	$	101,731
Net loss	—	—		—			(2,911		)	—	—			(2,911		)
Excess tax deficiency	—	—		(14		)	—			—	—			(14		)
Issuance of common stock upon exercise of warrants and stock options	40,550	—		85			—			—	—			85
Share-based compensation from option grants	—	—		346			—			—	—			346
BALANCE at December 31, 2011	30,438,339	$	304	$	107,046		$	27,160		9,668,977	$	(35,273	)	$	99,237

See notes to condensed consolidated financial statements.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)



	Nine Months Ended December 31,
	2011			2010
Cash flows from operating activities:
Net (loss) income	$	(2,911	)	$	1,058
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Share-based compensation expense	346			284
Loss on disposal of fixed assets	6			—
Depreciation and amortization	1,536			1,706
(Recovery) provision for doubtful accounts	(38		)	192
Deferred income tax (benefit) provision	(1,932		)	720
Write-downs of inventories and prepaid promotional supplies	2,743			801
Changes in assets and liabilities:
Decrease (increase) in trade receivables - customers	900			(5,583		)
Decrease (increase) in trade receivables - related parties	394			(3,571		)
Decrease in income tax receivable	(201		)	7,001
(Increase) decrease in inventories	(7,718		)	2,658
(Increase) decrease in prepaid promotional expenses	(525		)	484
Decrease in prepaid expenses and other current assets	2,669			1,568
Decrease (increase) in other non-current assets	244			(9		)
Increase (decrease) in accounts payable	7,225			(2,461		)
Increase (decrease) in accrued expenses and income taxes payable	99			(1,613		)
Total adjustments	5,748			2,177
Net cash provided by operating activities	2,837			3,235
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net	(377		)	(591		)
Purchases of trademarks	(52		)	(42		)
Net cash used in investing activities	(429		)	(633		)
Cash flows from financing activities:
Repayments of capital leases	(17		)	—
Proceeds from issuance of common stock upon exercise of stock options and warrants	85			69
Recovery of profits under Section 16(b) on the sale of common stock	—			53
Net cash provided by financing activities	68			122
Net increase in cash and cash equivalents	2,476			2,724
Cash and cash equivalents, beginning of period	20,511			17,579
Cash and cash equivalents, end of period	$	22,987		$	20,303

See notes to condensed consolidated financial statements.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


A.	Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Parlux Fragrances, Inc., and its wholly-owned subsidiaries, Parlux, S.A., a French company (“S.A.”), and Parlux Ltd., a New York corporation, (jointly referred to as, “Parlux”, the “Company”, “us”, and “we”). All material intercompany balances and transactions have been eliminated in consolidation.

Effective December 19, 2011, the Company liquidated its wholly-owned subsidiary, Parlux, S.A. The Company is in the process of establishing a new wholly-owned subsidiary, Parlux SARL, a French company. The liquidation of Parlux, S.A. did not have a material effect on the Company's accompanying unaudited Condensed Consolidated Financial Statements.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information presented not misleading. The financial information presented herein, which is not necessarily indicative of results to be expected for the current fiscal year, reflects all adjustments (consisting only of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the interim accompanying unaudited Condensed Consolidated Financial Statements. It is suggested that these unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011, as filed with the SEC on May 26, 2011.

The Company’s gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold, since the Company allocates a portion of these distribution costs to costs of goods sold and includes the remaining unallocated amounts as selling and distribution expenses.

The accompanying unaudited Condensed Consolidated Financial Statements and the Notes to the Condensed Consolidated Financial Statements are presented in thousands, except for number of shares and per share data.

On December 23, 2011, the Company and Perfumania, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Parlux, Perfumania, and PFI Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Perfumania (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into Parlux with Parlux as the surviving company (the “Merger”). The Merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

At the effective time of the Merger (the “Effective Time”), each issued and outstanding share of Parlux common stock (other than shares held by Perfumania and its affiliates) will be canceled and automatically converted into the right to receive either (i) $4.00 in cash plus 0.20 shares of Perfumania common stock (the “Mixed Consideration”) or (ii) 0.533333 shares of validly issued, fully paid and non-assessable shares of Perfumania common stock (“Stock Consideration”). Parlux stockholders may elect whether they would prefer to receive Mixed Consideration or Stock Consideration, however, the maximum amount of cash that will be paid is $61,895 and the maximum amount of Perfumania common stock that will be issued is 5,919,052 shares, which amounts are subject to adjustment in certain circumstances provided in the Merger Agreement, including to reflect any issuance of Parlux shares due to the exercise of options, to adjust the maximum cash consideration for each share of Parlux stock as to which appraisal rights have been exercised, and for any shortfall of Parlux cash or cash equivalents at the Effective Time below a target amount calculated as provided in the Merger Agreement. As described under “Voting Agreements” below, certain stockholders of Parlux have agreed to elect to receive the Stock Consideration.

Each warrant to purchase Parlux common stock held by Glenn Gopman, a member of Parlux' Board of Directors, that

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is unexercised at the Effective Time will be automatically converted into a warrant to purchase a number of shares of Perfumania common stock equal to the product (rounded down to the nearest whole share) of (x) the number of shares of Parlux common stock subject to such warrant and (y) 0.533333, at an exercise price per share (rounded up to the nearest whole cent) equal to (1) the exercise price of such warrant divided by (2) 0.533333.

See Part 1, Item 2 and Note G to the accompanying unaudited Condensed Consolidated Financial Statements for further discussion of our relationship with Perfumania.


B.	Share-Based Compensation, Stock Options and Other Plans

2007 Plan

The Parlux Fragrances, Inc. 2007 Stock Incentive Plan (the “2007 Plan”) provides for the grant of equity-based awards to employees, officers, directors, consultants and/or independent contractors of the Company. A maximum of 1,500,000 shares of common stock may be issued pursuant to awards under the 2007 Plan. As of December 31, 2011, options to acquire 1,121,800 shares of the Company’s common stock have been granted (including options to acquire 50,000 shares of common stock granted during May 2011, 25,000 shares of common stock granted during August 2011 and 60,000 shares of common stock granted during November 2011, as noted below).

On April 1, 2010, the Company granted, to two executive officers and a consultant, options under the 2007 Plan to acquire 50,000, 20,000 and 15,000 shares, respectively, of its common stock at $2.25 per share, the closing price of the stock on April 1, 2010. These options have a life of five years from the date of grant. The executive officer’s options vested 50% immediately, with the remaining 50% vesting on April 1, 2011, for one executive officer, and July 31, 2011, for the other executive officer, respectively, which were expensed as share-based compensation in accordance with the vesting period. The consultant’s options vested immediately and were expensed as share-based compensation. The fair value of the options was determined to be $60, $24, and $17, respectively.

PARLUX FRAGRANCES INC 10-Q