What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2024-02-20 · 60 added, 56 removed, 71 unchanged (62% of the section changed)

1 unchanged sentence

Results of Operations

The following table sets forth, for the periods indicated, information derived from our Interim Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales.

The discussion that follows the table should be read in conjunction with our Interim Unaudited Condensed Consolidated Financial Statements.

Dollar amounts below are reflected in thousands.

The following table sets forth, for the periods indicated, information derived from our Interim Unaudited Consolidated Financial Statements, expressed as a percentage of net sales.

The discussion that follows the table should be read in conjunction with our Interim Unaudited Consolidated Financial Statements.

Three Months Ended

March 31, 2024

March 31, 2023

Cost Of Goods Sold

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Income from operations

Six Months Ended

Nine Months Ended

March 31, 2024

March 31, 2023

100.0 % 100.0 %

Cost Of Goods Sold

73.2 % 74.0 %

26.8 % 26.0 %

Operating Expenses

25.9 % 18.4 %

Income from operations

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(Dollars in thousands)

December 31, 2023

December 31, 2022

March 31, 2024

March 31, 2023

Products purchased for resale

Total Net Sales

Six Months Ended

Nine Months Ended

(Dollars in thousands)

December 31, 2023

December 31, 2022

March 31, 2024

March 31, 2023

Products purchased for resale

Total Net Sales

Three Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022

Sales for the three months ended December 31, 2023 were approximately $6,786, a 17% decrease from the comparable prior year period.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Sales for the three months ended March 31, 2024 were $5,922,760, a 14% decrease from the comparable prior year period.

The major components of net sales, by product, are as follows:

Liberator sales - Sales of Liberator branded products decreased $1,045,617, or 23%, during the quarter from the comparable prior year period, due primarily to lower sales through the Company’s e-commerce site, Liberator.com, and Amazon.

The decrease was a result of the increased revenues for the three months ended December 31, 2022, from the Netflix series “How to Build a Sex Room” - 7 part series began July 2022.

Despite increased expenses in advertising and promotion we were not successful in maintaining that growth.

Jaxx sales – Jaxx product sales decreased $322 or 15% from the prior year first quarter to $1,799.

The decrease was a result of increased competition.

Avana sales – Net sales of Avana products decreased $89,000 or 24% during the quarter from the comparable prior year quarter to $531.

Sales of this product line have been impacted by lower-priced competitive products in the marketplace, production constraints which resulted in longer delivery lead times which resulted in lower sales through drop ship channels including Amazon, Overstock and Wayfair.

Products purchased for resale – This product remained the same from the prior year second

Sales through Liberator.com, and Amazon primarily decreased due to weakening of the market and increase competition from knock off products.

Jaxx sales – Jaxx product sales increased $198,884 or 16% from the prior year third quarter to $1,418.929.

The increase was primarily due to the addition of new products and increased customer base that continue to perform well.

Avana sales – Net sales of Avana products increased 5% during the quarter from the comparable prior year third quarter to $681,427.

The increase was primarily due the addition of new customers.

Products purchased for resale – This product category decreased by 5%, or $13,550, from the prior year quarter due to lower sales of certain products through our e-commerce website, Liberator.com.

The decrease was primarily due to continued weakening of the adult market.

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, royalties and depreciation.

Gross profit margin, as a percentage of sales, decreased to 26.8% from 27.8% in the prior year first quarter.

Gross profit decreased to $1,818 from $2,259 in the prior year first quarter.

Gross profit margin, as a percentage of sales, increased to 27.7% from 25.6% in the prior year quarter.

Gross profit decreased to $1,639,143 from 1,768,890 in the prior year quarter.

The 7% percent decrease was primarily due to the decrease in net sales and inflationary pressures on raw materials and shipping costs.

Operating expenses .

Total operating expenses for the three months ended December 31, 2023 were approximately 24% of net sales, or approximately $1,664 compared to 18% of net sales, or approximately $1,476, for the same period in the prior year.

The increase was due to additional spending on advertising, marketing, promotions and well as higher labor costs.

Total operating expenses for the three months ended March 31, 2024 were approximately 27% of net sales, or approximately $1,599,450 compared to 20% of net sales, or $1,386,315, for the same period in the prior year.

The increase on a percentage and cash basis was primarily due to the decrease in net sales and increase in marketing expenses in advertising to support sales.

Other income (expense) .

Interest expense during the first quarter increased slightly from approximately ($88) in fiscal 2023 to approximately ($84) in fiscal 2024.

The decrease was primarily due to higher average borrowing balances.

Six Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022

Sales for the Six months ended December 31, 2023 were approximately $12,912, a 20% decrease from the comparable prior year period.

Interest expense during the three months ending March 31, 2024 increased slightly from ($89,858) in fiscal 2023 to ($133,936) during the three months fiscal 2024.

Nine Months Ended March 31, 2024 Compared to Nine Months Ended March 31, 2023

Sales for the nine months ended March 31, 2024 were $18,834,616, an 18% decrease from the comparable prior year period.

The major components of net sales, by product, are as follows:

Liberator sales - Sales of Liberator branded products decreased $2,879, or 29%, during the quarter from the comparable prior year period, due primarily to lower sales through the Company’s e-commerce site, Liberator.com, and Amazon.

The decrease was a result of the increased revenues for the six months ended December 31, 2022, from the Netflix series “How to Build a Sex Room” - 7 part series began July 2022.

Despite increased expenses in advertising and promotion we were not successful in maintaining that growth.

Jaxx sales – Jaxx product sales decreased $318 or 8% from the prior year first quarter to $1,799 The decrease was a result of increased competition.

Avana sales – Net sales of Avana products decreased $101 or 9% during the quarter from the comparable prior year quarter to $531.

Products purchased for resale – This product category decreased by 6%, or $33, from the prior year six months due to lower sales of certain products through our e-commerce website, Liberator.com.

Liberator sales - Sales of Liberator branded products decreased $3,795,690, or 26%, during the nine months from the comparable prior year period, due primarily to lower sales through the Company’s e-commerce site, Liberator.com, and Amazon.

Sales through Liberator.com, and Amazon primarily decreased due to weakening of the market and increased competition in the market.

Jaxx sales – Jaxx product sales decreased $56,846 or 1% from the prior year nine months to $5,031,978,.

The increase was primarily due to the addition of new products and increased customer base that continue to perform well.

Avana sales – Net sales of Avana products increased 9% during the quarter from the comparable prior year nine months to $1,901,000.

The increase was primarily due the addition of new customers.

Products purchased for resale – This product category decreased by 17%, or $162,000, from the prior year nine month due to lower sales of certain products through our e-commerce website, Liberator.com.

The decrease was primarily due to continued weakening of the market.

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, royalties and depreciation.

Gross profit margin, as a percentage of sales, decreased to 26.3% from 26.1% in the prior year first quarter.

Gross profit decreased to $3,400 from $4,232 in the prior year first quarter.

Gross profit margin, as a percentage of sales, increased to 26.8% from 26.0% in the prior year nine months.

Gross profit decreased to $5,039,494 from $6,001,000 in the prior year nine months.

The 16% percent decrease was primarily due to the decrease in net sales and inflationary pressures on raw materials and shipping costs.

Operating expenses .

Total operating expenses for the six months ended December 31, 2023 were approximately 25% of net sales, or approximately $3,278 compared to 18% of net sales, or approximately $2,873 for the same period in the prior year.

The increase was due to additional spending on advertising, marketing, promotions and well as higher labor costs.

Total operating expenses for the nine months ended March 31, 2024 were approximately 26% of net sales, or $4,878,000 compared to 18% of net sales, or approximately $4,259,000, for the same period in the prior year.

The increase on a percentage and cash basis was primarily due to the decrease in net sales and increase in marketing expenses in advertising to support sales.

Other income (expense) .

Interest expense during the six months increased slightly from approximately ($171) in fiscal 2023 to approximately ($188) in fiscal 2024.

The decrease was primarily due to higher average borrowing balances.

Interest expense during the nine months increased slightly from approximately ($262,000) in fiscal 2023 to approximately ($322,000) during the nine months fiscal 2024.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods.

Operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, seasonality costs associated with new product introductions, and increases in raw material costs.

In addition, future operating results may fluctuate as a result of factors beyond our control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which we operate and sell.

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The following table summarizes our cash flows:

Six Months Ended

Nine Months Ended

(Dollars in thousands)

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Cash provided by financing activities

As of December 31, 2023, our cash and cash equivalents totaled $1,213 compared to $1,875 in cash and cash equivalents as of December 31, 2022.

As of March 31, 2024, our cash and cash equivalents totaled $1,072,772, compared to $1,352,619 in cash and cash equivalents as of March 31, 2023.

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

1 unchanged sentence

Operating Activities

Net cash provided by operating activities was $370,000 during the Six months ended December 31, 2023 compared to $1,402,000 net cash provided by operating activities in the six months ended December 31, 2022.

The primary components of the cash provided by operating activities in the current year is the decrease in Inventory of $709,000 and increase in Accrued Compensation of $4,000, offset in part by a net loss of 125,000 an increase in accounts receivable of $227,000 decrease accounts payable of $258,000.

Net cash provided by operating activities was $333,000 during the nine months ended March 31, 2024 compared to $906,000 net cash provided by operating activities in the nine months ended March 31, 2023.

The primary components of the cash provided by operating activities in the current year is the decrease in Inventory of $733,000 and increase in Accrued Compensation of $171,000, offset in part by a net loss of $191,000 and increase in accounts receivable of $247,000.

Investing Activities

Cash used in investing activities in the Six months ended December 31, 2023 was $39 and related to the purchase and installation of certain production equipment during the period.

Cash used in investing activities in the nine months ended March 31, 2024 was $52,000 and related to the purchase and installation of certain production equipment during the period.

Financing Activities

Cash used by financing activities during the Six months ended December 31, 2023 of $159 was primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes.

Cash used by financing activities during the nine months ended March 31, 2024 of $249,000 was primarily attributable to the repayment of the unsecured notes payable and payments made on equipment notes.

During fiscal 2024, we experienced increases in various raw material costs and increases in labor and transportation costs.

These cost pressures have not stabilized and we anticipate they will continue to increase throughout the fiscal 2024, although there is no assurance this will occur.

These cost pressures have not stabilized and we anticipate they will continue to be impactful throughout the fiscal 2024, although there is no assurance this will occur.

Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease.

Non-GAAP Financial Measures

Reconciliation of net income to Adjusted EBITDA for the six months ended December 31, 2023 and 2022:

Reconciliation of net income to Adjusted EBITDA for the nine months ended March 31, 2024 and 2023:

(Dollars in thousands)

Six months ended December 31,

Nine months ended March 31,

Net income (loss)

12 unchanged sentences

Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities.

As of December 31, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of March 31, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical accounting policies

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The more critical accounting estimates include estimates related to revenue recognition, accounts receivable allowances and impairment of long-lived assets.

We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing in this report.

We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited consolidated financial statements appearing in this report.

Recent accounting pronouncements

ASU 2016-13 Current Expected Credit Loss (ASC326)

In December 2021, the FASB issued an update to ASU No.

2016-13 the Current Expected Credit Losses (CECL) standard (ASC 326), which is designed to provide greater transparency and understanding of credit risk by incorporating estimated, forward-looking data when measuring lifetime Estimated Credit Losses (ECL) and requires enhanced financial statement disclosures.

This guidance was adopted on January 1, 2023, with no effect to the financial statements.

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the unaudited condensed consolidated accompanying financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis