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Item 7. Management’s Discussion and Analysis

2024-09-30 compared with 2023-10-16 · 15 added, 121 removed, 76 unchanged (64% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Company during the fiscal years ended June 30, 2023 and 2022 and should be read in conjunction with our financial statements and accompanying notes thereto included elsewhere herein.

Certain information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements.

These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed.

Our actual results may differ materially from the results discussed in this section because of various factors, including those set forth elsewhere herein.

See “Forward-Looking Statements” included in this report.

Results of Operations

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

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

June 30, 2023

June 30, 2022

Cost of goods sold

Selling, General and Administrative Expenses

Operating income

Fiscal Year ended June 30, 2023 Compared to the Fiscal Year Ended June 30, 2022

The net sales increase of 11% in fiscal 2023 from fiscal 2022 consists of a 48% increase in sales of Liberator products, offset, in part, by a 16% decrease in Jaxx products, a 23% decrease in sales of Avana products and 28% decrease in products purchased for resale.

Sales of Liberator products increased 48% from the prior year to approximately $17.8 million during fiscal 2023.

Sales of Jaxx products decreased 16% during fiscal 2023 to approximately $6.9 million.

Sales of Avana products decreased 23% to $2.2 million during fiscal 2023.

Sales of all products through the Wholesale sales channel in fiscal 2023 increased 9% from the prior year while the Direct sales channel increased approximately 16% from the prior year.

The Wholesale sales channel includes branded products and resale products sold to brick-and-mortar retailers and e-merchants including, but not limited to, Amazon, Overstock and Wayfair.

The Wholesale sales channel also includes contract manufacturing services which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business.

The Direct sales channel consists of consumer sales through our three websites.

The increase in sales through the Direct channel was due to higher sales of products sold through our websites.

Gross profit.

Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead and depreciation.

Total gross profit as a percentage of sales for the year ended June 30, 2023 increased to 25% from 23% in the prior year.

Gross profit dollars increased to $7,192,000 from $6,001,000 in the prior year and represented a 21% increase.

The Company also continued to implement cost reduction strategies like transitioning the sewing of certain high-volume Jaxx and Avana products to a contract facility in Mexico which, during fiscal 2023, produced approximately 30% of our sewn products and reduced our total cost of production for those products.

Operating expenses.

Excluding depreciation expense, total operating expenses for the year ended June 30, 2023 were 18% of net sales, or $5,294,000, compared to 18% of net sales, or $4,749,000, for the year ended June 30, 2022.

The 11% increase in operating expenses from the prior year was primarily due to higher advertising and promotion expenses which were incurred in an effort to increase sales, higher occupancy costs, and higher personnel related costs.

Other income (expense).

Other expense decreased to ($262,000) from expense of ($342,000) in the prior fiscal year.

We had a net income from operations of $1,282,000, or $0.02 per diluted share, for the year ended June 30, 2023 compared with net income from operations of $604,000 or $0.01 per diluted share, for the year ended June 30, 2022 due to increase in net sales and improvement in gross profit margin, partially offset by increase in operating expenses.

Financial Information about Our Business Sales Channels

We conduct our business through two primary sales channels:

Direct (consisting of our Internet websites) and Wholesale (consisting of our stocking reseller, drop-ship, contract manufacturing and distributor accounts).

During our last two years, substantially all of our revenue was generated within North America, and all of our long-lived assets are located within the United States.

The following is a summary of our revenues:

(Dollars in thousands)

Total Net Sales

Net sales in the Other channel consists primarily of shipping and handling fees derived from our Direct business.

The following is a summary of our Direct business net sales and the percentage relationship to total revenues:

(Dollars in thousands)

Direct sales channel net sales

Direct net sales as a percentage of total revenues

The following is a summary of our net sales to Wholesale customers and the percentage relationship to total revenues:

(Dollars in thousands)

Wholesale sales channel net sales

Wholesale net sales as a percentage of total revenues

As of June 30, 2023, the Company has over 950 active wholesale accounts, most of which are located in the United States.

Sales by Product Type

The following table represents the dollars and percentage of net sales by product type:

(Dollars in thousands)

June 30, 2023

June 30, 2022

Products purchased for resale

Total Net Sales

Liberator - Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market.

Liberator products are sold to e-merchants, retailers and distributors as well as directly through our e-commerce site.

Net sales of Liberator products increased 48% during the year ended June 30, 2023, from the comparable year earlier period.

This increase is primarily related to higher sales through our e-commerce site, Liberator.com.

Jaxx - Jaxx products are contemporary seating products manufactured by us and sold under the Jaxx brand.

Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site.

Net sales of Jaxx products decreased 16% during the year ended June 30, 2023, compared to the prior year.

This decrease is primarily due to lower sales of Jaxx indoor and outdoor products.

Avana - The Avana product line is a unique collection of top-of-bed and comfort products that aid in sleep, meditation, and relaxation.

Avana products are sold through e-merchants, mail order catalogers and through our e-commerce site.

Net sales of Avana products decreased 23% during the year ended June 30, 2023, compared to the prior year.

The decrease in sales was due primarily to increased competition from lower priced products from China and other countries.

Products purchased for resale – Products purchased for resale are other branded products that we purchase from others at wholesale or distributor prices and resell through our sales channels to e-merchants, retailers, or through one of our e-commerce sites.

Sales of these products decreased 28% during the year ended June 30, 2023 from the prior year, due to consumer demand shrinkage across the industry.

Sales of these products is increasingly competitive and, as a result, the Company has elected to only offer a more curated selection of products that typically have a higher gross profit.

Other - Other products include sales from contract manufacturing and fulfillment services.

Net sales during the year ended June 30, 2023 decreased 25% from the prior year.

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, the COVID-19 pandemic aftereffects, 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 raw material cost increases, labor cost increases resulting from the current labor shortage, foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which we operate and sell.

A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales.

Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to meaningfully adjust spending in certain areas, or the inability to adjust spending quickly enough, as in personnel and administrative costs, to compensate for a sales shortfall.

We may also choose to increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

Liquidity and Capital Resources

The following table summarizes our cash flows:

Year ended June 30,

(in thousands)

Cash flow data from continuing operations:

Cash provided by operating activities

Cash used in investing activities

Cash used in financing activities

As of June 30, 2023, our cash and cash equivalents totaled $1,041,310 compared to $858,870 in cash and cash equivalents as of June 30, 2022.

Operating Activities

Net cash provided by operating activities primarily consists of the net income adjusted for certain non-cash items, including depreciation, stock-based compensation, and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities increased from the prior year due to the net income from operations, offset, in part, by an increase in inventory.

Investing Activities

Cash used in investing activities in the year ended June 30, 2023 and June 30, 2022 was primarily for production equipment purchases and software development work.

Financing Activities

Cash used in financing activities in the year ended June 30, 2023 and June 30, 2022 was primarily due to repayment of secured and unsecured notes payable and equipment notes payable offset in part by borrowings through unsecured notes payable.

During fiscal 2022 and 2023, we experienced increases in various raw material costs and increases in labor costs.

We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2024, although there is no assurance this will occur.

Inflation can harm our margins and profitability if we are unable to increase prices or improve productivity enough to offset the effects of inflation in our cost base.

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.

Capital Resources

We expect total capital expenditures for fiscal 2024 to be less than $150,000 and to be funded by equipment loans and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit with Advance Financial Corporation.

This includes capital expenditures in support of our normal operations.

If our business plans and cost estimates are inaccurate and our operations require additional cash or if we deviate from our current plans, we could be required to seek additional debt financing for particular projects or for ongoing operational needs.

This indebtedness could harm our business if we are unable to obtain additional financing on reasonable terms.

In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business.

If we do not comply with such covenants, our lenders could accelerate repayment of our debt or restrict our access to further borrowings, which in turn could restrict our operating flexibility and endanger our ability to continue operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Off-Balance Sheet Arrangements

10 unchanged sentences

Our significant accounting policies are described in the notes to our consolidated financial statements.

The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes.

Preparing financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes.

We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations.

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The impact of this policy election is insignificant as it aligns with our current practice.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation.

Revenue is measured as the net amount of consideration expected to be received to fulfill a performance obligation.

We have elected to exclude sales, use and similar taxes from the measurement of the transaction price.

The impact of this policy election is insignificant, as it aligns with our current practice.

The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns, and early payment discounts.

The amount of consideration expected to be received and revenue recognized includes variable consideration estimates, including costs for trade promotion programs, coupons, returns, and early payment discounts.

Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience.

3 unchanged sentences

Revenue is recognized at the point in time that control of the ordered products is transferred to the customer.

Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer.

Generally, this occurs at the time of the shipment from our warehouse.

or in some cases, picked up from one of our distribution centers by the customer.

Allowance for Doubtful Accounts

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Finished goods and goods in process include a provision for manufacturing overhead, including depreciation.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Accounting for Income Taxes

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If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

In fiscal year 2022 and 2023, we did generate positive cash flows from operations.

If the estimated fair value is less than the book value, the asset is written down to the estimated fair value, and an impairment loss is recognized.

In fiscal years 2023 and 2024, we generated positive cash flows from operations.

However, if our long-term future results do not continue to yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including the operating and macroeconomic factors that may affect them.

We use historical financial information, internal plans and projections and industry information in making such estimates.

Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including operating and macroeconomic factors that may affect them.

We use historical financial information, internal plans and projections, and industry information to make such estimates.

Non-GAAP Financial Measures

Reconciliation of net income to Adjusted EBITDA for the years ended June 30, 2023 and 2022:

Reconciliation of net loss to Adjusted EBITDA for the years ended June 30, 2024 and 2023:

Year ended June 30,

(in thousands)

Net income (loss)

Plus interest expense, financing costs and income tax

3 unchanged sentences

As used herein, Adjusted EBITDA represents net income before interest income, interest expense and financing costs, depreciation, and stock-based compensation expense.

We have excluded the non-cash expenses and stock-based compensation expense as they do not reflect the cash-based operations of the Company.

Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP.

We have excluded the non-cash expenses and stock-based compensation expenses as they do not reflect the cash-based operations of the Company.

Adjusted EBITDA is a non-GAAP financial measure that is not required by or defined under GAAP.

The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income of the Company or net cash provided by operating activities.

4 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis