Luvu Brands, Inc. 10-K

ITEM 1. Business. General Luvu Brands, Inc. designs, manufactures and markets a portfolio of consumer lifestyle brands through the Company’s websites, online mass merchants, and specialty retail stores worldwide. Brands include Liberator ® , a brand category of iconic products for enhancing sensuality and intimacy; Avana ® , Top-of-Bed Comfort products and inclined bed therapy products, assistive in relieving medical conditions associated with acid reflux, surgery recovery, and chronic pain; and Jaxx ® , a diverse range of casual fashion daybeds, sofas and beanbags made from virgin and re-purposed polyurethane foam. These products are sold through the Company’s websites, online mass merchants, and retail stores worldwide. Many of our products are offered flat-packed and either roll or vacuum-compressed to save on shipping and reduce our carbon footprint. Headquartered in Atlanta, Georgia, the Company occupies a 140,000-square-foot vertically integrated manufacturing facility. The Company’s e-commerce websites include liberator.com, jaxxbeanbags.com, and avanacomfort.com. Unless the context requires otherwise, all references in this report to the “Company,” “Luvu Brands,” “we,” “our,” and “us” refers to Luvu Brands, Inc. and its subsidiaries. Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400. Our corporate website is www.LuvuBrands.com . There we make available copies of Luvu Brands documents, news releases and our filings with the U.S. Securities and Exchange Commission, the “SEC”, including financial statements. Unless specifically set forth to the contrary, the information that appears on our websites or our various social media platforms is not part of this annual report. Corporate History The Company was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc., a Nevada corporation (“Old Liberator”). Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity. On February 28, 2011, the Company name was changed from WES Consulting, Inc. to Liberator, Inc. Effective November 5, 2015, the Company changed its corporate name from Liberator, Inc. to Luvu Brands, Inc. to reflect its broader offering of wellness and lifestyle products designed for mass market channels. Overview of our Facilities and Operations Since inception we have used a vertically integrated business model, with manufacturing, distribution, product development, advertising and marketing performed in-house. We believe this allows us to create new products with reduced lead times at a lower cost while enabling us to quickly respond to market and customer demands for our existing products. For our wholesale accounts and international distributors, being able to fulfill large orders with shorter turnaround times allows us to capture business during December and February when wholesale customers make just-in-time holiday purchases. Our 140,000 square foot facility on eight acres is located in a suburb of metro Atlanta, Georgia and includes manufacturing and distribution, sales and marketing, product development, customer service and administrative staff. All of the Liberator, Jaxx and Avana branded products are designed, produced and marketed from our facility in Atlanta, Georgia. Our Atlanta-based manufacturing operation has two CAD controlled fabric cutters, one CAD controlled wood cutter, two CAD controlled foam contouring machines and two state-of-the-art conveyor unit production sewing systems. 1 Table of Contents Our sewing equipment is also highly automated with conveyor-based lines leading into vacuum and roll compression packaging of finished products. We believe that our in-house manufacturing capabilities have enabled us to achieve greater efficiencies and cost savings, as well as strict control over the entire manufacturing cycle including raw material procurement, finished goods production and logistics optimization. In addition to providing us with greater production flexibility, our in-house manufacturing provides us with the opportunity to improve fulfillment response time, reduces the risk of out-of-stock situations, limits finished goods obsolescence and improves overall operating margins. Because fabric cutting, sewing, foam contouring, assembly and vacuum packaging are performed in-house, we believe we can exercise greater control over product quality and respond faster to changing customer demands, which gives us a competitive advantage over companies that utilize only out-sourced sewing services. In addition to our in-house sewing capabilities, we outsource the sewing of certain high-volume products to a contract sewing facility in Mexico. We source raw materials from multiple domestic and foreign suppliers and have supply contracts to produce our specialty fabrics under specific quality control and performance standards with just-in-time deliveries. We also repurpose over 4,000 pounds of polyurethane foam trim daily, primarily for Jaxx bean bags, giving us a cost and quality competitive advantage. All business activity of the Company is done through our wholly-owned subsidiary, OneUp Innovations, Inc. (“OneUp”). OneUp was organized in 2000 and began operations in 2002. Business Strategy We aim to achieve long-term growth and profitability by expanding our distribution channels and customer base for Liberator, Jaxx, and Avana. We create ongoing collections of innovative products with good design and price-to-value that ship flat-packed and vacuum-compressed. By running our own websites and aligning ourselves with both mass market and specialty retailers, we leave less room for importers and copy-cats to compete. We believe that marketing directly to the customer is the best way to build brands, and by doing so we create value for our customers and wealth for our shareholders. · Manufacturing . To improve our business results, we constantly look for ways to manage the impact of rising raw material and labor costs by improving the productivity of our Lean manufacturing processes. As demand for certain high-volume products continues to increase, we plan to shift more of the sewing of those products to a contract facility in Mexico. · Sustainability . We believe that sustainable operations are both financially and operationally beneficial to our business and critical to our future success. We are acutely focused on waste reduction efforts: repurposing 98% of our foam trim to other products, compressing all of our foam products to reduce freight costs and corrugated use, improving manufacturing processes to reduce waste overall, finding new ways to repurpose certain waste streams and establishing local recycling partnerships to divert waste from landfills. · Eco-Packaging . We maintain vacuum-compressed packaging to reduce our carbon footprint, make our products more convenient for the consumer and easier to display for the retailer, and reduce our outbound shipping costs. · Wholesale Operations . Our goal is to increase consumer demand through advertising and public relations while our wholesale operations expand our offering to distributors, retailers, and e-tailers across every channel of adult, mass market, drug, and specialty accounts. For wholesalers thinking about adding Sexual Wellness products to their retail or online store, our Liberator product line is typically one of the first “safer” products presented, as it can be promoted as an assistive aid to sexual positioning. As the mainstream demand for Sexual Wellness products grows, our sales staff is training and educating new resellers on how to get started in this category. For retail display, we offer mainstream packaging in a variety of sizes and price points to meet their customers’ particular demographic. We offer all our brands for sale through various e-tailers, and for these customers we maintain brand continuity by providing rich product content, photography and instructional videos for use on their websites. We also provide fulfillment services and can drop-ship orders directly to their customer, frequently the same day the order is received. 2 Table of Contents Products, Principal Markets and Methods of Distribution Liberator Products We developed a patented brand category called “ Liberator Bedroom Adventure Gear ” ® . The products in this collection are designed to elevate, create motion, and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting. Liberator Bedroom Adventure Gear combines functional design with sensuous textures that transform ordinary bedrooms into supportive landscapes for intimacy. Liberator products present angles, elevations, curves, and motion that help people of all sizes, including those with back injuries and other medical conditions, find comfortable ways to connect intimately while assisting their stamina and performance. Liberator foam-based products (called “Liberator Shapes”) are manufactured in a variety of heights and widths to accommodate variations in the human body. They consist of differently shaped cushions and props that are available in an assortment of fabric colors to add to the visual excitement. Each of the product profiles of the Liberator Shapes is unique, designed to introduce positions to the sexual experience that were previously difficult to achieve or impossible to achieve with standard pillows or cushions. Liberator Shapes are manufactured from structured polyurethane foam and cut at various angles, platforms, and profiles. The foam base is encased in a tight, fluid-resistant polyester shell, helping the cushions to maintain their shape. Liberator Shapes that are designed to be used in tandem are covered in a proprietary microfiber cover that allows the “Shapes” to adhere to each other without slipping loose. This allows for positioning freedom. We have also developed vacuum-compressed large profile designs commonly called “Love Loungers or Tantric / Yoga Chaises”. Most of the sex furniture pieces are made from contoured polyurethane foam and covered in a variety of fabrics and colors. These items are marketed as the Esse® Chaise, Equus Wave®, and Prelude® Bench, all in a variety of sizes. Larger designs include products based on shredded polyurethane foam trim encased in a wide range of fabric types and colors and sold under our Zeppelin ® product offering. The Liberator larger profile designs can also be used as lounge seating when not being used for relaxed interaction and creative intimacy. Newer styles are now flat packed with wooden bases and maple feet. We conduct our wholesale business for Liberator sexual wellness products through four primary channels: (1) adult and female-friendly retailers and specialty boutiques, (2) e-tailers who sell our products through adult, mass market, drug, and other sites offering sexual wellness products, (3) mail order catalogers, and (4) wholesale distributors of adult / sexual wellness products. These wholesale accounts have approximately 1,000 retail locations and websites in the United States and Canada. We have a growing number of retailers who have added a dedicated Liberator exhibition concept to their merchandising space. We also sell our products in Europe through a Germany-based exclusive distributor. Jaxx Casual Seating The Company manufactures a line of contemporary casual indoor and outdoor seating under the Jaxx® brand. Jaxx bean bags are an offshoot from Liberator manufacturing as it provides additional revenue from repurposing our polyurethane foam trim into shredded bean bag fill. The Jaxx indoor beanbag collection includes an offering of adult and children size beanbags in a variety of fabrics, faux-furs and vinyl. The Jaxx product line also includes solid foam indoor furniture collections and outdoor furniture collections that use polystyrene bead filling. The Jaxx product line and accessory products are sold through the following wholesale channels: (1) modern furniture e-tailers, (2) mass marketers, (3) mail order catalogers, (4) interior designers, (5) schools and daycare centers, and (6) retail furniture stores. We also offer Jaxx private label and custom designs for large regional and national furniture chains. The Company also owns and manages a website under the URLs www.JaxxBeanBags.com and www.JaxxLiving.com for direct-to-consumer sales of Jaxx products. Avana ® Top-of-Bed Comfort Products The Company sells a unique collection of comfort products that aid in sleep, meditation, and relaxation under the Avana ® brand. These products include a diverse offering of top-of-bed support cushions and props, many of which are assistive in relieving medical conditions associated with acid reflux, surgery recovery, and chronic pain. The Avana product line is sold through e-merchants (including Amazon.com, Walmart.com, medical product distributors and specialty e-tailers), mail order catalogers and through our website under the URL www.AvanaComfort.com . We believe that our Avana products compete effectively on the basis of good design, through offering a wide-range of designer colors and fabrics and supported by thousands of 5-star product reviews. 3 Table of Contents Products Purchased for Resale We import high-quality pleasure objects from around the world for sale on our direct-to-consumer website Liberator.com. Sales and Distribution Our sales management team is organized by market channel and by customer type. We have sales personnel who routinely visit sexual wellness retailers to assist in product training, merchandising and stocking of selling areas. Through our in-house wholesale sales organization, we engage e-merchants and retailers directly and then either ship to them on a wholesale basis or provide fulfillment services by drop-shipping directly to their customers. In international markets, the Company has a direct sales model with a US-based salesperson. This salesperson is responsible for wholesale sales, marketing operations and customer service in Canada and the European Union and other international markets. For European customers, orders are filled from our exclusive Germany-based distributor or directly from our facilities in Atlanta. As is customary in the sexual wellness and casual furniture industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers or wholesale distributors. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of sexual wellness and casual furniture products, combined with our expertise in marketing and new product introduction. Internet Websites We design and operate our websites using in-house development teams and our creative group using all media and social platforms to promote visibility and sales conversions. We also maintain a B-to-B website allowing wholesalers to both place orders and track delivery schedules. Liberator.com is promoted as a direct B-to-C website, and entertainment and educational venue, where consumers can watch product demonstration videos, peruse ezine blog content on sexual wellness topics, and watch non-pornographic videos on the many facets of human sexuality and erotic expression. Jaxxbeanbags.com offers a collection of contemporary indoor and outdoor fashion seating, daybeds, children’s play couches and modular Panelist wall mounted headboards. AvanaComfort.com presents our collection of top-of-bed comfort products, specialty pillows and mattress elevators proven effective in controlling reflux and GERD symptoms during sleep. Sources and Availability of Raw Materials We obtain all of the raw materials and component parts used to produce our products from outside sources without long term supply contracts. A number of components, including certain fabrics and polyurethane foam are sourced from suppliers who currently serve as our sole or primary source of supply. We believe we can obtain these raw materials and components from other sources of supply, although we could experience some short-term disruption in our ability to fulfill orders in the event of an unexpected loss of supply from one of the primary suppliers. We utilize dual sourcing on most fabrics and components when effective. Changes in U.S. trade policy, including tariffs on certain goods imported into the United States from China, have increased the costs of certain raw materials, parts or components used in our products. Such an increase may materially and adversely affect our sales and our business, as we may increase the selling prices of our products. If any increase in costs of goods cannot be passed on to our customers, our business and gross profit may be materially and adversely affected. 4 Table of Contents Major Customers Sales to (and through) Amazon accounted for 36% of our net sales during the year ended June 30, 2024 and 36% of our net sales for the year ended June 30, 2023. The loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows. Competition We compete with other marketers of sexual wellness, lifestyle and casual seating products both within and outside the U.S. The sexual wellness, bean bag and comfort products are highly fragmented and competition for the sale of such products comes from many types of e-tailers and retailers across diverse channels. For Liberator products, our primary competitive advantage is consumer recognition of our iconic brand. Due to the strength of our brand, we have some direct competition for the majority of our Liberator branded products. In fact, many e-commerce websites refer to Liberator as a product category and not as a generic sex furniture listing. And since we sell through multiple sales channels, we provide consumers with the ability to shop for Liberator intimacy products in an environment or website that they are most comfortable in. We also believe that we differentiate ourselves from conventional sexual wellness products based on our utility of design and overall customer satisfaction as it relates to enhanced intimacy. For Jaxx and Avana products, we believe our primary competitive advantage is good designs, our offering of a wide range of designer colors and fabrics, good price to value, and our positive consumer reviews. For our pleasure products purchased for Resale, competition among retailers of adult products and web-based marketers is high. Although we compete with retail and internet businesses and now mass and drug retailers that sell sexual wellness products including vibrators, pleasure objects, accessories and similar merchandise, we believe that this opens new channels of distribution for our Liberator products and that we are able to compete favorably as our Liberator products are unique, are couple-centric, and are assistive devices for couples with sexual limitations and issues. For the Liberator e-commerce website, other competitive factors include the effectiveness of our electronic customer mailing lists, maintaining natural search listing, advertising response rates, website design and functionality. The broad range of designs, color choice, fabrics and accessories that we offer helps to differentiate us and allows us to compete favorably against many other adult or sexual wellness websites. Liberator.com also competes against numerous mainstream websites, many of which have a greater volume of web traffic, greater financial strength and marketing resources. We believe competition in our industries is based on, among other things, the ability to deliver the right product at the right time, product quality and safety, innovation, customer service and price. We believe we compete favorably with other companies because of our ability to provide a broad product offering for customers, our vertically integrated manufacturing operation which allows us to quickly respond to customer demand, our commitment to quality and safety, and our commitment to minimizing our environmental impact. Government Regulation We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations that regulate the promotion and sale of merchandise and the operation of warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws. Intellectual Property The Liberator trademark is registered with the United States Patent and Trademark office and with the registries of many foreign countries. In addition, we were issued approximately 20 other product name trademarks and trade names including: “Bedroom Adventure Gear” ® , Ramp ® , Wedge ® , Stage ® , Esse ® , Zeppelin ® , Hipster ® , Wing ® , Equus ® , Jaxx ® , Avana ® , and Bonbon ® . In August 2005, we were issued utility patent number US 6,925,669 “Support Cushion and System of Cushions.” We believe our trademarks and patent have significant value and we intend to continue to vigorously protect them against infringement. 5 Table of Contents Human Capital and Resources As of June 30, 2024, we had 192 employees. The Company’s employment levels may change seasonally based on current and anticipated order levels. Additional staffing is typically required to support the peak holiday period through Valentine’s Day. None of our employees are represented by a union. We have had no labor-related work stoppages, and we believe our relationships with our employees are good. Human capital management is critical to our ongoing business success, which requires investing in our people. Our aim is to create a highly engaged and motivated workforce where employees are inspired by leadership, involved in purpose-driven, meaningful work, and have opportunities for growth and development. We are committed to creating and maintaining a work environment where employees are treated with respect and dignity. We value our diverse employees and provide career and professional development opportunities that foster the success of our company. An effective approach to human capital management requires that we invest in talent, development, culture, and employee engagement. We aim to create an environment where our employees are encouraged to contribute positively and fulfill their potential. We emphasize our core values of innovation, encouragement, motivation, and curiosity with our employees to instill our culture and create an environment of growth and positivity. Additional information We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. Other information about the Company can be found on our website www.luvubrands.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.