Luvu Brands Inc

Greetings, ladies and gentlemen, and welcome to Louisville Brands Inc's Fiscal Second Quarter 2021 Conference Call. At this time, all participants are in its own mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Ron Scott, the company's Chief Financial Officer. Mr. Scott, you may begin.

Thank you, Shamali, and thank you to everyone who has joined us today for Lubu Brand's second quarter and first half fiscal 2021 conference call. Joining me today is Louis Friedman, our founder, president, and CEO. On Friday, after the markets closed, we filed our quarterly report on Form 10-Q for the three and six months ended December 31, 2020. And this morning, we issued an earnings release that highlighted the company's second quarter and first half fiscal 2021 performance. There are a number of items that I look forward to discussing with you this morning, including Lubu Brand's financial results for the second quarter ended December 31st, 2020, recent developments in Lubu Brand's operational activities, as well as the company's near-term plans for the future. At the conclusion of this call, we will be answering questions during a Q&A session. Before I begin, I'd like to remind you that today's call contains forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including, without limitation, statements made with respect to our ability to continue as a going concern, the impact of the COVID pandemic on our company, our ability to continue to generate revenues and report profitable operations, our ability to repay outstanding promissory notes, our ability to pay our operating expenses, and lack of access to additional capital, our ability to effectively compete, and the lack of an active trading market for our common stock. You are urged to carefully review and consider any cautionary statements and other disclosures within our filings with the Securities and Exchange Commission. All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, many of which are generally outside the control of Lubu Brands and are difficult to predict. Lubu Brands does not undertake any duty to update any forward-looking statements except as may be required by law. Also during this call today, I may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You'll find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in our Form 10-Q filed on Friday and the press release issued this morning. Now, with that completed, I'd like to start the call with a few words from Lubu Brand's founder and CEO, Louis Friedman. Louis?

Thank you, Ron, and good morning, everyone. Thank you for joining us this morning. As many of you may know, Luvu has three distinct brands advertised and promoted to consumers. These brands include Liberator, Jack's Living, and Havana. These brands are sold directly on our websites and through Amazon, mass market, web retailers, and specialty retail stores, and to wholesale distributors worldwide. We participate in long-term contracts with companies like Room & Board, School Specialty, and Rooms to Go, and many others. Fortunately for our company, all of our brands are intended for use at home and typically procured through web sales. As a result, we experienced continued strong demand during the first and second quarter of fiscal 2021, as many consumers continued to stay at home and not travel. While it's difficult to predict the longer implications of making and selling branded consumer products, for now at least, there seems to be fairly consistent and very strong demand across all of our brands. Now I'll turn the call back over to Ron Scott, Luvu Brands Chief Financial Officer, to summarize some of the financial highlights of the second quarter and six months of fiscal 2021. Ron, please go ahead.

Thank you, Louis. I'll touch briefly on some of the financial highlights from the three and six months ended December 31st, 2020. Net sales for the second quarter increased 20% to 5.7 million compared to 4.8 million in the same year-ago quarter. Sales of Liberator branded products increased 25% to 2.5 million from 2 million in the prior year. Jaxx product sales increased up to $1.7 million, up 45% from $1.2 million in the second quarter of the prior fiscal year. And we saw a slight decrease in Avana products, 20% decrease to $0.8 million from $1 million in the prior year. For the six months, net sales increased to $11.1 million from $8.9 million, an increase of 25%. Liberator sales increased 28% to 4.5 million. Jaxx product sales increased 48% to 3.4 million. And Avana product sales decreased 5% to 1.8 million. As mentioned in our Form 10-Q filing, Avana sales have been impacted by competitive products and longer production lead times. Our new foam cutting equipment, which was operational last week, and our new roll compression equipment, which we expect to be operational in early Q4, should reduce our production lead times and make the products more competitive in the dropship marketplaces. Gross profit for the second quarter totaled $1.6 million compared to $1.5 million in the prior year second quarter. The company experienced labor and raw material cost increases during the second quarter. As a result, gross profit as a percentage of net sales fell to 27% from 32% in the prior year second quarter. For the six months, gross profit was 28% compared to 30% in the prior year six months. As I mentioned, we continue to experience labor and raw material cost increases, which we are now passing on to our customers through selling price increases. These selling price increases should be fully implemented by the end of March 2021. For the second quarter, operating expenses were approximately 19% of net sales. or approximately $1,109,000 compared to 23% of net sales or approximately $1,105,000 for the same period in the prior year. For the six months, operating expenses increased 1.5% to $2.2 million. Second quarter income from operations was $457,000 compared to $414,000 in the prior year. First half fiscal 2021 income from operations increased 69% to $893,000 from $528,000 in the prior year first half. Net income for the quarter was $1,465,000 or two cents per share compared to net income of 257,000, or zero cents per share, in the prior year second quarter. Net income for the six months was 1,794,000, or two cents per share, compared to 212,000, or zero cents per share, in the prior year six months. For the first half, adjusted EBITDA was 2.1 million, compared to 618,000, in the prior year first half. Excluding the PPP note forgiveness, adjusted EBITDA in the current year was still one million, an increase of 62% from the prior year. Turning now to the balance sheet, we continue to make good progress on improving the balance sheet. Secured and unsecured debt decreased 34% from 3.5 million on June 30, 2020 to 2.3 million on December 31st, 2020. And the working capital deficit improved from 1.4 million to 0.6 million. Cash and cash equivalents on December 31st, 2020 totaled just a little over a million dollars compared to $1.2 million at June 30, 2020. The PPP note of $1.1 million was forgiven prior to December 31st, 2020, and is included in other income for the second quarter and six months. Now I'd like to turn the call back to Louis for some additional comments regarding current developments. Louis?

Great. Thank you, Ron. Our lines of consumer brands continue to attract new customers, and as a result, we expect to see continued strong demand across our three major consumer brands as we finish the remainder of fiscal year and move into fiscal 2022. We have new foam contouring equipment, which was operational last week, and we have additional foam compression equipment that has been ordered with delivery expected in April. Both these purchases should increase our production throughput and reduce our production costs. We appreciate the recent strong support we've received from shareholders and look forward to keeping you updated on our progress and development as we work through the third and fourth quarters. That wraps up our formal presentation, Operator, and now we'll open the call for Q&A. After the Q&A, we'll provide some closing comments. Thank you. Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please type your question on the webcast link or call 877-407-0778. Also, if you would like to ask a question, please press star 1 on your telephone key. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. And Mr. Friedman, are there any questions over the web line?

Well, let's see. We do have one here from one of our shareholders. Does the Liberator brand have or plan to have any sales or marketing arrangements with OnlyFans or direct with OnlyFans creators?

Ron?

I don't know. The answer is no. I am not familiar with OnlyFans.

Okay, who are OnlyFans? I don't know.

Okay.

And OnlyFans creators, I guess we need to look into that. But thank you for the question.

Yeah.

Are there any other questions? And we actually have a question on the line from Brian Robson with a private investor. Please proceed with your question.

Hi, congratulations on the quarter. At this point, you would presumably know your January results, and I wondered if you could comment on how they look compared to the prior year.

Yeah, hi, Brian. Yeah, January was, sales-wise, net sales was 40% ahead of last January. Keep in mind that last January was sort of the start of some concern in the economy about the pandemic. And quarter to date, which would be January through Valentine's Day, we're up 44%. So we sort of seem to be consistently running about 40% ahead of last year on the third quarter. It's hard to know how we'll finish the quarter, but at least for the first. Seems like we have a good start. We have a good start for the first quarter.

six weeks, we're in pretty good shape. Okay, very good. And so I'm guessing that the Valentine's Day's orders have all been shipped at this point?

Yeah, Valentine's Day orders have all gone out.

I just looked at how we did for the first 14 days in February, and, you know, again, it's pretty consistent. We were up 46% from last year for the first 14 days of February. But yeah, all the Valentine's orders have gone out. And we're open orders of 1.3 million as of this morning. So we saw a pretty good backlog.

I'm sorry, that was 1.3 million is your current order status?

Current open orders.

Backloads.

Yeah.

Okay. Okay. And then thanks for that. And you referred to, I guess, from the press release, the last press release that talked about the foam cutting machine. And now I see in the queue, the roll compression machine, which is a little over 400,000. And that first machine is there. I guess maybe it's a kind of a two-phase question. Firstly, with the machine that's in place at this moment, what sort of a sense do you have as to how much that will increase production as well as what impact it could have on your margins.

Yeah, so actually it doubles the production really very easily with only two operators. And we're already seeing, I mean, from day one that the equipment was installed, we were seeing double the productivity. So it's really wonderful. The next machine is a much larger roll compression machine for doing bigger products, and we have a host of new products that will fit into that machine as well. So that makes three ways of compressing here, and so that's the third way, and that's the biggest machine to date that we'll have on order. And that should be operative certainly no later than May 1, probably the middle of April.

And do you have, or how much of a sense do you have as to how much sales were limited on the you know, because of the production capacity limitations.

Yeah, well, I guess that million three that we have in back order right now, perhaps at least a million would have gone out. And so instead of being up 40-something percent, we would have been up, I guess, 60-something percent. So, yeah, so part of the challenge is equipment, and, of course, the other challenge is making sure people remain healthy and come to work every day. We have 220 people employed right now, and we do still have people out. So on somewhat of a rotating basis, even though it's a low level, you never really know. And so fortunately here in Atlanta, the weather has been fine, and so we haven't lost any production days so far that are weather-related.

Okay, and then... You've spoken to price increases as well. So with price increases as well as with the new equipment that you've received, do you have kind of what you would target in terms of gross margin? You know, we've seen kind of the slight decrease that you spoke to. Are you confident in your ability to get that back over 30%? And any further, I guess, guidance in that regard?

Yeah, what we've seen really is an increase in labor costs and the raw materials, specifically foam cost increases. Foam is a big component of all of our products and with pretty substantial increases over the past, really foam increases have gone up since October, they may go down once their supply issues get resolved. But it's hard to say whether they will or not. But having said that, we're still factoring in the higher labor costs and the foam price increases into our price increases that we'll be implementing here over the next few weeks. And that should get us back to over 30% margins.

Okay. Okay, very good. Thanks for taking my questions. Good luck. Hey, we appreciate it. Thank you.

There's another question there.

Another question. Are the major buyers of the products aware of the higher prices? How have they reacted to it?

Yeah, you know, fortunately, we're able to offset some of the increased costs of foam by flat packing and compressing our product. We also have a facility in Mexico that's producing at a lower cost as well. So even though the prices have gone up, they haven't gone up that much that would have any real impact. And for products that are as big as the ones we have, to be able to shrink them down to really fit in the front seat or the back seat of a car is pretty remarkable, and that helps us keep pace with the rising cost of UPS and LTL freight. So I don't think that the price increase will have any real impact. But thank you for the question. And I think there's another question there, or a comment regarding OnlyFans, right?

Yeah, that's an explanation.

Yeah, we do need to look into that, and I appreciate you bringing that to our attention. This is OnlyFans, which is an Instagram that's growing in there.

That's a product for adults.

Right. Okay, is that the end of the questions or anyone else? Shamali, do you have anything else?

Nope, no further questions. Do you guys have any closing comments?

Oh, we do, yeah. So thank you, operator. We're very pleased with the second quarter, as we mentioned, and the first half of 2021. We believe we're building upon a solid foundation for Lubu Brand's future growth and are well-positioned to capitalize on our growing markets. Our debt levels are decreasing. Our working capital is improving. Our sales growth continues in excess of 25% year over year. And we're very optimistic about the remainder of fiscal 2021. Thank you, everyone, for your time. And we look forward to keeping you abreast of future developments at lufubrands.com. And by the way, a new website is launching momentarily. So please be on the lookout for that. On behalf of our entire Louvre Vans management team, I want to again thank you for joining us today, and thank you, operator.

Thank you. And ladies and gentlemen, this concludes today's conference call. You may now disconnect from the webcast at this time. Thank you for your participation.