Luvu Brands Inc

Greetings, ladies and gentlemen, and welcome to the Lulu Brands Inc. Fiscal Third Quarter 2021 Conference Call. At this time, all participants are in a listen-only 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, Melissa, and thank you to everyone who has joined us today for Lubu Brand's third quarter and fiscal 2021 conference call. Joining me today is Louis Friedman, our founder, president, and CEO. Yesterday morning, we filed our quarterly report on Form 10-Q for the three and nine months ended March 31st, 2021, and also issued an earnings press release that highlighted the company's third quarter and nine months of 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 third quarter end at March 31st, 2021, 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 we get started, I'd like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These statements include our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes yesterday's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, May 8, 2021. and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-GAAP financial measures including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. The reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financing measure has been provided as supplemental financial information in our press release. Now with that completed, I'd like to start the call with a few words from Lubu Brands founder and CEO, Louis Friedman. Louis?

Louis Friedman Hi, yes. Good morning, everyone, and thank you, Ron, and thank you, everyone, for joining us this morning. The momentum that we built at Louvre Brands throughout the fiscal year carried into our third quarter. Louvre Brands' third quarter financial performance exceeded all our expectations, making it an exceptional strong quarter for calendar 2021. The team has been executing very well, and the results reflect that. Our third quarter results demonstrate our ability to drive strong top-line growth, maintain our margins, and control spending. During the third quarter, we did experience some industry-wide shortages and delays in raw materials needed to produce some of our products. Despite this, our just-in-time manufacturing and inventory management strategies enabled us to effectively navigate these supply chain challenges. We reallocated production and worked with our vendors and alternate vendors to remain largely in stock with our materials. As these lead times improve, we expect to capture more of increased demand as we're seeing in the marketplace. Now I'll turn this call back to Ron Scott, Louvre Brand's Chief Financial Officer, to summarize some of the financial highlights of the third quarter and the first nine months of fiscal 2021. Ron, please go ahead.

Thank you, Louis. I'll briefly touch on some of the financial highlights from the three and nine months end at March 31st, 2021. Net sales for the third quarter increased 53% to a record $6.2 million compared to $4 million in the same year-ago quarter. Sales of Liberator products increased 69% to $2.8 million from $1.7 million in the prior year. Jack's product sales totaled $1.5 million, up 76% from $0.8 million in the third quarter of the prior fiscal year. and Avana products increased slightly 2% to 1 million. For the nine months, net sales increased 34% to a record 17.3 million from 12.9 million in 2020. Liberator sales increased 42% to 7.3 million. Jaxx product sales increased 55% to 4.9 million, and Avana product sales decreased a little bit 2% to $2.8 million. As mentioned in our Form 10Q, Avana sales have been impacted by competitive products and longer production lead times. Our new foam cutting equipment, which was operational last quarter, and our new roll compression equipment, which we expect to be delivered next week, should reduce our production lead times and make the products more competitive in the direct-to-consumer dropship marketplaces. Gross profit for the third quarter totaled $1.7 million compared to $1.1 million in the prior year third quarter. As a result of selling price increases on certain products, the gross profit margin as a percentage of sales increased at 28.2% from 26.5% in the prior year third quarter. Year-to-date gross profit increased to a record $4.8 million from $3.7 million in 2020. Year-to-date gross profit margin as a percentage of sales was 27.8% compared to 28.9% in the prior year nine months. We continue to experience labor and raw material cost increases, and we are passing these on to our consumers and our customers as much as possible through gradual selling price increases. For the third quarter, operating expenses were approximately 19% of net sales or $1,183,000 compared to 26% of net sales or approximately $1,067,000 for the same third quarter in the prior year. For the nine months operating expenses increased 4.7% to 3.3 million. Third quarter income from operations was a record 563,000 compared to $1,000 in the prior year. Year to date fiscal 2021 income from operations increased 175% to a record 1,456,000 from 529,000 in the first nine months of the prior year. Net income for the third quarter was $469,000 or one cent per share compared to a net loss of $148,000 or zero per share in the prior year third quarter. Net income for the nine months was $2,263,000 or three cents per share compared to $64,000 or zero cents per share in the prior year nine months. Year to date, adjusted EBITDA was $2.7 million compared to $661,000 in the prior year nine-month period. Excluding the PPP note forgiveness, adjusted EBITDA in the current year was still $1.6 million, an increase of $964,000 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 2.9 million on March 31, 2021. And the working capital deficit improved from 1.4 million at June 30, 2020 to 0.2 million. I think it was 196,000. at March 31st, 2021. Cash and cash equivalents on March 31st, 2021 totaled $1,270,000 compared to $1,152,000 at June 30, 2020. The PPP note of 1.1 million was forgiven prior to December 31st and is included in other income for the nine months. Now I'd like to turn the call back to Louis for some additional closing comments. Louis?

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 three major consumer product lines as we finish the remainder of fiscal year and move into fiscal 2022. Based on our anticipated growth, Over a million dollars of new equipment has been ordered and or installed since September 2020, including new CNC polyurethane contour equipment, additional fabric cutting and spreading lines, and large-scale foam compression equipment. All of these equipment purchases should increase our production throughput and reduce our production costs. Regarding sustainability, a subject that we take very seriously here at Louvou, We continue our efforts to become calm and neutral by deploying initiatives to repurpose our foam trim and reduce our shippable product size and reduce paper product consumption by at least 66%. For example, our advanced roll compression operations reduces box size by two-thirds, which saves paper, water, electricity, and freight to our customers. As a matter of fact, freight is reduced by two-thirds, which saves fuel and reduces emissions. We repurposed 100% of our foam trim and used foam trim from other furniture manufacturers to create micro-cushions used in our foam beanbag products. We also use military surplus and recycled products whenever possible to manufacture our beanbag liners, and two-thirds of our raw materials are sourced locally. And, of course, we're proud to be made in the United States. We appreciate the recent strong support we've received from shareholders and look forward to keeping you updated on our progress and developments as we work through the fourth quarter and calendar 2021. That wraps up our formal presentation, operator. Now we'll open the call for Q&A and after Q&A, we'll provide some closing comments.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please type your question on the webcast link or you may call 877-407-0778. The international dial number is 201-689-8565. Once joined to the conference, please press star 1 to enter the question queue. One moment, please, while we poll for questions. Gentlemen, we do have a phone question from the line of Brian Robson, private investor. Please proceed with your question.

Hi, guys. Congratulations on the strong results, both for the quarter as well as for the full year. And in your press release, you mentioned the strong results so far in Q4. And I wonder, now that you're about halfway through the quarter, are you able to be more specific in terms of how the fourth quarter is proceeding.

Hi, Brian. We're running ahead similar to what we were in previous quarters, in excess of 25%. One thing I will point out, though, last year, Q4, we did ship approximately $750,000 worth of PPE equipment which was masks and gowns. And so our percentage increase in Q4 may be a little less certainly than it was in Q3. I don't expect us to be up 53% in Q4 as we were in Q4 of last year, Q3. But we're still expecting to be ahead of where we were last year, Q4.

Okay, so is that roughly like $2 million a month in revenues?

Yeah, that's kind of been our run rate, and that continues. We saw that in April, and we're on track for that in May as well.

Okay, and then you referenced the supply shortages in Q3, which I'm guessing relate to foam shortages tied into the issues with Texas weather, and I'm guessing those increased, or I should say continued, in the fourth quarter, and I wondered if you could comment on how you're managing through that at this time.

You know remarkably well, we're just in time manufacturing, and because we're vertically integrated, as the materials come in, we produce it and really balance our orders accordingly. But we have every indication that supply chains are easing at the moment for foam and other fabrics that might be affected. And I don't see a problem after, I guess, maybe 30 or 60 days at max. But so far, it's been relatively easy to handle as we're vertically integrated and we can just-in-time manufacture goods as they come in.

Okay. And you've mentioned open orders in the past. Are you able to provide what your open order status is at this time?

I think they're about a million three. Yeah. We're running about a million three as of today. Right.

And I know at one time you'd mentioned 100,000 a day as maybe an approximation of what you ship. What would your kind of ideal be? level of open orders. I'm guessing this is higher than what you'd desire.

Well, you know, as an e-commerce company, we typically don't have a lot of open orders. Some of these are contracts that we have, and they're dated. So some will be shipped later in this month or in the next quarter. But we try to ship everything within a few days as we supply e-commerce sites. I think we're about, what, 85%, 88% e-commerce with our business. So we have to move fast. We have to ship fast. And that's our goal. So don't let that million three concern you because some of them are contracts with states that really have nothing to do with supply chain issues.

Okay. And I would imagine also with the new production equipment that you've referenced, you're going to be increasing your throughput. And if you just use a $6 million number, that's putting you at roughly $23 million for this fiscal year. And given some of these new production equipment purchases, I'm wondering if you have aspirations as to where you can get going forward. perhaps in terms of targeted revenues next year or within the next couple of years?

Well, we certainly want to continue to try to keep up with demand and create additional demand for our products. So assuming we're going to do somewhere around $23 million this year, we're looking to do probably close to $28 to $30 million next year. and keep moving it up year over year.

We're really using our facility quite effectively. We have a very lean operation, and I think within the facility that we have, 140,000 square feet, we could easily do 40 million without a need for additional space. And so that's really... really our goal within this facility. And, of course, we can always lease and or purchase other buildings. But that's where we are. It's a very lean, efficient operation that should get us to about $40 million.

Okay, thanks. That's very helpful. And then you had mentioned, and this is the last one for me, You had mentioned that you've been gradually doing some price increases, and I'm wondering maybe kind of what your sense is to how those increases have been received and if you'll be continuing to implement price increases, especially given the rise in certain costs.

You have a comment on that, Ron? Oh, okay. Fortunately for our increases, a lot of the customers we do business with don't believe in increases, and so they're willing to pay more but not necessarily reflect those increases to their customers. An example is Amazon and Wayfair and a lot of the mass market that we sell to. So we're able to increase prices to them without necessarily losing price to value on the products that we sell. But some items are really not affected at all, like Liberator is not affected by the price increase. And certainly companies like Wayfair haven't really, you know, they're used to working on narrow margins. So the products have not been priced out of the market as a result of marginal increases that we put forth.

All right. Very good. That is it for me. Thanks, guys.

We appreciate the questions. Thank you.

Thank you. As a reminder, ladies and gentlemen, please enter your questions on the website link or please dial in to 877-407-0778 and press star 1 to ask any questions.

Okay, it doesn't look like we have any questions.

No, there are no questions on the phone. If you have none over the web, I'll turn the floor back to you, Mr. Friedman, for any final comments.

All right, great. Yes, I'm happy to finish up. So we are very pleased with the third quarter and year-to-date fiscal 2021 results. We believe we're building a solid foundation for Lupu Brand's future growth, and we're well positioned to capitalize on our growing markets. Our debt levels are decreasing. Our working capital is improving. Sales growth continues to exceed 25% year-over-year, and we're optimistic about the remainder of calendar 2021. We thank you all for your time and look forward to updating you further as developments continue. You might check out www.LufuBrands.com. On behalf of our entire Lufu Brands management team, I want to thank you again for joining us today.

Thank you ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.