Luvu Brands Inc

Thank you for holding, ladies and gentlemen, and please remain on the line. The LeVou Brands conference call will begin shortly. Thank you for your patience. Thank you. Thank you. Why do you keep smiling? Greetings, ladies and gentlemen, and welcome to LeVou Brands Incorporated's Fiscal First Quarter 2023 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 Alex Sanikov, the company's Chief Financial Officer. Mr. Sanikov, you may begin.

Thank you, Holly, and thank you to everyone who joined us today at Louisville Brands' fiscal first quarter conference call. Joining me today is Louis Friedman, our founder, president, and chief executive officer, and Jordan Friedman, our sales director. On Monday, we filed our quarterly report on Form 10Q for the three months ended September 30, 2022, and issued an earning release that highlighted the company's first quarter performance. There are a number of items that we look forward to discussing with you this morning, including Louisville Brand's financial results for the three months ended September 30, 2022, recent developments in Louisville 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 the brief Q&A session. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about 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 filing with the SEC, which includes our press release. You should not rely on our forward-looking statements as prediction of future events. All forward-looking statements that we make on our call are based on assumptions and beliefs as of today, 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. A reconciliation of most directly comparable GAAP financial measure to such non-GAAP financial 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 Luvu Brands founder and CEO, Louis Friedman. Louis?

Good morning, everyone, and thank you for joining us on Luvu Brands' first quarter conference call. We delivered a strong quarter in what remains a highly dynamic operating environment. For the three months ending September 30, 2022, we reported record sales of 8.1 million, an increase of 29.5 over the prior year. Our company is driven by creativity and innovation. Our success comes from our balanced and diversified direct-to-consumer business, along with multiple channels of growth, coupled with outstanding digital marketing execution. Looking ahead to calendar year end and to 2023, we continue to expect macroeconomic headwinds to persist, but believe that our brands, our growth strategy, and product development initiatives position us well to emerge strongly from this period. As announced last quarter, we continue to implement initiatives designed to generate material cost savings, streamlined workflows, and lowering operating costs. And while we seek to deliver increased sales in this environment, we are also laser focused on profitability and higher margins. Thanks to the team's hard work, I remain confident in our ability to continue to execute into the holiday season and beyond. At this point, I'll turn the presentation over to Jordan, who will discuss our digital mass market approach to sales and brand awareness.

Thank you, Louis. Good morning, everyone. This has been a really strong and exciting start to the year for us, and I'm extremely pleased with the results so far. Our marketing efforts are paying off as consumer demand continues to increase, and extensive online distribution allows our customers to find our products in more locations than ever before. We raise awareness online through a multi-channel marketing approach and by making products available on all major e-commerce sites related to our categories. We have three main brands. Liberator, Jaxx, and Avana, all containing a variety of product categories. Jaxx is a lifestyle brand of luxury beanbags, modular outdoor furniture, day beds, and children's place seating. Avana is our comfort product brand that integrates a sense of style combined with an unmatched lounging experience. While some of our products lend themselves to sales growth innately through Amazon and other marketplaces, Other products reach success through mass retailers like Wayfair or regional furniture chains and specialty stores. Commercial, outdoor furnishings, and education accounts play their own role as well at continuing to keep business flowing throughout the year. With our extensive product offering and distribution network, each product can find the correct customer base, leading to ongoing and steady sales growth. For e-commerce, we flourish with any channel that allows us to edit and enhance their data and media content directly, as our rich images, video, and SEO-friendly product copy continue to impress customers and increase visibility. Our in-house creative team is always delivering the best quality content to enhance our offerings every day. As long as we have great photography, enhanced content, and innovative product designs, consumer demand increases naturally every year. Regarding our distribution network, we're constantly adding new e-commerce stores and retailers, plus numerous large resorts, commercial, school, and hospitality clients. Researching and adding new wholesalers is something we do daily. Likewise, with our innovative product designs and expertly crafted media content, new wholesale and commercial clients are regularly seeking us out. In existing channels, longstanding relationships with buyers gives us a leg up in terms of personal knowledge and history, which leads to greater placement and visibility. In terms of advertising and marketing, we test and deploy many mediums, including Google PPC, Amazon PPC, print ads, strong email campaigns, retargeting and abandoned cart emails, and many social channel advertising, including Reddit, Pinterest, Instagram, and Facebook. Constant monitoring, A-B testing, careful site placement, and use of clever long-tail keywords keeps our advertising initiatives converting at a high level. We also continue to capitalize on being a made-in-America company. Wholesale partners and consumers regularly seek us out and applaud our American-made commitment. In the first quarter, we really took advantage of our domestic manufacturing as we were able to adapt and react instantly to changes in demand. When we experienced a large surge in Liberator business due to increased awareness of sexual wellness products, we were able to adapt and supply the inventory customers wanted at a time when international producers were twiddling their thumbs waiting on the next ocean container to ship. Overall, our growth potential is stronger than ever, and we're really looking forward to what we can deliver in the upcoming months and years to come. Now I'll turn this over to Alex Sanikov, Lubu Brand's Chief Financial Officer, to summarize some of the financial highlights for the first quarter of 2023.

Thank you, Jordan. I'll briefly touch on some of the financial highlights from the fiscal first quarter ended September 30, 2022. For the first three months of fiscal 2023, net sales increased to $8.1 million from $6.2 million in the prior year's first quarter, an increase of 29.5%. Liberator sales increased 86% to $5.1 million from $2.7 million in the prior year. Jack's product sales decreased 5% to $1.8 million compared to $1.9 million. And Havana product sales decreased 25% to $0.6 million from $0.7 million a year ago. Gross profit for the fiscal first quarter totaled $2 million compared to $1.5 million in the prior year. Despite the fact that the company continues to experience labor and raw material cost increases, gross profit as a percentage of net sales increased slightly to 24.5% from 24.1% in the prior year's first quarter. Operating expenses for the first three months were approximately 17% of net sales, or approximately $1,397,000, compared to 19% of net sales or approximately $1,176,000 in the prior year. Net income for the first fiscal quarter was $492,000 compared to net income of $227,000 in the prior year. And adjusted EBITDA was $675,000 compared to $398,000 in the prior year's first quarter. We continue to increase the quantity of products sawn by our contractor in Mexico. It now is running at approximately 35% of all of our sawn products. Cash and cash equivalents on September 30th, 2022 totaled $1,348,000 compared to $859,000 on June 30th, 2022. And working capital increased from $774,000 on June 30th to $1 million and $25,000 at the end of fiscal first quarter 2023. Now I'd like to turn the call back to Louis for some additional comments regarding current development. Louis?

Thank you, Alex. We continue to increase brand awareness for Liberator by telling our story, building our community, and launching new products. As background, Liberator started in 2002 with a single offering, the Wedgeram Combo. For over two decades, we've been the only company focused solely on the sex furniture market, a market we created. We now offer over 60 novel products across the sexual wellness, erotic lifestyle categories. Liberator products are designed to enhance intimacy for couples of all ages, shapes, and sizes, regardless of physical limitations or sexual orientation. This quarter, Liberator sales increased 86%, primarily attributable to strong consumer demand from our digital and retail channels, accelerated by exposure from Netflix series, How to Build a Sex Room. Our innovation and product engine are humming like never before. We are also adding new retail distribution strategy across all mass market channels. As a consequence of climate change becoming ever-present, we incorporate sustainable practices methodologies, and designs across our brand portfolios to reduce our carbon footprint. This now wraps up our formal presentation. Operator will now open the call for Q&A. After the Q&A, we'll have some additional closing comments.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your phone at this time. If you would like to ask your question through the webcast, please click on the ask question box and type in your question and hit submit. One moment, please, while we poll for questions. Your first question for today is coming from Brian Robson from Break Cut Investors.

Hi, guys. Congrats on the results. Jordan, I'd like to say I really appreciated the additional commentary that you provided just now. That's very helpful. My first question is perhaps a bit more of a tough one. In your last quarter, or I should say your first quarter, you grew 30%. Right now, you're about halfway through your second quarter, the calendar fourth quarter. Although I realize probably the vast majority of your sales are you know, as the holiday season begins. But what are you seeing in terms of sales growth, momentum, and, you know, what are you expecting for this quarter that we're in?

Yeah, thanks a lot for that question. We are definitely very confident about Q2. We're expecting to deliver strong results, and we expect to continue to deliver strong results. So, Obviously, we're just going into Black Friday and holiday season weekend next week, but so far everything's looking good and we expect to continue to deliver what you want to see.

We have the whole crew working tomorrow, Saturday, just to make sure we have enough inventory and we're ready for the holiday season. We have quite a few new products that we've introduced. If you go to jacksbeanbags.com, you'll see a bunch of new products there. Liberator has new products. Havana has new products. And these products have been positioned and placed across mass market sites. So it's going to be interesting to see what the holiday season produces. So we'll sit back and wait. But we're ready. All guns are loaded, so to speak.

My understanding is the Netflix show has been renewed for a second season as Netflix. Is that correct?

As far as we know, that is correct.

Right. Yeah, we've been in contact with them and, you know, offering product and, you know, working with them whichever way we can. But it's just their final choice as to what they select. But I'm sure we'll benefit one way or another. So we'll see.

Okay. And if you have kind of the – You know, the increase in sales that you, you know, experience in your first quarter, in this current quarter, how well positioned do you feel you are to meet what could be, you know, significant demand?

Yeah, we're really very well. There's really no problem doing $8 million a quarter or $10 million a quarter with our current facility, supported by Mexico and the staff that we have. So it's pretty easy for us to do as we're vertically integrated and we can pivot quite easily. We've had a surge on some of the JAX products recently, more than what we expected. Perhaps you could elaborate on that a little bit, even before Black Friday.

Yeah, yeah. I mean, we've already been experiencing some increase in holiday traffic, and it's all been looking good so far, and we've been able to meet that demand. We're just going to continue to work hard to meet and get out whatever orders come in, but we're very well positioned across a lot of our brands and categories on making sure we have a lot of inventory ready to ship for when we get back from the holidays in two weeks' time.

Very good. So with this recent boost in sales, I'm certain that you had a number of new customers that What do you typically see when you get new customers? Are they typically repeat buyers? Do they then also explore other products? And what can you kind of tell me about the value of acquiring new customers, such as what I imagine you've just experienced recently?

Right. Well, we're about, what, 86% direct to consumer through mass market. in addition to our own website. We have checkout surveys which go into in-depth questions. We ask customers for recommendations and so on. We analyze them and read them every two weeks and see where they're up to. We produce 400,000 email blasts per week, actually.

400,000 different emails?

Well, they're not different. There's 100,000 four times.

Oh, right, right, right.

There's 100,000 four times of email blasts to our customers. And they come back and they buy other things. So repeat customers are, you know, I would say they average about 30%.

Yeah, we're very good at email follow-up and email marketing, and that's where a lot of revenue comes from for Liberator.com. So anytime we're collecting emails, it's a big boost for return visits as well. So we expect to capitalize on a lot of those new customers who will become repeat customers. Right.

So if you're interested in following us, please sign up for the free mail blasts on Jax and Liberator and Nirvana. And, you know, you can see how we're constantly tracking and going after customers in a wide variety of ways to keep them close to us.

Okay, very good. One last question for me, and this one's on the margin side. So you're at, I think, 24.5% for the quarter. You've talked about, you know, additional outsourcing of sewing in Mexico. I know you also have, over the last fiscal year or, you know, over the last 12 months, you've gotten a number of new pieces of equipment. And my question is, you know, are those – is some of that new machinery, is that more towards – Increasing your throughput, does it have an impact on margin? And essentially the question is, where do you, you know, foresee margin, you know, in this environment? Do you feel you're able to maintain the margin that you have going forward, or is there even room to increase it?

Yeah, I think a lot of the machinery we've gotten has increased throughput a lot. But obviously, if we're increasing efficiency, then it can also increase margin as well. And our partners in Mexico are helping as well. And also just are constantly honing in pricing and seeing what consumers are willing to pay for the products that we are offering without reducing demand. So yes, we expect to be able to deliver this amount of margin, if not more. Our goal is to consistently increase our margin. So we're trying to get it up even higher.

And Jordan, to piggyback on that, Brian, it's understandable that It takes a little bit of time to actually see the impact of the new machinery being installed. For example, our latest and greatest investment was in our Eton 3 conveyor line. But that conveyor line was installed, in fact, in the first quarter. And it took a few months to get it up and running. So we will... We'll hope to start seeing impact on the margin from that implementation in the further quarters down the year.

Okay, great. I will cede the floor. Thank you very much for answering my questions, and best of luck.

Hey, we appreciate your input and your confidence in our brands and our business. Thank you, Brian.

Your next question for today is coming from Chris Tuttle at Blue Caterpillar.

Hi. Thanks for taking my question. I actually had two. One of them is your company seems to be getting a lot more visibility, I'm sure, in some part to the Netflix show. And I'm wondering, the first question is, are you seeing a change in your opportunities to partner with either people on the distribution side or the joint marketing side in terms of digital distribution?

We are seeing some. I'd say a lot of our Liberator stores as well are coming back to us for possibly retail locations that haven't carried Liberator before or haven't carried Liberator in some years. A lot of them are coming back because the demand is there. And, uh, and also we have had several, uh, e-commerce sites reaching out to us wanting to carry our products, um, across the board. Um, so yes, there has been some of that, but at the same time, we're also still seeking out new partners, um, because, you know, that's part of our, our daily goals is to increase, uh, the amount of wholesale partners, um, and different places where we can sell our products.

You know, the Netflix show has added a lot of excitement to the industry, the pleasure products industry and what used to be called the adult industry. Now it's called sexual wellness. So everybody's excited about it. Retailers are building how to build a sex room facility in their retail stores. And being that we're really the only player in this market that has what is perceived to be the sex furniture or love lounger kind of category, that there's been a lot of interest in expanding retail space within hustler stores and other e-commerce sites as well. So it's good. It's great for us. It's great for the industry. And any time there's this sort of publicity, whether it's 50 Shades of Grey or the show that was on Goop recently that actually featured Jaya, who's been on our site for quite a few years, all of that is always good for us. As you might know, we've been advertising in Rolling Stone magazine now for almost 18 years. That magazine, our ads have never left the book and is seen by the entertainment industry. And so we get quite a bit of play off that placement. And we've been the only sex product in Rolling Stone ever to appear in the magazine. So it's sort of like a franchise for us.

And the other thing I would say, too, is that when something like this happens in mass media, we generally see increased brand awareness from these types of shows or movies that we've been in in the past for many years. So this is not the kind of thing that it's going to be seen by a single audience over a brief period of time and then never seen again because You know, that's not the way that people watch TV. People watch reruns. They watch, you know.

Yeah, well, it's still streaming on Netflix.

And it's going to be streaming on Netflix for probably 10 years. Could be, yeah.

All right, well, I hope we've answered that question.

Yeah, I had one more, which is. Sure. And I knew a little bit to this particular story, but I wonder what kind of protection do you have in terms of, you know, intellectual property, obviously you have trademarks, but I'm just, I'm curious about, or worried a little bit, I guess about, you know, what, what, you know, what if other people like, you know, wanted, you know, someone like a lovesack, you know, it was like, Hey, you know, we could make this stuff. You know, how do you kind of think about protecting your, your position in the market that you've, you've built up?

Right. Well, I guess it depends on the brand. In the case of Liberator, we've had patents for almost, I guess, probably 18 years at this particular point on assorted Liberator products. We have an unusual factory. Unlike those in the sex toy business, when someone comes out a sex toy, 100 companies are ready with molding equipment and motors and electronics to copy those toys instantly. But I invite you to see our factory tour that's on Lufu Brands. We have a unique factory that's unlike any other factory in the sex business. And it's not really a mattress factory either. So we're vertically integrated. We're able to produce, well, starting with Liberator products, we've created the category. The brand is at this point extremely well-known with consumers based on all the advertising dollars we have spent. and there's truly no competition on the Liberator side. On the Jack side, there's plenty of competition. However, we are vertically integrated. Our waste stream throws off basically zero-cost foam products that we convert into bean bags. Unlike Lovesac, who outsources everything and pays money for their foam product and outsources their covers, we produce it vertically. So really, our bean bag business, which actually came from really our waste stream and part of our sustainability program here at Liberator, is 100% trim, 100% waste, and our liners are also 100% surplus material from military and from the automotive industry. So we have extremely low costs on producing beanbags, and we process about 5,000 pounds of waste foam per day. So really in an excellent position to compete with anybody, whether it's from China or Lovesac or whatever. So that's how we protect that side of the business. But I'll just add one other thing. The Jaxx products are sold on good design and price to value, and Liberator products are sold on brand. And where Jaxx and even Havana has lots of competition, Liberator, the only competition we truly have is individuals' habits and the way that they, you know, whatever they do in the bedroom. however they choose to make love, that's really our competition.

Yeah, and I would add to that, too, that we're constantly innovating, and we release a lot of new products every year, and so we're always looking for better design, better quality, and affordable price point to the consumer. So anytime that we have had companies who have tried to knock us off in the past, either they don't last that long, Or they might release a product that's similar to ours, but ours winds up being better in the end. And then we release new versions that also gain attention and they're slow to catch up.

So it's really all about content and distribution. I mean, we try to cover all markets for all products and we try not to leave any cracks allowing competition to get in. So we just sell over here and leave this market wide open. Well, we don't do that. We market to the consumer, and they have a choice as to where they choose to buy, and we try to offer them many places to buy Liberator products, and that's fine with us.

Okay. Well, thanks very much, you guys. You're a little gem, a little undiscovered gem.

I was pleased to discover you, so thanks very much. We appreciate your interest. Thank you.

Gentlemen, there appear to be no further questions from the phone lines.

Okay, well, thank you, operator. I'll finish up the call. I'd like to say that we manage our business for the long term. We are methodically delivering on what we need to build world-class brands, and we believe that over time the market will realize our value. In 2022 was our 20th year in business, and this quarter we delivered 29.5% net revenue growth We expect to surpass $275 million in cumulative lifetime-to-date net sales during the second quarter of 2023. On behalf of the entire Luvu Brands management team, I want to thank you for joining us today and for your continued interest and support. Thank you, operator.

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