LUVU BRANDS, INC. This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Company during the fiscal years ended
Results of Operations Overview
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.
Year Ended Year Ended
June 30, 2020 June 30, 2019
Net sales 100 % 100 %
Cost of goods sold 70 % 74 %
Gross profit 30 % 26 %Selling, General and Administrative Expenses 22 % 22 %
Operating income 8 % 2 %
Fiscal Year endedJune 30, 2020 Compared to the Fiscal Year EndedJune 30, 2019
Net sales. The net sales increase of 8% in fiscal 2020 from fiscal 2019 consists
of a 32% increase in sales of manufactured branded Jaxx and Avana products
offset, in part, by a 8% decrease in sales of Liberator products and an 11%
decrease in sales of products purchased for resale. Sales of Jaxx products
increased 21% from the prior year to approximately
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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
Operating expenses. Excluding depreciation expense, total operating expenses for
the year ended
Other income (expense). Other income (expense) increased to
We had a net income from operations of
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, 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 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
Year ended
The following table summarizes our cash flows:
2020 2019
(in thousands)
Cash flow data from continuing operations:
Cash provided by operating activities $ 367 $ 158
Cash used in investing activities $ (227 ) $ (13 )
Cash provided by financing activities $ 363 $ 73 As of
Operating Activities
Net cash provided by operating activities primarily consists of the net income (loss) 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 and an increase in accrued payroll and related offset, in part, by an increase in accounts receivable and inventory and a decrease in accounts payable.
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Investing Activities
Cash used in investing activities in the year ended
Financing Activities
Cash provided by financing activities in the year ended
Cash provided by financing activities in the year ended
Inflation
During fiscal 2019 and 2020, we experienced increases in various raw material costs and increases in labor costs. We believe these cost pressures have not stabilized and will continue to increase throughout fiscal 2021, although there is no assurance this will occur. Inflation and import tariffs 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.
Sufficiency of Liquidity
The accompanying consolidated financial statements have been prepared in
accordance with
In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern.
These actions include an ongoing initiative to increase sales, gross profits and
our gross profit margin. To that end, during the first quarter of fiscal 2018,
we purchased new foam compression equipment for installation during the second
quarter of fiscal 2018. These actions did yield higher factory throughput at a
lower cost of goods sold but were not sufficient to offset rising raw material
and labor costs. In response to rising labor costs, we moved the sewing of
certain high-volume Jaxx and Avana products to a contract facility in
We also plan to continue to manage discretionary expense levels to be better
aligned with current and expected revenue levels. We estimate that the
operational and strategic growth plans we have identified over the next twelve
months will, at a minimum, require approximately
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Capital Resources
We expect total capital expenditures for fiscal 2021 to be less than
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.
Off-Balance Sheet Arrangements
We do not use off-balance sheet arrangements with unconsolidated entities or
related parties, nor do we use other forms of off-balance sheet arrangements.
Accordingly, our liquidity and capital resources are not subject to off-balance
sheet risks from unconsolidated entities. As of
We have entered into operating leases primarily for certain equipment and our
facilities in the normal course of business. These arrangements are often
referred to as a form of off-balance-sheet financing. Future minimum lease
payments under our operating leases as of
Effect of Recently Issued Accounting Standards and Estimates
We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our consolidated financial position, results of operations, or cash flows.
Application of Critical Accounting Policies and Estimates
Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with GAAP. 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. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below.
Revenue Recognition
We record revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of our revenue is generated by fulfilling orders for the purchase of manufactured products and product purchased for resale to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which we are responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill our promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice.
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Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling 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. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. 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.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and an additional allowance may be required.
Inventories
We value inventory at the lower of cost or net realizable value on an item-by-item basis and establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the net realizable value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or net realizable value, management considers such factors as the amount of inventory on-hand, the estimated time required to sell such inventory, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations. Finished goods and goods in process include a provision for manufacturing overhead, including depreciation.
Accounting for Income Taxes
We utilize the asset and liability method of accounting for income taxes. We
recognize deferred tax liabilities or assets for the expected future tax
consequences of temporary differences between the book and tax basis of assets
and liabilities. We regularly assess the likelihood that our deferred tax assets
will be recovered from future taxable income. We consider projected future
taxable income and ongoing tax planning strategies in assessing the amount of
the valuation allowance necessary to offset our deferred tax assets that will
not be recoverable. We have recorded and continue to carry a full valuation
allowance against our gross deferred tax assets that will not reverse against
deferred tax liabilities within the scheduled reversal period. If we determine
in the future that it is more likely than not that we will realize all or a
portion of our deferred tax assets, we will adjust our valuation allowance in
the period we make the determination. We expect to provide a full valuation
allowance on our future tax benefits until we can sustain a level of
profitability that demonstrates our ability to realize these assets. At
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Impairment of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. 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 2019 and 2020, we did generate 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.
Non-GAAP Financial Measures Reconciliation of net income (loss) to Adjusted EBITDA for the years endedJune 30, 2020 and 2019: Year ended June 30, 2020 2019 (in thousands) Net income (loss)$ 860 $ (157 ) Plus interest expense and financing costs 590 567
Plus depreciation and amortization expense 151 165 Plus stock-based compensation expense
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Adjusted EBITDA $ 1,622 $ 598 As used herein, Adjusted EBITDA represents net income (loss) 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. 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 (loss) of the Company or net cash provided by operating activities.
Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company's net income as determined in accordance with GAAP, and are not a substitute for or a measure of the Company's profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for stock-based compensation expense and loss on disposal of assets.
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