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LUVU > SEC Filings for LUVU > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for LIBERATOR, INC.

Form 10-Q for LIBERATOR, INC.


14-May-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Results of Operations

The following table sets forth, for the periods indicated, information derived from our Interim Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows the table should be read in conjunction with our Interim Unaudited Condensed Consolidated Financial Statements.

                                                          Three Months Ended
                                                             (unaudited)
                                                 March 31, 2014        March 31, 2013
Net Sales                                                 100.0 %              100.0 %
Cost Of Goods Sold                                         76.0 %               72.0 %
Gross Margin                                               24.0 %               28.0 %
Selling, General and Administrative Expenses               24.0 %               27.8 %
Income From Operations                                      0.0 %                0.2 %

                                                            Nine Months Ended
                                                                (unaudited)
                                                    March 31, 2014       March 31, 2013
Net Sales                                                 100.0 %              100.0 %
Cost Of Goods Sold                                         72.7 %               70.4 %
Gross Margin                                               27.3 %               29.6 %
Selling, General and Administrative Expenses               24.9 %               26.9 %
Income From Operations                                      2.4 %                2.7 %

The following table represents percentage of net sales by product type:

                                     Three Months Ended            Nine Months Ended
                                        (unaudited)                  (unaudited)
                                  March 31,      March 31,     March 31,      March 31,
                                    2014           2013          2014           2013

        Net Sales:
        Liberator                      52 %            52 %         48 %            48 %
        Jaxx                           13 %            10 %         15 %            12 %
        Resale                         32 %            34 %         30 %            32 %
        Other                           3 %             4 %          7 %             8 %
               Total Net Sales        100 %           100 %        100 %           100 %

Liberator- Liberator products consist of items that are manufactured by us and are intended for sale in the sexual health and wellness market. Liberator products are sold to mass market internet retailers and retail stores as well as directly through our e-commerce sites and single retail store. Total dollar sales of Liberator products increased 11% during the three month period ended March 31, 2014 from the comparable year earlier period and 6% for the nine month period ended March 31, 2014 from the same period in the prior year. This increase is primarily related to higher sales of Liberator retail products, products in our Décor line and sales of our larger Liberator furniture products.

Jaxx- Jaxx products are casual and contemporary furniture products manufactured by us and sold under the Jaxx brand. Jaxx products are sold to e-merchants and retailers as well as directly through our e-commerce site. Net dollar sales of Jaxx products increased 38% during the three month period ended March 31, 2014 compared to the prior year period and accounted for 13% of total net sales. This increase is primarily due to an increase in sales to certain wholesale customers and, to a lessor extent, sales through our JaxxLiving website. Net sales of Jaxx products increased 42% during the nine month period ended March 31, 2014 compared to the prior year period and accounted for 15% of total net sales. This increase is primarily due to an increase in sales to certain wholesale customers.


Resale-Resale products are non-Liberator branded products (including Tenga) that we purchase from others at wholesale or distributor prices and resell through our sales channels to retailers, distributors, or through one of our e-commerce sites and single retail store. Net sales of resale products increased 4% during the three month period ending March 31, 2014 from the comparable prior year period and accounted for 32% of total net sales due to higher sales of non-Tenga products to certain customers. Sales of Tenga products accounted for approximately 22% in each of the three month periods ended March 31, 2014 and 2013, respectively. Net sales of resale products increased almost 3% during the nine month period ending March 31, 2014 from the comparable prior year period and accounted for 30% of total net sales due to lower sales of non-Tenga products to certain customers. Sales of Tenga products accounted for approximately 20% in each of the nine month periods ended March 31, 2014 and 2013, respectively.

Other- Other products include sales from contract manufacturing and fulfillment services. Net sales of these products and services during the three month period ended March 31, 2014 decreased 11% compared to the three month periods in the prior year and accounted for 3% of total net sales. This decrease is due to a decrease in the number of contract manufacturing projects and fulfillment contracts during fiscal year 2014 from the prior fiscal year. Contract manufacturing projects are typically short-term in nature and there can be no assurance that such projects will either continue or increase in future periods. Net sales of these products and services during the nine month period ended March 31, 2014 decreased 11% compared to the three month periods in the prior year and accounted for 7% of total net sales. This decrease is due to a decrease in the number of contract manufacturing projects and fulfillment contracts during fiscal year 2014 from the prior fiscal year.

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net sales. The Company recorded net sales for the three months ended March 31, 2014 of $3,949,639, an increase from the comparable prior year period by $381,524, or 10.7%. The increase in net sales was primarily due to higher sales in the Direct channel which was due to higher sales through Liberator.com and JaxxLiving.com. Sales through the Direct channel, which included Liberator.com and JaxxLiving.com, increased 21% during the three months ended March 31, 2014 from the comparable prior year period. Sales through the Wholesale channel increased by 9% during the three months ended March 31, 2014 from the comparable year earlier period. The Wholesale channel includes Liberator branded products sold to distributors and retailers, non-Liberator products sold to retailers, and private label items sold to other resellers. The Wholesale channel also includes contract manufacturing services, which consists of specialty items that are manufactured in small quantities for certain customers, and which, during the three months ended March 31, 2014, accounted for approximately 1% of net sales. The Other sales channel consists principally of shipping and handling fees derived from our Direct sales channel. The Other sales channel decreased 32% to $145,732 in the three months ended March 31, 2014, primarily as a result of lower shipping and handling charges on sales through the Direct channel. We expect Other revenue to continue to decline in future periods as "free" or reduced-cost shipping and handling continues to be the trend in the e-commerce industry.

Gross profit. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation. Gross profit decreased to $946,043 for the three months ended March 31, 2014 from $999,372 in the comparable prior year period (a decrease of 5%) and primarily resulted from increased production costs and increased raw material costs which were offset in part by higher average selling prices.

Operating expenses. Total operating expenses for the three months ended March 31, 2014 were 24% of net sales, or $946,181, compared to 27.8% of net sales, or $990,848, for the same period in the prior year. The slight decrease in operating expenses was primarily the result of decreased selling and marketing expense. Selling and marketing expense decreased by $76,629 from the prior year quarter, primarily as a result of decreased sales personnel costs.

Other income (expense).Other income (expense) during the third quarter decreased from expense of ($187,789) in fiscal 2013 to expense of ($104,123) in fiscal 2014. The decrease was due to a loss on disposals of assets during the three months ended March 31, 2013 which did not occur during the current year period.


Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

Net sales. Net sales for the nine months ended March 31, 2014 increased from the comparable prior year period by $691,523, or 6.4%. The increase in net sales was primarily due to higher sales in the Direct and Wholesale channels, offset in part by lower sales through the Other channel. The Direct channel (which includes product sales through our three e-commerce sites and our single retail store) increased by 21.4%, or $843,470 during the nine months ended March 31, 2014, from the comparable year earlier period. The Wholesale channel (which consists principally of sales to distributors and retailers) increased by 2.3%, or $142,920, compared to the prior year. These increases was partially offset by a decrease of $294,867, or 40.5%, in the Other channel which consists primarily of shipping and handling fees and costs derived from our Direct business and fulfillment service fees.

Gross profit. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs and depreciation. Total gross profit for the nine months ended March 31, 2014 decreased to $3,121,942 from $3,188,891 (a decrease of 2%) in the comparable prior year period. Gross profit as a percentage of sales decreased to 27.3% for the nine months ended March 31, 2014 from 29.6% in the comparable prior year period. The decrease primarily resulted from increased production costs and increased raw material costs which were offset in part by higher average selling prices.

Operating expenses. Total operating expenses for the nine months ended March 31, 2014 were 24.9% of net sales, or $2,854,817, compared to 26.9% of net sales, or $2,898,362, for the same period in the prior year and represents a decrease of 2%. The decrease in operating expenses was primarily the result of lower selling and marketing costs. Selling and marketing expense decreased from $1,091,440 to $980,662, or 10% as the Company incurred lower personnel related expenses.

Other income (expense).Other income (expense) decreased from an expense of ($359,609) in fiscal 2013 to an expense of ($303,216) in fiscal 2014. Interest expense increased from $272,308 in the nine months of the prior fiscal year to $303,598 in the current comparable year period due to higher borrowing balances. The decrease was primarily due to a loss on disposals of assets during the three months ended March 31, 2013 which did not occur during the current year period.

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, 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



      The following table summarizes our cash flows:
                                                            Nine Months Ended
                                                                March 31,
                                                           2014           2013
                                                               (Unaudited)
      Cash flow data:
      Cash provided by (used in) operating activities   $ 221,205     $  (18,994 )
      Cash used in investing activities                   (26,125 )     (253,471 )
      Cash provided by financing activities                42,030        154,616


As of March 31, 2014, our cash and cash equivalents totaled $634,970, compared to $376,571 in cash and cash equivalents as of March 31, 2013.

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Our principal sources of liquidity are our cash flow that we generate from our operations, availability of borrowings under our line of credit and cash raised through equity and debt financings.

Operating Activities

Net cash provided by operating activities from continuing operations primarily consists of net income adjusted for certain non-cash items, including depreciation, stock-based compensation, and the effect of changes in working capital. Net cash provided by operating activities was $221,205 in the nine months ended March 31, 2014 compared cash used in operating activities of $18,994 in the nine months ended March 31, 2013. The primary reasons for the increase in cash provided by operating activities is a decrease in inventory of $82,742, as well as the increase in accounts payable of $128,041 and accrued compensation of $92,562.

Investing Activities

Cash used in investing activities in the nine months ended March 31, 2014 was $26,125 and related to the purchase of incidental office and production equipment. Investing activities in the nine months ended March 31, 2013 were $253,471 and was primarily attributable to the costs associated with the new e-commerce platform.

Financing Activities

Cash provided by financing activities during the nine months ended March 31, 2014 of $42,030 was primarily attributable to the borrowings under the line of credit offset by repayments of debt obligations.

Cash provided by financing activities during the nine months ended March 31, 2013 of $154,616 was primarily attributable to the borrowings of debt obligations, partially offset by repayments under the line of credit and credit card advance.

Inflation

We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and transportation costs. We attempt to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs.

Sufficiency of Liquidity

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We had a net loss of $36,091 for the nine months ended March 31, 2014 and a net loss of $288,485 for the year ended June 30, 2013. As of March 31, 2014, we have an accumulated deficit of $8,083,776 and a working capital deficit of $1,793,074.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to meet our financing requirements, and the success of our future operations. Management believes that actions presently being taken to revise our operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase gross profit margins through improved production controls and reporting. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational growth plans we have identified over the next twelve months will require approximately $200,000 of funding, primarily for working capital. We expect to invest approximately $150,000 on sales and marketing programs, primarily sexual wellness advertising in magazines, on the internet, and on cable television. We will also be exploring the opportunity to acquire other compatible and related businesses.


We plan to finance the required $200,000 with a combination of anticipated cash flows from operations over the next twelve months as well as cash on hand and cash we are able to obtain through equity and debt financings. We cannot provide any assurances that required financing will be obtained or that terms of such required financings will be on reasonable terms to our company.

Capital Resources

We do not currently have any material commitments for capital expenditures. We expect total capital expenditures for the remainder of fiscal 2014 to be under $40,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit. This includes capital expenditures that we may incur in conjunction with initiatives to further upgrade our e-commerce platform, our computer network infrastructure or our production capabilities and capacity.

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.

At March 31, 2014, we had $647,130 outstanding on our accounts receivable and inventory line of credit, compared to an outstanding balance of $366,196 on our accounts receivable line of credit at June 30, 2013. On September 4, 2013, the credit agreement with Advance Financial Corporation was amended and restated to increase the asset based line of credit to $1,000,000 and include an Inventory Advance (as defined in the amended and restated receivable financing agreement) of up to the lesser of $300,000 or 75% of the eligible accounts receivable loan. In addition, the amended and restated agreement changed the interest calculation to prime rate plus 3% (as of March 31, 2014, the interest rate was 6.25%) and the Monthly Service Fee was changed to 0.5% per month.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements. Those statements include, but may not be limited to, all statements regarding management's intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as believe," anticipate," expect," will," may," should," intend," plan," estimate," predict," potential," continue," likely" and similar expressions are intended to identify forward-looking statements.

In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Non-GAAP Financial Measures



Reconciliation of net loss to Adjusted EBITDA income for the nine months ended
March 31, 2014 and 2013:



                                                     Nine months ended March 31,
                                                       2014               2013
    Net loss                                     $     (36,091 )     $     (69,080 )
    Less interest income                                  (382 )              (552 )
    Plus interest expense                              303,598             272,308
    Plus depreciation and amortization expense         174,762             133,524
    Plus stock-based compensation                       47,752              29,219
    Adjusted EBITDA income                       $     489,639       $     365,419


As used herein, Adjusted EBITDA represents net loss before interest income, interest expense, income taxes, depreciation, amortization, amortization of debt issuance costs and stock-based compensation expense. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). 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 loss of the Company or net cash provided by (or used in) 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 loss 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.

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