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)
                          September 30,        September 30,
                              2022                 2021
Net Sales                          100.0 %              100.0 %
Cost Of Goods Sold                  75.5 %               75.9 %
Gross Margin                        24.5 %               24.1 %
Operating Expenses                  17.2 %               18.9 %
Income from operations               7.3 %                5.2 %




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



                                                 Three Months Ended
                                                    (unaudited)
(Dollars in thousands)            September 30, 2022          September 30, 2021
Net Sales:
Liberator                       $     5,107          63 %   $     2,741          44 %
Jaxx                                  1,781          22 %         1,880          30 %
Avana                                   554           7 %           744          12 %
Products purchased for resale           315           4 %           428           7 %
Other                                   302           4 %           431           7 %
 Total Net Sales                $     8,059         100 %   $     6,224         100 %

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Net sales. Sales for the three months ended September 30, 2022 were approximately $8,059,000, a 29% increase from the comparable prior year period. The major components of net sales, by product, are as follows:





    ·   Liberator sales - Sales of Liberator branded products increased
        $2,741,000, or 86%, during the quarter from the comparable prior year
        period, due primarily to higher sales through the Company's e-commerce
        site, Liberator.com, and higher sales through Amazon.




    ·   Jaxx sales - Jaxx product sales decreased 5% from the prior year first
        quarter to $1,781,000, primarily due to reallocating our production
        resources to fulfill increased demand for the Liberator products.




    ·   Avana sales - Net sales of Avana products decreased 25% during the quarter
        from the comparable prior year quarter to $554,000. Sales of this product
        line have been impacted by lower-priced competitive products in the
        marketplace, production constraints which resulted in longer delivery lead
        times which resulted in lower sales through drop ship channels including
        Amazon, Overstock and Wayfair.




    ·   Products purchased for resale - This product category decreased by 26%, or
        $113,000, from the prior year first quarter due to lower sales of certain
        products through our e-commerce website, Liberator.com.





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Gross margin. Gross profit, derived from net sales less the cost of goods sold, includes the cost of materials, direct labor, manufacturing overhead, freight costs, royalties and depreciation. Gross profit margin, as a percentage of sales, increased to 24.5% from 24.1% in the prior year first quarter. Gross profit increased to $1,973,000 from $1,499,000 in the prior year first quarter.

Operating expenses. Total operating expenses for the three months ended September 30, 2022 were approximately 17% of net sales, or approximately $1,397,000, compared to 19% of net sales, or approximately $1,176,000, for the same period in the prior year.

Other income (expense). Interest expense during the first quarter decreased slightly from approximately ($96,000) in fiscal 2022 to approximately ($84,000) in fiscal 2023. The decrease was primarily due to lower average borrowing balances and reduced interest expense on those lower balances.





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:





                                          Three Months Ended
                                             September 30,
(Dollars in thousands)                    2022           2021
                                              (Unaudited)

Cash flow data: Cash provided by operating activities $ 617 $ 169 Cash used in investing activities $ (21 ) $ (50 ) Cash provided by financing activities $ (107 ) $ (135 )

As of September 30, 2022, our cash and cash equivalents totaled $1,347,790, compared to $960,635 in cash and cash equivalents as of September 30, 2021.

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 was $617,000 during the three months ended September 30, 2022 compared to $169,000 net cash provided by operating activities in the three months ended September 30, 2021. The primary components of the cash provided by operating activities in the current year is the net income of $492,000, decrease in Inventory of $158,000 and increase in Accrued Compensation of $110,000, offset in part by an increase in accounts receivable of $290,000.





Investing Activities

Cash used in investing activities in the three months ended September 30, 2022 was $21,000 and related to the purchase and installation of certain production equipment during the period.






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Financing Activities

Cash used by financing activities during the three months ended September 30, 2022 of $107,000 was primarily attributable to the repayment of the secured and unsecured notes payable and payments made on equipment notes.





Inflation

During fiscal 2022, we experienced increases in various raw material costs and increases in labor and transportation costs. These cost pressures have not stabilized and we anticipate they will continue to increase throughout the fiscal 2023, although there is no assurance this will occur. 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.





Non-GAAP Financial Measures



Reconciliation of net income to Adjusted EBITDA for the three months ended
September 30, 2022 and 2021:



 (Dollars in thousands)                          Three months ended September 30,
                                                  2022                      2021
Net income                                   $           492           $           227
Plus interest expense, net                                84                        96
Plus depreciation and amortization expense                87                        71
Plus stock-based compensation                             12                         4
Adjusted EBITDA                              $           675           $           398

As used herein, Adjusted EBITDA represents net income before interest income, interest expense, income taxes, depreciation, amortization, and stock-based compensation expense. We have excluded the non-cash expenses and stock-based compensation, 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 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 or 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 non-cash charges for stock-based compensation expense.

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 September 30, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.





Critical accounting policies

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, accounts receivable allowances and impairment of long-lived assets. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing in this report.






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Recent accounting pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the unaudited condensed consolidated accompanying financial statements.

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