Capstone Companies, Inc. (OTCQB:CAPC) Q1 2016 Earnings Conference Call May 17, 2016 10:30 AM ET
Garett Gough - Investor Relations
Stewart Wallach - President and Chief Executive Officer
Gerry McClinton - Chief Financial Officer and Chief Operating Officer
Aimee Gaudet - Corporate Secretary
Michael Levine - Private Investor
Greetings and welcome to the Capstone Companies Inc. First Quarter 2016 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. Garett Gough of Investor Relations for CAPC. Thank you. You may begin.
Thank you, Adam and good morning everyone. We appreciate your time and interest in Capstone Companies. On the call today is Stewart Wallach, Capstone’s President and Chief Executive Officer and Gerry McClinton, Chief Financial Officer and Chief Operating Officer.
They will be discussing the first quarter results as well as giving you an update on their strategy and outlook. If you do not have the release that was distributed yesterday afternoon, it is available on the company’s website at www.capstonecompaniesinc.com. As you are aware, we may make forward-looking statements during today’s presentation. These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what we say today. These factors are outlined in our earnings release as well as in the documents filed by the company with the SEC, which can be found at capstonecompaniesinc.com or at sec.gov.
I just want to add this morning Stewart will be joining us remotely, so I just want to apologize in advance for any connection issues that may occur as a result. We don’t anticipate anything to go wrong, but if there is interruption of any kind, we will work quickly to resolve it.
With that, I will now turn it over to you, Stewart.
Thank you, Garett. I appreciate it. Thank you and good morning to everyone. I appreciate your time with us today. Before introducing Gerry McClinton to review the Q1 financial results, I would like to just take a few moments to discuss a couple of points that contributed to the results of Q1 2016. We built a great deal of momentum in 2015 through the launch of an expanded product portfolio and the addition of an iconic brand for LED lighting.
I am pleased to share with you that the momentum continues with having generated in excess of $2 million in Q1. Looking back to last year at this time, promotional opportunities were in decline as a result of the West Coast port disputes. We are now ramping up and resuming more normal promotional activity. And as I report strong revenues for Q1, I can also confirm the strongest record backlog entering into Q2. I will come back and elaborate on the backlog and its relative impact on the balance of 2016 after Gerry has completed his financial report.
A significant contributor to the revenue buildup is the launch of the exclusive North America trademark license for Hoover Home LED products. Upon acquiring this license in February of 2015, we fit a strategy in place to validate the brand extension for LED lighting by partnering with a single retailer that believed in our strategic direction. We launched the first Hoover Home LED products in Q4 2015 and we exceeded all retail sell-through expectations. In fact, the program was so successful that the promotional plan was extended out to 2017 with its original termination date planned for Q2 2016. Additionally, promotional programs for our Capstone branded products remain strong throughout 2015 and continue to gain traction through this quarter in 2016.
At this time, I would like to introduce Gerry McClinton to review the financials in detail, after which I will comment on the company’s outlook followed by a question-and-answer session. Thank you. Gerry?
Okay. Thank you, Stewart and good morning everyone. As we review the first quarter 2016 10-Q, we highly recommend that you also review the 10-K report for 2015. The company’s financial results can fluctuate greatly from quarter to quarter, but the 10-K report reflects the full year’s performance and more importantly discusses our strategic plans for the year.
So, let’s review the numbers. Net revenue for the quarter ended March 31, 2016 were approximately $2.1 million compared to $714,000 in 2015, that’s an increase of approximately $1.4 million from the first quarter 2015. Now, the company continued to have strong sales under both Capstone and the Hoover Home LED brand. Also international sales continued to gain traction contributing in excess of $1 million in total revenue in the quarter.
Cost of sales. For the three months ended March 31, 2016 and 2015 cost of sales were approximately $1.5 million and $406,000 respectively. That’s an increase of $1.1 million from their previous year. Now, cost of sales increased as a result of the increased sales volume. Overall, product costs have continued to remain steady during the period and the local presence of our Hong Kong-based sourcing team through strategic volume buying and negotiations with our factory suppliers have been instrumental in stabilizing production costs.
Gross profit. For the three months ended March 31, 2016 and 2015, gross profit was approximately $614,000 and $307,000 respectively. That’s an increase of $307,000 compared to the same period in 2015. Gross profit as a percentage of sales was 29.5% in the three month period compared to 43.1% in the same quarter 2015. However, we would note that in the period March 31, 2015, the company determined that $182,000 as previously accrued promotional allowances were no longer required. The reduction of those promotional allowances, were included in revenue in that period and had the impact of increasing gross profit.
Operating expenses. Sales and marketing for the three months ended March 31, 2016 and 2015, sales and marketing expenses were approximately $63,000 and $37,000 respectively. That’s an increase of $26,000. But during the quarter, we incurred initial royalty payments of $31,000 for the Hoover Home LED branded items, which accounted for most of that increase. Compensation expenses for the three months ended March 31, 2016 and 2015 overall compensation expenses were approximately $308,000 and $361,000 respectively. The reduction of $53,000 was a result of personnel cutbacks during the period.
Professional fees for the three months ended March 31, 2016 and 2015 were approximately $104,000 and $96,000 respectively, an increase of $8,000. The higher expense is partly the result of the company engaging the services of a sales consultant to support the U.S. sales operation functions. Product development expenses for the three months ended March 31, 2016 and 2015 were approximately $36,000 and $45,000 respectively, a reduction of $9,000. This expense reduction is a result of our Hong Kong office negotiating more favorable startup terms for new project development.
Other general and administration for the three months ended March 31, 2016 and 2015 expenses were approximately $143,000 and $122,000 respectively, an increase of $21,000. The expense increase is mainly the result of increased bank fees associated with the processing of higher revenue during the period. Total operating expenses for the three months ended March 31, 2016 were $655,000 compared to $661,000 in 2015, a net reduction of $6,000. Now, despite the additional sales and marketing expenses and the higher bank fees resulting from the increased revenues, total operating expenses were in fact lower than the same quarter in 2015.
Net operating loss. For the three months ended March 31, 2016, the operating loss was approximately $41,000 compared to $354,000 net operating loss in 2015. This is an improved performance of $313,000 over the same period last year. Interest expense for the three months ended March 31, 2016 and 2015 was approximately $58,000 and $37,000 respectively, an increase of $21,000 as compared to the same period in 2015. This higher interest expense in the first quarter is a result of higher bank funding required to support the large accounts receivable balances carried over from the fourth quarter 2015, also combined with additional funding needs required to support the increase in accounts receivable in the first quarter of 2016 compared to last year.
Net loss. For the three months ended March 31, 2016, the company had a net loss of approximately $99,000 as compared to a net loss of $391,000 in the same period last year. The overall net improvement of $292,000 was the result of improved revenue, gross profit and additionally total expenses remained under 2015 levels.
Now, in order to support sustained revenue growth and invest in strategic marketing initiatives, funding must also be in place. With our principle sources of liquidity being cash on hand, cash generated from operations, availability under our bank line and director funding as needed, management believes that our borrowing capacity provides the company with the financial resources needed to run operations and reinvest in our business during 2016. The funding activities during the quarter were operating activities. Cash provided by operating activities was $1.8 million in the three months ended March 31, 2016 compared with approximately $278,000 provided by operating activities in 2015. That’s an increase of $1.5 million compared to the previous year. During the quarter, the company collected $3.8 million of accounts receivable and used approximately $1.8 million and reducing accounts payable and accrued liabilities and $99,000 funding the period loss.
Investing activities, cash used for investing activities in the quarter was approximately $5,000 compared to 2015. Now, the company plans future investments in new product molds and tooling. As the company grow – continues to grow the company’s future capital requirements will also increase. The Hong Kong management team have been successful negotiating more favorable payment terms that will reduce the amounts of upfront capital required when initiating new project. Financing activities, net cash used in financing activities for the period March 31, 2016 was approximately $1.7 million compared to the $442,000 used in 2015. Now with the collections of the accounts receivable balances in the quarter, the company paid down outstanding loans to Sterling National Bank and other note holders. The company also paid off an old related party loan with interest totaling $109,000 and opened a new note for $360,000 as partial funding for the large order backlog that we currently have on hand. At March 31, 2016, the company was in full compliance with all agreements pursuing to existing credit facilities and loans.
This concludes my financial summary for the first quarter 2016. I will now turn the call back to Stewart.
Thank you, Gerry. I appreciate that. Let’s continue the discussion by taking a look forward to the balance of 2016. Please keep in mind that product launches do not immediately impact revenues. So therefore our expanded product portfolio recently introduced at this year’s National Hardware Show will not materially impact our performance until the earliest of Q4 of 2016 and early 2017. Conversely the sales year-to-date and our current backlog resulted from our product development efforts which we conducted in 2015. I am pleased to inform that the current backlog with ship dates in Q2 is anticipated to generate revenues upwards of $8 million. This will be a record Q2 for the company and equally as important our Q3 backlog is outpacing our performance in the same period 2015.
In summary, we are anticipating a record year and the underlying strategy that have been in place by your company’s management team are yielding the desired results. I am comfortable with reaffirming that revenues in excess of $20 million should be realized in 2016. Moreover, as we achieve these results your Board of Directors are now taking a very strong look at the company’s relative share value. We are prioritizing discussions on this matter and allocating time and resources to determine a proper course of action to bring Capstone’s stock to its rightful and deserving share value. You can anticipate an increase in communications from the company in the months ahead as well.
Once again, to our long time shareholders, I would like to personally thank you for your continued support and to our new and potential shareholders I would like to welcome you to the exciting time in our company’s history. Aimee?
We do have a few questions that came in via e-mail that we would like to address upfront. The first one was directed for you Stewart maybe you can shed some light on this regarding the CPC what is the status of the patent for the CPC bulbs, when will the patent be finalized and can you monetize the patent?
Alright. Well this is a very timely question. Actually I am pleased to tell you we have not formally announced this, but I am pleased to tell you that this past week, we have been notified by the Patent Office that our patent has been allowed which means we have Notice of Allowance and it will still be a couple of months for publishing and printing. But the issuance of the patent is imminent. And this is a long process, great deal of things go out to AC Kinetics, particularly Dr. Neil Singer. And we are very excited about this, so yes, timely question. We are in fact getting the patent, it will be issued in the months ahead, but we have received our Notice of Allowance.
Okay, great. Next question, can you add more color to the international sales?
Alright. Let me – our international sale, let me address this, our international sales as you can see from Q1 continued to gain traction. These sales are typically generated as a result of successful programs with our global client headquarters in the U.S. However, I will point out that we also had visitors at the recent International Hardware Show from Australia and New Zealand expressing interest in working directly with our Hong Kong office on programs suitable for those regions. Larry Sloven, the President of our Capstone International subsidiary will in fact be conducting that business directly. So we anticipate that our international sales picture will continue to improve.
Okay. Thank you. Gerry maybe you can answer this question, its regarding the Board, so far Mr. Guzy is the only Independent Director on the Board, do you have plans to add to the Board of Directors?
Yes, another opportune question. Yes, we have plans to add to the Board of Directors and addressing the Independent Directors will be pivotable in our decision making and election. So it’s a very important strategy that we are looking at right now.
Okay. Thanks. Now, this one might be another for you Gerry, are you comfortable with forecasting CAGR comp – excuse me compound annual growth rate for Capstone?
Well, the quick answer to that is no. We are not comfortable forecasting a compound annual growth rate. However, we can highlight that in 2015, revenues were $15.9 million and in 2016 revenues will be in excess of $20 million which will provide a growth rate in excess of 25% for the year. So we feel comfortable about that.
Okay. Thank you. Stewart has there been a shake out in LED market and how do you deal with that modification and pricing pressures on LED products?
Well, there has been in fact a significant reduction in the selling costs in the LED lighting market. This is most obvious, I am sure in the areas of light bulbs. For instance today a 60 watt light bulb may sell for $2 to $3 or $2 to $3.50 will promote it and only 1 year ago we are selling for $10 to $12. But keep in mind our business strategy has always been to shy away from commodity price. We have always and we will continue to focus on innovation through inventiveness. And we do not buy off the shelf products per se. The comparative impact on LED bulbs really only affects potentially our power failure bulbs as the consumer will logically consider the power failure benefit and its relative cost when compared to the low cost LED light bulbs being sold today. It was for this reason that we decided to postpone the launch last year and initiated development with lower cost manufacturers. This price down version of CPC light bulb was introduced at the International Hardware Show and was very well received. So it was a good strategy. The postponement was a bit frustrating I am sure to our shareholders not knowing exactly what was behind it. But we had to watch the dynamics of the LED business and find the right partner to allow us to compete as aggressively as possible. So now of course adding the recent news of the Notice of Allowance on our patent, this CPC bulb is being the initial product incorporating CPC technology should be a very exciting launch.
Okay. And this last question is from one of our long time shareholders, he states, he is very encouraged to learn today that the Board of Directors will be focusing their attention to addressing our share value, the company definitely deserves to be recognized for its success it has achieved over the last several years. Can you elaborate if your plans include up-listing the stock or details you maybe willing to share. It simply doesn’t seem like that we continue to be compared to non-reporting businesses?
Let me take that with Stewart. We are considering several strategies to ensure that our stock price properly reflects our current and future opportunities. Once we have identified the most appropriate course of actions we will keep the public informed as we implement the strategy. Truly, all I can say at this moment.
Yes I might add to that once again, Garett, I just want to emphasize for our listeners and our shareholders that this is a priority and this is going to immediately be addressed. So, I suspect you will be hearing things from the board and/or me directly not in the months ahead, but possibly the days and weeks ahead. So, again I just want to make sure everybody realizes that the long wait may in fact be over. So – and myself as the largest shareholder looks forward to this. I am very anxious about this. So, everybody got their attention focused. The business has stabilized and has a tremendous growth curve and we are looking to an amazing 2016. So, I want to thank you all for your support again and for those that have been with us the long time especially, a special thanks to you. Aimee, are there any more e-mail questions or because I see on the….
That covered all the e-mail questions.
Adam, could you open it up for questions in the telephone line?
Thank you, gentlemen. [Operator Instructions] Our first question comes from the line of Dr. Michael Levine, a Private Investor. Please go ahead.
Good morning, everyone. It’s just a great quarter. Thank you so much. The question I have is can you further explain the record $8 million revenue backlog, is there any specific product or products that’s leading the way?
Well, let me – this is Stewart Wallach speaking, let me elaborate maybe give you a little bit further understanding of how the products continue to grow and those that don’t. This record backlog is a direct result of two quarters of success at retail. As I mentioned earlier particularly the Hoover brand, which was at a specific retailer, which as you know in accordance with our vendor agreements we can’t make announcements, but who carriers the products and what their plans are. But I can tell you that we so far exceeded expectations that the bookings that you are now hitting Q2 for that one quarter exceeded the projections and the orders placed for the prior two quarters. So, on that note, it’s a direct result of sell-through. We did not anticipate this quite frankly. We knew we were having a great success, but we were such a standout performance with particularly with our accent lighting programs that it generated a strong backlog for Q2 or Q3.
Just as a follow-up to that, is it possible that $8 million figure could actually be raised if there is six weeks left in the second quarter?
I would say it’s a very good possibility. But I wouldn’t go on record providing any guidance in that regard. Keep in mind as you probably know having watched the company for sometime, quarterly cut-offs on sales are affected by a number of things. Container loads that lead the docs or don’t lead the docs, so sometimes what we anticipate to occur in a quarter actually falls into the very next quarter and it may only be a day or two. So, it’s difficult to project exactly, but yes, I think that what you stated is a fair conclusion. It may in fact be greater the number that we have shared with you today.
Okay. And that’s the next question, you stated in the recent 10-K that part of the stock price volatility and spread on the price is due to the lack of having a primary market marker, is there any way to remedy that situation?
That’s all being discussed and addressed as part of what I discussed earlier. When I tell you that we are taking a comprehensive look at the board level of what is required to have our stock recognized properly and to have it start to gain traction in the marketplace, this obviously becomes a key component of that. But at this point, it would be premature to share anything with you along those lines other than the fact that it is in fact a component of the strategy.
Okay. And the final question, you mentioned that CPC LED lighting that’s coming on to the market, I believe the impact maybe Q4 or into 2017. So, basically what the company is doing right now is not reflective of all so far CPC bulbs. Is that correct?
Yes, correct. The numbers that we are providing right now and our anticipated $20 plus million does not forecast bulbs into it at all.
Okay. Thank you.
You bet. Thank you for participating.
Thank you, Mike.
[Operator Instructions] Ladies and gentlemen, it appears we have no further questions in queue at this time. I would like to turn the floor back over to management for any closing comments.
Thank you all for participating today. I know that for many of you what we shared with you today is something you have all been looking forward to hearing. And I pledge to you that this will not get lost in the shuffle. We are focused on this. As I said, this is not a long-term plan, this is something that’s been in plans for us for quite some time over the past several months, but it is now coming to ahead and you could anticipate some feedback and information if not announcements in the days ahead, not months – in the days and weeks ahead. You will be very well informed of the direction we are taking. So, again, thank you very much for your years of support. I know, I as the largest shareholder of the company, I am very excited about the results and looking forward as even more excited. So, thank you again and look forward to speaking to you in the weeks ahead.
Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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