IPO Update: Intelligent Living Application Group Proposes IPO Plan

Summary

• Intelligent Living Application Group has filed to raise $20 million in a U.S. IPO.
• The firm sells mechanical locksets and electronic security devices.
• ILAG has produced contracting revenue and the IPO looks expensive, so I'll pass on it.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Get started today »

Quick Take

Intelligent Living Application Group (NASDAQ:ILAG) has filed to raise $20 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company sells mechanical locksets primarily in the United States and Canada.

ILAG is focusing on its existing, slow growing business, its financial results have been poor and it is seeking a comparatively high IPO valuation, so I'll watch the IPO from the sidelines.

Company & Technology

Hong Kong, China-based Intelligent Living was founded to design, manufacture and sell mechanical locksets for indoors and outdoors as well as smart locks for the connected home market.

Management is headed by Chairman and CEO Mr. Bong Lau, who has more than 20 years' experience in the door security hardware industry.

The company sells its products to major retailers as well as property developers and hotel/service apartment developers.

The firm began work on its smart locks initiative several years ago but has since focused its resources on its core business due to the trade conflict between the U.S. and China and more recently the effects of the Covid-19 pandemic.

Currently, 98% of the firm's revenue is from sales to the U.S. market.

Intelligent Living has received at least $4.2 million from investors including senior management.

Market & Competition

According to a 2020 market research report by Zion Market Research, the global market for mechanical locks is expected to exceed $9 billion in annual turnover by 2026.

This represents a forecast CAGR of 5.1% from 2020 to 2026.

The main drivers for this expected growth are increasing security concerns among consumers and the portable natures of mechanical locks.

Also, the Asia Pacific region is expected to account for the highest market share by 2026 owing to continued residential development at large scale in countries such as China and India.

Major competitive or other industry participants include:

• Defiant/Home Depot (HD)

• Schlage/Allegion (ALLE)

• Kwikset/Spectrum (SPB)

• Delaney Hardware

• Assa Abloy

• DOM Security

• Codelocks

• Serrature Meroni SpA

Customer Acquisition

The company pursues large customers through a direct sales and marketing force and attendance at trade shows and conferences.

Management believes its focus on producing higher quality products has 'hurt our profit margin in light of cut-throat price competition.'

The firm intends to perform test marketing of its self-branded products in the Southeast Asian region.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have decreased, as the figures below indicate:

Selling and Marketing	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2020	1.5%
2019	1.6%
2018	1.9%

Click to enlarge

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, improved to a still negative (12.4x) in the most recent reporting period.

Selling and Marketing	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2020	-12.4
2019	-18.1

Click to enlarge

Financial Performance

Intelligent Living's recent financial results can be summarized as follows:

• Contracting topline revenue

• Increased gross profit and gross margin

• Slightly reduced operating losses

• Increasing cash used in operations

Below are relevant financial results derived from the firm's registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2020	$ 5,036,257	-16.0%
2019	$ 11,129,943	-22.8%
2018	$ 14,415,069
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2020	$ 645,564	2.9%
2019	$ 1,118,003	14.4%
2018	$ 977,439
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2020	12.82%
2019	10.05%
2018	6.78%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2020	$ (640,833)	-12.7%
2019	$ (1,408,476)	-12.7%
2018	$ (1,449,995)	-10.1%
Net Income (Loss)
Period	Net Income (Loss)
Six Mos. Ended June 30, 2020	$ (481,930)
2019	$ (1,278,641)
2018	$ (1,409,306)
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2020	$ (686,880)
2019	$ (289,403)
2018	$ 522,629
(Glossary Of Terms)

Click to enlarge

Source: Company registration statement

As of June 30, 2020, Intelligent Living had $863,394 in cash and $3.8 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative ($1.2 million).

IPO Details

ILG intends to sell 4.4 million shares of common stock at a proposed midpoint price of $4.50 per share for gross proceeds of approximately $19.8 million, not including the sale of customary underwriter options.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO at the midpoint of the proposed price range, the company's enterprise value at IPO would approximate $77.4 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 25.29%.

Per the firm's most recent regulatory filing, the firm plans to use the net proceeds as follows:

We plan to use approximately $4 million of the proceeds to set up our new subsidiary or representative office in the United States to enhance sales and service support for our customers and future expansion in marketing and internet sales of self-branded products.

Approximately $3 million of the proceeds will be applied to establishment of production facility(ies) outside China in order to mitigate the effects of additional tariffs that may be levied due to the trade war between U.S. and China and to leverage lower labor costs in southeast Asia countries.

Approximately $4 million of the proceeds will be used for working capital of our Hong Kong operations, including but not limited to sale and marketing expenses, and research and development expenses for our smart locks, smart security and internet of things (IoT) products.

All of the remaining of the proceeds will be immediately remitted to China following the completion of this offering to increase the registered capital of our manufacturing facility in China for capital expenses and working capital.

Management's presentation of the company roadshow is not available.

The sole listed underwriter of the IPO is Network 1 Financial Securities.

Commentary

Intelligent Living is seeking U.S. capital to essentially begin to diversify its operations and revenue opportunities.

The company has provided updated financials, which show the negative effects of the Covid-19 pandemic and U.S China trade tensions with contracting revenue and swings to operating losses and operating cash used.

Selling and Marketing expenses as a percentage of total revenue have dropped slightly; however, its Selling and Marketing efficiency rate remains heavily negative, though improved more recently.

The market opportunity for traditional locksets is expected to grow at a moderate rate in the near term.

There is a growing opportunity for smart locks, but management has restrained itself in that regard and focused its limited resources on its core business, so its growth prospects remain muted.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. investors would only have an interest in an offshore firm with uncertain rights to the firm's operational results.

Management asserts that it has no unconsolidated VIEs, or variable interest entities.

This is a legal gray area that brings the risk of management changing the terms of the relationship or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Notably, many of the firm's entities have been incorporated in Hong Kong, where in the past it has been easier for them to serve U.S. and other foreign customers.

With the recent and ongoing crackdown by Beijing on Hong Kong, this advantage may be under some question as to the terms under which these businesses may operate.

Network 1 Financial Securities is the sole underwriter and its only IPO led by the firm over the last 12-month period has generated a return of negative (53.5%) since its IPO.

As to valuation, management is asking IPO investors to pay far higher revenue multiples than Schlage/Allegion, while producing worse financial results.

Given the firm's focus on its existing slow-growing business, negative financial results and high valuation assumptions, I'll watch the IPO from the sidelines.

Expected IPO Pricing Date: To be announced.

Note: This report is intended for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research before making any decisions. IPO investing carries significant volatility and risk of loss.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.