ToughBuilt Industries, Inc. (TBLT) CEO Michael Panosian on Q2 2022 Results - Earnings Call Transcript

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ToughBuilt Industries, Inc. (NASDAQ:TBLT) Q2 2022 Earnings Conference Call August 19, 2022 5:00 PM ET

Company Participants

Martin Galstyan - Chief Financial Officer

Michael Panosian - President and Chief Executive Officer

Conference Call Participants

Kevin Dede - H.C. Wainwright

Operator

Greetings. Welcome to the ToughBuilt’s Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Martin Galstyan, Chief Financial Officer. Thank you. You may begin.

Martin Galstyan

Good morning, and thank you all for joining us today to discuss ToughBuilt's second quarter 2022 financial and operating results. Again, my name is Martin Galstyan, and I am the Chief Financial Officer of ToughBuilt. Joining me on today's call is Michael Panosian, President and Chief Executive Officer of ToughBuilt. Michael will begin today's discussion by providing operational and financial highlights from the second quarter. I will then review our financial performance for the same period. Michael will conclude the discussion with our plans for 2022 and beyond.

Before turning the call over to Michael, I would like to remind you that any forward-looking statements made by management are covered under the U.S. Private Securities Litigation Reform Act of 1995 and are subject to the changes, risks, uncertainties described in the press release and in our U.S. securities filings. In addition, during the course of the call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review ToughBuilt's current report on Form 8-K furnished with the SEC for ToughBuilt's reasons for including those non-GAAP financial measures in the earnings release and presentation. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in our earnings press release issued earlier today, unless otherwise noted therein.

I will now turn the call to Michael.

Michael Panosian

Thank you, Martin, and thank you all for joining us on today's call. The second quarter of 2022 was strong for ToughBuilt, culminating in revenue $17.9 million and approximate 13% year-over-year increase compared to Q2 2021. During the second quarter, Amazon.com gross sales increased by 41% to approximately $3.5 million compared to approximately $2.4 million for the second quarter of 2021, highlighting the strength of this sales channel. During the quarter, we also announced the launch of 93 products on Amazon Italy and Amazon Germany. As a result of these strong revenue numbers and our expansion efforts, we expect to see online revenues continue to grow into the future.

In U.S., we increased our brick-and-mortar presence by launching 35 products in Ace Hardware warehouses that services 5,500 members across the country. We continue to offer new products, such as our one-of-a-kind magazine-fed Auto-Reloading Utility Knife. We sell this and many other of our innovative products at a leading U.S. home improvement retailer and across our global strategic network of partners that currently services over 15,500 stores in the U.S. and across the globe.

We further increased our brick-and-mortar sales channels internationally, which will increase our reach to numerous stores and thousands of end users. This significant progress in executing our sales strategy gives us reason to believe that we will continue our revenue growth moving forward. ToughBuilt continues to be a leader known for innovation and for developing some of the most unique products for the construction and home improvement industry. We believe that much of our success is due to our ability to attract the best talent. Our unique platform has proven to be a tremendous draw for professionals eager to join our organization known for its creativity and ability to quickly and efficiently bring ideas for concept to shelves in record time. An example of this is the new Auto-Reloading Utility Knife I just mentioned.

While our staff has grown considerably, we now believe that we are at a place where we can stabilize our hiring. And as such, we anticipate a flattening of our SG&A costs in the second half of the year.

As we mentioned on our last call, we are taking steps to reduce other costs as well. To help combat logistic-related costs in 2022, we have negotiated improved shipping rates as well as working with our large retail partners to implement direct import ordering where possible. Direct import ordering would result our retail partners taking ToughBuilt products directly from ports and shipping to their own warehouses. In the months to come, we anticipate that this will decrease our shipping costs by shifting several supply chain steps from ToughBuilt to our partners. We are looking closely at other costs through the company. And through the disciplined management of the business, we believe, can achieve profitability in 2023 while accelerating our top line growth as we target the launch of five to 10 new product lines this year and into next year and further expand our sales channels.

I will now turn the call back to Martin to cover our financial results in greater detail. Martin?

Martin Galstyan

Thank you, Michael. Revenues for the second quarter of 2022 were approximately $17.9 million, an increase of 13% compared to the same period in 2021. Revenues for the six months ended June 30, '22 and 2021 were $35 million and $28 million respectively, which consisted of metal goods, soft goods and electronic goods sold to customers. Revenues increased in 2022 over 2021 by $7 million or 25%, primarily due to wide acceptance of our products in the tool industry and received recurring sales orders for metal goods and soft goods from our existing and new customers, and introduction and sale of new software products to our customers. An increase in sales throughout Amazon was a major factor of the increase.

Cost of goods sold for the three months ended June 30, 2022 and 2021 was $12.9 million and $12.5 million, respectively. Cost of goods sold increased by 3.5% compared with the same period last year. Cost of goods sold for the six months ended in June 30, 2022 and 2021 was $27 million and $21 million, respectively. Cost of goods sold increased in 2022 over 2021 by $5.8 million or 27%, primarily due to our increased sales as well as increase in materials to manufacture metal goods and stock goods and increase in labor cost in China. Selling, general and administrative expenses for the three months ended June 30, 2022 and 2021 were $14.5 million and $9.2 million, respectively.

SG&A expenses for the six months ended June 30, 2022 and 2021 were $30 million and $17 million, respectively. SG&A expenses increased in 2022 over 2021 by $13 million, primarily due to an increase in shipping costs, marketing and advertising expenses for product launches and hiring of additional employees. We expect our SG&A expenses will start to increase at a lower rate as our business matures and we develop economies of scale.

Research and development costs for the three months ended June 30, 2022 and 2021 were $2.8 million and $1.4 million, respectively. R&D for the six months ended June 30, 2022 and 2021 was $5.3 million and $2.8 million, respectively. This increase was primarily due to the company developing new tools for the construction industry. We reported a net loss of $12.1 million for the three months ended June 30, 2022, as compared to a net loss of $7.4 million for the three months ended June 30, 2021. We recorded a net loss of $24.2 million for the six months ended June 30, 2022, as compared to a net loss of $13.5 million for the six months ended June 30, 2021.

Our balance sheet as of June 30, 2022, our cash position was $2.1 million, our accounts receivable were $15 million, our inventory was $40.2 million, our prepaid and other current assets was $2.6 million. Subtracting our current liabilities, $37.4 million, this gives us a working capital of $22.5 million. Additionally, we have seen cash coming in into the company daily as we sell down our inventory.

At the close of the second quarter, the company's basic and diluted and weighted average common shares outstanding totaled 6,570,195 shares.

I will now turn the call back to Michael for his final remarks. Michael?

Michael Panosian

Thank you, Martin. Before I open the call for questions, I would like to reiterate the tremendous market opportunities that continue to exist at ToughBuilt and the hard to duplicate infrastructure we have in place to capitalize on those opportunities. Right now, the top retailers around the world are selling ToughBuilt products, and we continue to expand to new retailers and strengthen our existing relationships. Through our growing Amazon.com sales and repeat orders from our strong retail base, we are seeing increased demand for ToughBuilt products across professional contractors and DIYers globally. In the second half of 2022, we will introduce five new products, giving our existing customers more to sell and helping to entice new customers.

To recapture additional international e-commerce demand, we will be offering tougher products in additional countries with Amazon in Europe and Latin America. As I mentioned previously, our future revenue opportunities can be broken down into three buckets: expanding existing relationships and categories with current retail partners, adding new retail partners and introducing new categories of products. As we clearly demonstrated, we have the potential to disrupt many categories in the home improvement industry through our innovations and execution speed. Therefore, I continue to believe we will reach our goals for large breadth of line that will contribute to exciting revenue growth and get us to profitability.

With that, I would like to turn it over to our operator to begin the questions-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kevin Dede with H.C. Wainwright.

Kevin Dede

Thanks for having me on the call and congrats on the Ace Hardware deal. That's really impressive. I was hoping we could talk a little bit about how you see your retailers acknowledging your Amazon presence and whether or not there's any cannibalization there?

Michael Panosian

Kevin, thank you for the question. Yes, Ace is a great opportunity for our company to go into thousands of retailers across the United States. As far as Amazon is concerned, it's not really that threatening because we don't have as much products on Amazon as the retailers carry, but -- and the prices are higher than the retailers carry. Your sensitive -- although we are priced to move and that's why you see the growth on Amazon, however, we are sensitive to the margins that our retail partners have to earn. So it's a delicate balance, but we are successful in keeping that.

Kevin Dede

Do you -- Michael, do you have sufficient inventory for 5,500 stores and 35 SKUs or -- at this point? Or how do you foresee the sales at Ace and its partners ramping up for the balance of the year?

Michael Panosian

Sure. The answer is yes, we do have enough inventory and growth. The way we are expecting our growth with Ace is a steady pace, going forward through a few hundred to a few thousand stores over the next 1 year, 1.5 years. So we do have enough inventory, I don't foresee us bringing the really large sum. These things are also coordinated with the Ace Group. So I'm not expecting any sudden surprises.

Kevin Dede

Okay. So 35 SKUs now, but 93% across the full ToughBuilt product line. I'm wondering if you see the SKU count increasing there?

Michael Panosian

Yes, it will. We have a tremendous amount of products coming out over this year and years to come. Some of the products may be exclusive in certain retailers, but the ones that are not, we will be sharing with the other retailers. I have no doubt we will be growing rapidly with Ace with a lot more SKUs.

Kevin Dede

I think last time we chatted, you targeted maybe 70,000 doors by year-end. Forgive me if I have that number off, but I was -- understand 15,500 currently. Where do you think that number goes to with the 5,500 at Ace?

Michael Panosian

Right. I think we -- there is about 120,000 retailers that we are targeting and trying to increase distribution as fast as possible. But it's, again, a delicate balance of adding headcount versus growing. So we're managing that. I think I don't want to give guidance because the exciting third and fourth quarter, but minimum, I think, we’ll end up being somewhere over 20,000.

Kevin Dede

Okay. I missed some of the balance sheet numbers. I think Martin read them. But could you give us the cash at the end of the quarter? And in light of the recent placement, where you think it is now halfway through August?

Martin Galstyan

Hi, Kevin. It's Martin. Our cash position end of the quarter was $2.1 million. Inventory was $40 million. AR was $15 million. AP was about $30 million. I can't give guidance on our cash position as of today.

Kevin Dede

Okay. Congrats on the mag-loaded knife, is that throughout the ToughBuilt retail chain at this point? Or how do you foresee it rolling out?

Michael Panosian

Yes. We are -- we've launched it at [lows]. It's doing great, and it's actually selling faster than our scraper knife. So we hope that we will be highly successful. We also have launched it throughout the -- our global network. It's just hitting the inventory areas. We also will be launching more products this year. So I'm very excited about each product and each product line because they generate a lot of revenue and help us to get to profitability.

Kevin Dede

Michael, yes, you referenced the scraper knife. That's the one that swivels, the head swivels?

Michael Panosian

Yes. That was highly successful. We sold hundreds of thousands of those, and it's growing sales across different countries. It's not that one knife comes out and the other one slows down. It's just designed for different needs.

Kevin Dede

No, understood. Absolutely. Last question before I hop back in the queue. Give us your take on manufacturing. Clearly, you work really hard to chase costs out of logistics. But I'm kind of curious, given lockdowns in China, pandemic issues and worker issues there, how that might ripple through your sourcing capability?

Michael Panosian

Sure. Good question. We've diversified about two years ago. So we are not manufacturing everything in China. There's a lot we manufacture in India, in Philippines and different parts of the world. However, those kind of events that are completely out of our control does affect that -- because we have a lot of inventory, it is not as harsh as some of our friends in the industry that are having those effects felt much harder. So the insurance that we took last year in bringing in a lot of inventory has helped us a lot. I'm not foreseeing major disruptions going forward. We have many lines being built to be launched this year and next year. So, so far, everything seems very normal.

And because the kind of global situation has got a little better, there seems to be lot more factory co-operations. Some of the Chinese factories are also opening up in Mexico and locally, and we are trying to do as much business as we can locally on our large item development. And I think we're going to have a lot of success there as well.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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