Intelligent Living Application: Struggling To Scale

Summary

• Intelligent Living Application competes in a growth market but is struggling to gain a share in the markets it's competing in.
• The company went public on July 13, 2022, for the primary purpose of raising capital to do R&D on smart locksets.
• Limitations on the company are holding it back from gaining momentum and scaling.
• Any growth in the company will be incremental until it finds ways to gain mindshare in the U.S. market, where the bulk of its sales is made.
• The risk doesn't appear to be worth the reward at this stage of its growth.

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Intelligent Living Application Group (NASDAQ:ILAG) is a company that went public on the Nasdaq on July 13, 2022, for the primary purpose of raising capital for R&D on software for its smart locksets.

The U.S. is its primary market at this time, where it sells locksets under the Kambo and Bamberg brand. It's also looking to compete in the APAC market.

While ILAG is going through the typical growing pains of a company that has to operate on limited resources, it should soon release its new smartlocks which will give a clearer indication of the growth potential of the company in the quarters ahead.

As the company stands today, it's going to continue to struggle to gain market share in its primary U.S. market until it has the available capital to increase brand awareness by investing in marketing campaigns.

For that reason, growth in the company will be incremental until those issues are solved.

In this article we'll look at how the company has been doing since its IPO, some of its recent earnings numbers, and what lies ahead for them in the current market environment.

Recent performance

There was some good news for the company in its last earnings report, as revenues in the first half were shown to grow to $7.3 million, up $2.1 million, or 41.4 percent from the $5.2 million in revenue it generated in the first half of the prior year.

The increase in revenue was attributed to an increase in the number of products sold, as well as increases in sales prices in its product mix. The increase in price is significant to me because it confirms the company has pricing power in the segment of security market it competes in. If ILAG can eventually scale at meaningful levels, it should be able to leverage its pricing power to improve gross margin and earnings over time, which would lead to positive free cash flow.

Another benefit of its pricing power is it helped the company to offset increased tariff costs the company has faced. That helped increase margin during the reporting period.

Gross profit in the first half was $1.05 million, up 432.9 percent from the gross profit of $198,000 in the first half of 2021.

Among the steps it's taking to improve gross margin is to negotiate volume discounts that would lower the cost of raw materials, and improve its product mix by focusing its marketing efforts on the products that have higher margins.

Net loss in the reporting period was $233,731, an improvement of $1.15 million from the $1.39 million loss in the same reporting period last year.

Loss per share was $0.02, compared to the loss of $0.11 year-over-year.

What these numbers tell me is if ILAG can boost its sales at a meaningful level, it's going to surprise to the upside in the quarters ahead. But as mentioned, the challenge it faces is, much of its resources are allocated to R&D for its smart locks, so it's limited on how much capital it has to invest in marketing.

Sales and marketing

My main thesis is the company is facing growth challenges because of the lack of capital it can allocate to selling and marketing, which is why I separated it from the general earnings numbers.

Selling and marketing expenses in the first half were $61,809, down $13,168, or 17.6 percent from the $74,977 it spent last year in the first half. The decline in selling and marketing expenses was, for the most part, cutting back on sales commissions.

With the company stating the other major components of expense in selling and marketing were related to transportation and custom tariffs, it would mean it took some capital from commissions and applied it to tariffs.

Based upon my past experience in sales, cutting back on commissions could create apathy among its sales force, resulting in a lack of motivation to boost sales. That said, I'm not certain what type of sales force ILAG has, or if much of the marketing is done by its management team or via digital means.

Limited liquidity and capital resources

The major challenge ILAG faces appears to be the lack of working capital to move its business forward. There is definitely demand in the industry it competes in, and its seems the company's products are attractive to end users, especially its high-end products.

With that in mind, the company must solve the problem of limited resource in order to successfully gain growth momentum if it's going to succeed.

According to management, the cost structure of the company is "relatively fixed," and the capital it needs is based upon the order backlog of the company. In the regard, the company needs capital to maintain inventory, pay for raw materials, and keep its facility operational. To that end ILAG has a credit facility of $897,000 with the Bank of China (Hong Kong) Limited at the end of the calendar first half (June 30, 2022), that's up from the $769,000 in the first half of 2021. Interestingly, the facility is guaranteed by the personal property of its directors. That suggests two things. First, banks don't consider ILAG a good risk as it stands today, and second, the directors have skin in the game, which points to a commitment to make the business work. As of the end of the reporting period ILAG has working capital of $1.7 million, down from the $2.2 million it had at the end of calendar 2021.

Cash and cash equivalents were $108,389 at the end of June 30, 2021.

Headwinds

In this section I want to briefly mention the headwinds the company faces that are outside of its control.

The first is the above mentioned increase in tariff costs on products imported into the U.S. market, which is being mitigated in part by increase in prices and cutting back on sales commissions. The other major headwind is the policy of the Chinese government toward COVID-19 and the associated control measures put in place to combat it.

Management said it believes it has enough capital from its IPO and credit facility to continue operations through the latter part of 2023.

At the same time, it's likely the company will have to raise more capital to fund operations and develop the business.

Conclusion

ILAG is in a position where it has a lot of potential to grow based upon increasing demand and sales of its products but is primarily limited by the lack of capital to invest in branding and marketing in order to rapidly scale.

It's competing in a market that has a lot of runway ahead of it as concerns over corporate and personal security rise in response to increasing risks in the world.

Until the company is able to solve its funding challenges, it only has the capacity to grow at an incremental pace, even though the market is wide open before it.

If it can raise more capital, I see it having the potential to be a legitimate growth company in the future, with the ability to grab some serious market share in the U.S. in particular. I'm not real positive at this time concerning the APAC market, as the company simply doesn't have the resources to allocate there in a meaningful way.

The bottom line to me is ILAG is doing a lot of things right, but as the company stands today, is unable to take full advantage of the opportunity it has before it.

For that reason, it would probably be best to hold back on taking a position until it gets a few more quarters under its belt, as well as see if it is able to solve its lack of funding resources to increase sales and improve earnings.

If it can gain traction from the release of its smart locks, that may go a long way toward solving some of its capital challenges.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.