ToughBuilt Industries, Inc. (NASDAQ:TBLT) Q2 2023 Earnings Call Transcript

ToughBuilt Industries, Inc. (NASDAQ:TBLT) Q2 2023 Earnings Call Transcript August 22, 2023

Operator: Greetings, and welcome to the ToughBuilt Industries Second Quarter 2023 Earnings 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, Martin Galstyan, Chief Financial [Operator] (ph). Thank you. Martin, you may begin.

Martin Galstyan: Good afternoon, and thank you all for joining us today to discuss ToughBuilt's second quarter 2023 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, ToughBuilt's President and Chief Executive Officer. Michael will begin today's discussion by providing operational and financial highlights from the second quarter. I will then review our financial performance. Michael will conclude the discussion with our growth plans for the upcoming fiscal year and beyond. Before turning the call over to Michael, I would like to remind you that forward-looking statements may be made by management during today's call and that any forward-looking statements are covered under the U.S. Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from what is described in those statements and are subject to the changes, risks, and uncertainties as described in our press release and in our SEC periodic and other filings. Additionally, information on risk factors that conduce the results to differ is available in the company's most recent Form 10-K filed with the SEC. In addition, during the course of the call, we may inadvertently use or refer to 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. If any non-GAAP financial measures are mentioned in today's call, the company will promptly file a form 8-K with the SEC reconciling such non-GAAP numbers to GAAP.

I will now turn the call to Michael.

Michael Panosian: Thank you, Martin, and thank you all for joining us today. Considering the challenging macroeconomic backdrop, the second quarter of 2023 was strong for ToughBuilt as revenues increased by approximately 5.5% to $18.9 million compared to same quarter in 2022. We continued to see solid online sales through Amazon in second quarter with $3.6 million in gross sales, representing a 2% increase over Amazon sales in the same period in 2022. Our gross profit for the second quarter increased by 18% to $5.8 million compared to the second quarter of 2022, while gross margin improved by 330 basis points year-over-year to 31%. This increase in gross profit margin in the 2023 second quarter was primarily driven by improving product mix and select pricing adjustments.

We will continue to focus on our improving gross profit margin in the quarters ahead. We also saw significant operating expense leverage in the quarter as our operating expenses declined year-over-year even as we grew revenues. During the last quarter, we continued to streamline the organization and focus on driving efficiencies on our accelerated path towards profitability. These streamlining efforts will be more visible in the quarters to come. We strongly believe our 20 product lines in eight different categories provide a strong foundation to continue our growth. Even as we introduce additional new products, we believe that a significant portion of our major new design work has been completed and we can begin to reap the rewards of what we have built so far.

Additionally, in line with our strategy of continuing to expand our customer reach, we were pleased to announce subsequent to the quarter-end that we significantly expanded distribution to customers in the UK -- United Kingdom through Howdens UK and City Electrical Factors, representing a combined 1,200 retail locations nationwide. We also announced recently that we have expanded distribution in the European Union through La Platforme Du Batiment and Prolians, which serve a combined 600,000-plus professional customers in France and Spain. I will now turn the call back to Martin to cover our financial results in greater details. Martin?

Martin Galstyan: Thank you, Michael. Revenues for the three months ended June 30, 2023 and 2022 were $18.9 million and $17.9 million, respectively, which consisted of metal goods, soft goods and electronic goods sold to customers. Revenues increased in the second quarter of 2023 over the same period in 2022 by approximately $1 million or 5.5%, primarily due to wide acceptance of our products in the tools industry, reoccurring sales orders for metal goods and soft goods from our existing and new customers, and the introduction and sale of new soft goods products. Increased sales through Amazon also contributed to the increase. Cost of goods sold for the three months ended June 30, 2023 and 2022 was $13 million and $12.9 million, respectively.

Cost of goods sold as a percentage of revenues for the second quarter of 2023 was 69%, down from 72% in the same period in the prior year. SG&A expenses for three months ended June 30, 2023 and 2022 were $14.9 million and $14.5 million, respectively. SG&A expenses as a percentage of revenues for the second quarter of 2023 was 79% compared to 81% for the same period prior year. We have and will continue to seek to realize further operating expense leverage in the coming quarters. Research and development costs for the three months ended June 30, 2023 and 2022 were $2.9 million and $2.8 million, respectively. The year-over-year increase was primarily due to development of new tools for the construction industry. For the second quarter of 2023, we recorded a net loss of $5.9 million as compared to a net loss of $12.1 million for the three months ended June 30, 2022.

This dramatic 49% improvement was primarily due to the previously mentioned sales increase, improved gross margins, cost reduction activities in many areas and an increase in hiring. As of June 30, 2023, ToughBuilt's cash position was $2.2 million, accounts receivable and inventory for the period totaled $7.8 million and $31.4 million, respectively. This and reduced net loss helped drive an 84% improvement in net cash used in operating activities in the first half of 2023 to a net cash used of $2.1 million. The company also raised $4.5 million in June in a public offering. Management anticipates that our capital resource will improve as our products gain even wider market recognition and acceptance. We seek to further improve our gross margins and we continue to maintain strong cost controls.

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

Michael Panosian: Thank you, Martin. I would like to reiterate that ToughBuilt has tremendous market opportunities ahead and the infrastructure we have built to capitalize on those opportunities are sound and operating well. We are satisfied with our current operating expense structure and do not plan to add significant headcount in 2023. Moving forward, we plan to continue expanding our product portfolio prudently, selectively adjust prices and focus on efficiency throughout the organization. We anticipate that these efforts will enable us to create new revenue streams by increasing our global reach, launching additional new products, categories and move us closer to profitability. In closing, I want to thank our shareholders and our team for helping grow ToughBuilt into a high-quality brand that has a bright future. With that, I would like to turn it over to our operator.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Kevin Dede with H.C. Wainwright. Please proceed with your question.

Kevin Dede: Hi, Michael. Hi, Martin. Thanks for taking my question.

Michael Panosian: Hello, Kevin.

Kevin Dede: Happy to see good year-over-year growth. I'm wondering if you could talk to maybe a comparison of where you are now versus the year-end '22 in the SKU count and the doors. Understand that you've got a couple of new retail outlets. And I was just wondering if you could give us the SKU count change over the first six months and the door count change.

Michael Panosian: Sure, Kevin. I'll be happy to. We've increased a lot of customers around the world. So, we are now roughly over 20,000 doors. I will get a more accurate count on our next announcement. We've got a couple of announcements coming, so we'll put out that accurate figure. But we got quite a bit of doors to service. As I mentioned, we have huge opportunities for ToughBuilt to build on in 2024, highly excited about the rest of the year and also 2024. As far as SKUs, we've put out some really good lines that are performing well, and we are now going to start distributing it throughout the United States and the rest of the world more rapidly. The whole push was to build the infrastructure of different category of products, which each one is a new revenue stream for us and also to build enough sales staff around the world to be able to present us to multitude of customers.

Kevin Dede: Okay. So, in your prepared remarks, Michael, you talked to just driving efficiencies and streamlining the organization. I imagine some of that has to do with the way you're sharing shipping costs, transportation with some of your key customers. But also to your last point, just about headcount, where are you headcount-wise now? Where were you at the beginning of the year? And maybe you could give us a little more insight on shipping costs, because I know they were tough during the pandemic.

Michael Panosian: Okay. Globally, we were at 248 team members. Now, we are at down to 200. And this savings accumulates month-over-month and it contributes towards other costs and paying down payables, et cetera. We are pushing for profitability next year. So, we are really focused on our costs. We've reduced our operation costs and many other areas, and we are not adding more designers or R&D or much staff, because we are well staffed now to support the growth globally. But these savings will be more visible over the next two quarters and beyond. So, I'm very happy about my team. Everyone is really pushing hard to save the company money and also deliver on time, get paid on time. And we are also raising prices in many places.

We didn't raise prices for many years with our customers due to contracts, et cetera. So -- also on the trucking and shipping, those costs have gone down drastically. During the pandemic, we were paying somewhere north of $25,000 per container instead of $3,000 or $5,000, and we've negotiated it down to below normal prices now. So, we are saving a lot of money and our margins are higher as a result of that.

Kevin Dede: Can you talk to -- I know you commented on being satisfied with where your design team is and the fact that you've made investments for designs that you'll be releasing later this year and I guess into next year. Can you talk to how you see product lines expanding? I know that electronic products were a key focus. I know that apparel was something that you were kicking around. Can you talk to how you might see those products coming into the sales mix?

Michael Panosian: Yes, absolutely. Some of the products that we've developed, they are ready to launch. You'll see some of them being launched end of the year in one of the U.S. leading retailers. So, then a lot of the R&D goes into developing these big lines and more to come next year. We didn't launch those big products this year. We are going to be in better position to take advantage next year. However, this year, we launched numerous lines of cutting tools, screw drivers, pliers, and many other hand tools, hammer line. And each one of these has numerous SKUs inside. It's not just one piece of product. So, every time we launch a new category that generates new revenue stream while the past lines and categories continue to grow for us globally. This is a path towards big sales and profitability. As our sales builds up, we will be profitable next year.

Kevin Dede: Okay. You spoke to the difficult operating environment currently. Can you give us some more insight on that? And maybe how you see it changing? And what you might be able to -- or what you might recommend us to expect for the second half?

Michael Panosian: Sure. The economic conditions around the world is not easy at this moment. Banking is not easy. Borrowing money is not easy, because of the borrowing rates, et cetera. So, we've kind of cut down on a lot of the expenses that we would typically do on marketing spend, et cetera. We are just focused on delivering the products that we already sold into the marketplace. And we are striving to get new financial vehicles in place to be able to do pure financing and try not to raise at the market as much as possible. What we expect the rest of the year is a little bit of growth this year and bigger growth next year. I think that's a fair statement to say. We are still growing. We are still strong. We keep adding customers.

We are in demand. Our brand is truly loved by the professionals and the end users. We have very strong traction and a very bright future. I'm very confident about growing. I'm not worried about growing, frankly. What I'm trying to balance is the well-being of the shareholders versus raising money versus getting financial vehicles. We are almost there. Once we are profitable, I think we'll be highly bankable and it will be easier from thereon.

Kevin Dede: Is there anything you can speak to -- I mean, understand just modest growth this year. Is -- does that have anything to do with sort of the end market? Or just to your point, financing the need, right, the need to build inventory, I guess?

Michael Panosian: Yes. Frankly, it's not the market. For us, a company our size, we can take this company to $1 billion quite easily. There's a lot of demand. We don't have the financial arms to bring in all the inventory we need to service customers that are already out there. We are registered with them. There's a lot of demand. But to provide product, we have to purchase local inventory. If I purchase local inventory, I have to go raise a lot of money, which is not good for our shareholders. So, sometimes, it's good to take half a step back and do what's prudent. And then, as times get better and as we become more bankable, then kind of press on the gas and grow faster.

Kevin Dede: Last question for me, Michael. I'm curious to understand the supply logistics chain and how you've managed that especially since the end of the pandemic. Are you still manufacturing predominantly in China? Or have you chase down maybe other sources that may be more economical?

Michael Panosian: Thank you, Kevin. That's a good question. Well, of course, everyone knows during the pandemic and just before that, we got all the tariffs. So, we've been forging ahead and trying to get to other countries. Some of the countries are not ready like China was. But right now, we are in Vietnam, Cambodia, India. Some parts are -- some products are developed in China. We are also in Taiwan, Thailand, Philippines, Bangladesh and other places as the need comes. So, we source per line and who can give us the best possible deal, then we go to that country if the capabilities are there.

Kevin Dede: Okay. Thanks for taking all my questions, Mike. I really appreciate it.

Michael Panosian: Thank you, Kevin.

Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to Michael Panosian for any closing comments.

Michael Panosian: Thank you, everyone, for being a supporter of ToughBuilt. We are truly excited about the future, and I look forward to a lot of good news for us this coming few months for the year and especially in 2024. Be well.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.