ToughBuilt Industries, Inc. (TBLT) on Q3 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to ToughBuilt Industries Third Quarter 2021 Earnings Conference Call. . I would now like to turn the conference over to Martin Galstyan, CFO. Please go ahead.
Martin Galstyan: Good afternoon, and thank you all for joining us on our quarterly call to discuss ToughBuilt's Third Quarter 2021 Financial and Operating Results. As the operator mentioned, 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 our discussion with operational and financial highlights from the third quarter and our outlook for the year. I will then review our financial performance for the quarter. Michael will conclude the discussion with our growth plans for the rest of 2021 and beyond. Before we begin, I would like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our 2020 Form 10-K filed with the SEC on March 26, 2021, and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. 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, commonly known as GAAP, and that may be different from non-GAAP financial measures used by other companies. 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 and furnished as an exhibit to the Form 8-K filed with the SEC, unless otherwise noted therein. Investors are encouraged to review ToughBuilt's Form 8-K, ToughBuilt's reasons for including those non-GAAP financial measures in its earnings release and presentation. I'd now like to turn the call over to Michael. Michael?
Michael Panosian: Thank you, Martin, and thank you all for joining us to discuss ToughBuilt's third quarter 2021 operational and financial results. In the third quarter of 2021, we generated revenues of approximately $17.2 million, a record quarter for ToughBuilt, and a 3.3% year-over-year increase compared to $16.7 million in the third quarter of 2020. For the comparable 2020 period, we recorded a significant onetime order from a new customer. When excluding this onetime revenue benefit, adjusted revenue for the third quarter of 2020 was approximately $13.3 million, which represents a 30% year-over-year revenue growth for the third quarter of 2021. For the 9 months ended September 30, 2021, we reported total revenue of $45.4 million, representing a 65% year-over-year increase. Excluding the above-mentioned onetime revenue benefit, adjusted revenue for the third quarter of 2020 was $24 million, which represents 89% year-over-year revenue growth for the third quarter of 2021. During the quarter, we continued to see strong demand across our portfolio of products with notable acceleration from our 2-in-1 scraper knife launched last quarter. We expect this innovative product to be another fast-moving item. During the quarter, we expanded our international footprint through new retail partnerships such as Toolstation, Satin Group and Cadima, a group of leading home improvement retailers and buying groups in France, servicing just under 1,400 new storefronts, increasing our total store count to approximately 14,400 stores. International revenue in Q3 2021 increased 45% year-over-year to $3.5 million compared to $2.4 million in the quarter of 2020. We are confident that our platform in Europe will continue to grow and generate additional revenue. Additionally, the company expects to launch 2 new product lines by the end of the year with continued expansion into North America and international home improvement retail chains. During the quarter, we expanded our capabilities, hiring additional employees and consultants to support our engineering, marketing and operational efforts. Over the past several quarters, the industry has experienced severe supply chain disruptions, which have caused a significant increase in shipping costs and shipping delays for companies around the globe. ToughBuilt has worked diligently to mitigate these challenges by strategically building up inventory levels throughout the year, which enables us to meet the demand for Q3 and into Q4. Additionally, we have manufacturing partners from around the globe, which decreases our exposure to specific regional constraints. Lastly, ToughBuilt recently hired several logistics professionals who have been able to secure favorable shipping contracts, which we expect will improve our gross margins going forward. Because certain revenue we had expected to realize in the third quarter has shifted to fourth quarter, we can confidently provide onetime guidance for the remainder of the year. As such, we expect full year 2021 revenue growth of at least 77% to 87% in the range of $70 million to $74 million, which translates into a fourth quarter revenue range of approximately $25 million to $29 million. 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 3 months ended September 30, 2021, were approximately $17.2 million compared to $16.7 million in the same period last year, representing a year-over-year increase of 3.3%. Revenues for the 9 months ended September 30, 2021, were approximately $45.4 million compared to $27.4 million in the prior period or an increase of 65%. The increase in the third quarter sales was mainly attributable to the continued demand for our portfolio of products, international expansion and accelerated demand for our 2-and-1 scraper utility knife. Cost of goods sold for the 3 months ended September 30, 2021, were approximately $11.8 million compared to $9.8 million for the same period in 2020. Cost of goods sold increased in 2021 over 2020, primarily due to industry-wide supply chain disruptions, which have led to historically high shipping costs as well as inventory builds ahead of fourth quarter. Cost of goods sold as a percentage of revenues in 2021 was 68% as compared to cost of goods sold as a percentage of revenue in 2020 of 59%. During the quarter, we secured favorable shipping contracts that we expect will decrease our shipping costs and positively impact our gross margins in the fourth quarter of 2021 and throughout 2022. Additionally, we significantly increased our inventory in the third quarter ahead of the holiday season and very strong customer demand. During the quarter of 2021, we reclassified freight and custom duty fees from cost of goods sold to SG&A expense, which amounted to $1.96 million. As a result, gross margin for the third quarter of 2021 was 31.6% compared to 41% in the prior year period and 21.1% in the second quarter of 2021. The reclassification had a significant impact to gross margin from accounting perspective. However, there was no effect on net income or loss for the reclassification. Selling, general and administrative expenses for the 3 months ended September 30, 2021, were approximately $15.2 million compared to $5.7 million for the same period last year. SG&A expenses increased in 2021 over 2020 by approximately $9.5 million primarily due to increased shipping costs, partially attributed to the reclassification of freight-in and custom duty fees, increases in marketing and advertising and Amazon fees related to Amazon.com sales. Considering the improvement of supply chain costs related to our new contracts as well as decelerated inventory builds in the fourth quarter, we expect SG&A expenses to decrease in the fourth quarter of 2021. Research and development costs for the 3 months ended September 30, 2021, were approximately $1.6 million compared to $790,000 in 2020. We expect to maintain similar levels of R&D costs as the company continues to develop new tools for the construction industry. In the third quarter of 2021, we had a net loss attributable to common stockholders of approximately $11.4 million or a loss of $0.09 per diluted share, compared to a net profit of approximately $121,000 or a flat per diluted share in the third quarter of 2020. As of September 30, 2021, the company's diluted weighted average common shares outstanding totaled 129 million. During the quarter, we completed a registered direct offering for net proceeds of $36.3 million. A portion of the funds from the registered direct offering were used for working capital purposes, including inventory builds for product launches, marketing and operations. As of September 30, 2021, ToughBuilt's cash position was $31.2 million. Based on the company's current cash balance, coupled with anticipated cash flow from operating activities, we have no plans to raise additional capital for the remainder of 2021. I will now turn the call back to Michael for his final remarks. Michael?
Michael Panosian: Thank you, Martin. ToughBuilt continues to execute on its strategy of bringing cutting-edge products to the global home improvement market. We have an exciting pipeline of over 20 lines of products that we expect to launch over the next several years. These products will be a combination of technology-enabled tools as well as innovative organizational products and durable gear that will enable professional builders and DIY-ers to work through projects faster and more comfortably than ever before. We are bringing the convenience of technology to everyday products with enhanced functionality and versatility. At ToughBuilt, we view ourselves as a next-generation home improvement product manufacturer. In that, we focus on designing and engineering only the highest quality products and test them rigorously to ensure each product meets our standards. Furthermore, we know the importance of scaling our products to generate the most value for each launch. As part of that, we have expanded into tens of thousands of stores in North America and abroad and continue to expand so that we are able to distribute our products across millions of consumers. To date, the consumer response across our entire product portfolio has been outstanding and as our retailers continue to add more ToughBuilt lines to their shelves and continually refill their shelves with our products. Our focus going forward is to continue strengthening the foundation of our organization through the hiring of professional engineers and designers, launching our pipeline of new products and increasing our shelf space into new retailers across the world. In closing, I want to thank our employees for growing ToughBuilt into a quality-first brand that customers can rely on and remaining dedicated to our mission even through a global pandemic. We have an exciting road ahead, and I cannot wait to grow ToughBuilt into a household name. Operator, if you would, please go to the question-and-answer session.
Operator: . Our first question is from Kevin Dede with H.C. Wainwright.
Unidentified Analyst: This is Spencer Kirson for Kevin. Congrats on the quarter. I just wanted to get your thoughts on if we would be seeing the 10-Q tonight as well as some color on that revenue backlog that you talked about.
Martin Galstyan: This is Martin Galstyan. We are pushing to finalize and file in the next -- by tonight or latest tomorrow morning.
Unidentified Analyst: Okay. And also in terms of that revenue backlog that you discussed earlier on the call, could you provide any additional color on that?
Martin Galstyan: No. We can't give any more guidance on that for now.
Unidentified Analyst: Okay. And in terms of the increased sales and marketing efforts, are you able to give any more color on that like in terms of head count or potential expansion plans?
Michael Panosian: Spencer, this is Michael Panosian. The expansion is really to make sure that our so-called platform is robust enough to be able to feed the demand. That's what we are focused right now. The global demand for ToughBuilt is massive, and our team is relatively small for the demand that we are experiencing. As far as marketing and other spend, as you know, today, we have to be on social. We have to create ways to make our products go viral and tell the story. In today's world, it's not just good enough to create a product. It's whoever tells a story as well and gets -- reaches the end users. So our marketing spend is really driven towards creating higher awareness, therefore creating higher revenue generation.
Unidentified Analyst: Okay. That's good color. And my last question is, could you provide any additional information on the -- what you're seeing in terms of the supply chain? I know you talked about securing shipping contracts. So any information on that would be helpful.
Michael Panosian: Sure. So far, from what we can see in the market and constantly being in touch with all the shipping providers and logistics partners, the numbers seem to be improving quite a bit. We will be finalizing a final contract sometime between January and June of next year, and we are confident that the numbers will be much, much lower as far as our cost, therefore improving our margins greatly. We are pretty much in touch with every supplier that there is. We've added 3, 4 people to our logistics team recently. There are experts at this, and we are very happy so far with the great savings that we've been able to achieve. So going forward, I expect very good news and very strong results and a much better contract for next year.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Michael Panosian: Thank you, operator. For all our shareholders that are listening, I want you to know that we are trying very hard to minimize spending and maximize growth. We are at that point where we are trying to create a much more robust platform for growth with an eye on profitability. We are very responsible the way we spend. It may look more than you expect. But today's global market is massive. Our opportunities are real. They are at hand, and we must supply. So within that context, please understand that our spending is very measured, and we have what we spend on today, the main effect will be felt a year from now to end out. In this business, whatever we spend today really sets us up for better growth and bigger numbers down the line. And in addition, I'd like to thank all of you for your support. Every one of you are important for our company, and we thank you for that.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
