FiEE Inc (FIEE) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to Minim's Q2 2022 Earnings Call. (Operator Instructions)

I'd now like to hand the conference over to your speaker today, Mr. James Carbonara from Hayden IR. Thank you. Please go ahead.

Thank you. Once again, welcome to Minim's Q2 2022 Earnings Call. With me on the call are Jeremy Hitchcock, Chairperson of the Board; Mehul Patel, Incoming Chief Executive Officer; and Dustin Tacker, Incoming Chief Financial Officer. As a reminder, all materials for today's live presentation are available on the company's Investor Relations website at ir.minim.com.

Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results or trends could materially differ from those contemplated by these forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see Risk Factors detailed in the company's annual report on Form 10-K, contained in subsequent filed reports on Form 10-Q as well as in other reports that the company files from time to time with the Securities and Exchange Commission.

Please note too that today's call may include the use of non-GAAP numbers that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP numbers to the most comparable GAAP measure is available in our most recent press release as well as in our periodic filings with the SEC.

Now I would like to turn the call over to Jeremy Hitchcock, Chairperson of the Board of Minim. Jeremy, please proceed.

Thanks, James. Good morning, everyone, and welcome. Before Mehul and Dustin covered the results for the quarter, I would like to address the announcement we shared earlier this week about changes to our senior leadership team. Mehul Patel, who has been serving as the company's CFO for the last 6 months, has been named Chief Executive Officer, replacing Gray Chynoweth. Gray will be transitioning from his role as Chief Executive Officer to pursue a new career opportunity as a member of the United States Navy Reserve. This change will take place on September 8. Gray is committed to an orderly transition of his duties until then.

I want to take this opportunity to publicly recognize and thank Gray for his leadership and the contributions he has made to Minim. He was instrumental in launching our software transformational strategy, building out our product offerings and expanding our reach through new distribution channels. Those have resulted in leading market positions and extensive top line growth. He has recruited a group of strong and capable leaders to advance our strategy and build upon our success.

Mehul joined Minim about 6 months ago and has proven to be an exceptional leader, and the Board and I are confident he will have a greater impact as CEO. Mehul has extensive experience in the technology and finance sectors that include supply chain management, contract manufacturing, financial operations, demonstrating operating leverage and top line growth. We are confident that Mehul has a proven ability to lead our company and take our business to the next level.

We also announced that Dustin Tacker, who has served as our Vice President of Accounting and Corporate Controller, will step into the role of Chief Financial Officer. Dustin has extensive experience at the CFO level and was previously our Interim Chief Accounting Officer. He is a strong finance professional with deep institutional knowledge that will be of great value to the company.

Finally, we are shifting the role of our Chief Operating Officer away from a C-suite operational executive and will be hiring a VP of Operations following the departure of John Lauten.

Your Board is committed to delivering improving results, which requires a deep focus on operational execution. Importantly, this team is committed to executing on the strategy that is already in place. The value proposition is as compelling today as it was when the company was founded, and there is tremendous opportunity to drive growth and unlock value.

With that, I'll turn the call over to Mehul.

Thanks, Jeremy. I joined Minim 6 months ago. I recognized the opportunity to be part of a business transformation that has the potential to create tremendous value for our customers and our shareholders. I'm encouraged by the forward-thinking strategy, the talent of the team and the progress that has been achieved so far.

Looking ahead, top tier execution, careful management of the cost, greater supply chain reliability, prudent allocation of the capital and robust digital capabilities will all be important to our success. I want to reiterate Jeremy's remark about commitment to our software transformation strategy. It is my firm belief and continued execution of this strategy with improvements to execution and cost management are key to unlocking value.

Our second quarter financial results reflect the near-term challenges that consumer brands are facing in current environment as well as challenging year-over-year comparisons specific to Minim as Amazon Prime Day shifted from Q2 event last year to Q3 event this year. Minim GAAP revenue was $12.9 million in Q2 2022, which is a 3% decrease compared to Q1 2022. We do see cooldown of consumer spending on home network equipment since the peak of pandemic, but we're well ahead of our pre-pandemic sales.

Importantly, though, consumers continue to shift to online purchasing, and our e-commerce platform aligned directly with this trend and continued to perform well. We are maintaining #1 position on Amazon.com following a successful Prime Day. Our Prime Day gross sales were 53% above last year, and we are encouraged by the announcement from Amazon on a second Prime Day in October this year. Our Prime Day performance compares favorable to the increase in overall Prime Day sales, which rose only around 7% on a year-over-year basis according to statistics.com.

While we have seen signs of tightening at retail stores, including reductions in inventory levels, we nonetheless continue to expand our retail footprint. In Q2, we won additional sales space at Target, and we're expecting to start sales at additional retailers during Q3. We have now surpassed our year-end goal of 100,000 Minim Intelligent Network in Q3. Additionally in Q2, deferred revenue grew to $1.1 million.

Lastly, we remain on track to pair our mobile app to all our products, making them intelligent by end of the year, and expect that this will continue to accelerate our growth of Minim Intelligent Network deferred revenue and sales on motorolanetwork.com.

We are pleased to share that we have successfully launched our new mesh products as planned in Q3 2022. The Motorola Q11 and Motorola Q14, first WiFi 6 products. Both products come bundled with motosync app, helping to bolster our portfolio and keep it at the cutting edge of WiFi performance standards. Both products also sell at a higher price point, which will help raise our average selling price. With both products on the market, we're excited to turn our R&D efforts to efforts to evolve our other parts of portfolio as we work to ensure we remain competitive for specifications perspective and resilient from supply chain perspective.

Regarding our cash and inventory positions, we executed our plan to reduce inventory levels by only purchasing a small selection of product in Q3 and focusing on our program to recover returned items rather than purchasing new ones. We exited Q2 with $34.4 million in inventory, up from restated $31.1 million exiting Q1. Almost all of our increases of $2.7 million of the $3 million was driven from same factors that gave rise to the restatement. Also worth to note on the issue is that $2.5 million of new inventory carried over from Q2 to Q3 was held in preparation for Prime Day and was instrumental on allowing for our outstanding Prime Day performance.

Our cash came in at $4.7 million exiting the quarter compared to $10.5 million exiting prior quarter. With higher sales expected in the second half of the year due to Prime Day and Black Friday, payer collection and maintaining our current debt levels, we expect our cash and inventory position to improve in the second half of the year.

We continue to focus on growing the business and executing our R&D road map and do not expect to require additional capital.

I'll now turn to Dustin who will review our financial results. Dustin?

Thank you, Mehul. A friendly reminder that the financials I will cover are depicted in the earnings presentation that has been posted on our website, ir.minim.com.

I would like to first share an update on the restatement pertaining to the year-end December 31, 2021, and the period ended March 31, 2022 that we had notified the SEC through our Form 8-K filing on August 4. The restatement was caused mostly by a favorable $1.9 million inventory cost and error related to returns, which was offset by an inventory reserve error of $0.5 million, or a net $1.4 million adjustment. The restatement has reduced the net loss reported in the annual report on the Form 10-K for the year ended December 31, 2021, from the originally reported $3.6 million net loss to the amended net loss of $2.2 million.

The company determined that the same source of errors did not impact the statement of operations for the period ended March 31, 2022. However, this correction also impacted Q2 by reducing our gross margin by 10.5%. Our net revenue for the quarter totaled $12.9 million, which is down 3% over the prior quarter, and deferred revenue increased to $1.1 million. Our second quarter net sales was impacted by the timing of Prime Day and was a second quarter event in 2021, and this year it was a third quarter event.

For the quarter, our gross margins were 19.7%, down from 31.5% in the prior quarter. Our gross margin continues to be around 30%, excluding these one-time postings as previously noted, despite the headwinds brought on by inflation and component cost increases.

Our net loss was $4.4 million for Q2 2022, a $3.1 million net loss before restatement, or negative $0.10 per basic and diluted share. This compares with a net loss of $2.5 million, or negative $0.06 per basic and diluted share, in the first quarter of 2022.

For the quarter, our adjusted EBITDA was negative $3.4 million, or negative $2.2 million before restatement, as compared to adjusted EBITDA of negative $1.7 million in the prior quarter.

Now for a look at the balance sheet. At the end of the quarter, we had cash and cash equivalents of $4.7 million, a decrease of $5.8 million compared to the prior quarter. The decrease in cash on a quarter-over-quarter basis was largely driven by paying down $1.5 million in debt and a $1.1 million increase in accounts receivable due to timing.

Inventories also increased to $34.3 million at the close of the quarter compared to an adjusted $31.3 million at the end of March 31, 2022. We continue to monitor our production and inventory levels closely as we balance the risk of not having enough inventory to meet market demand against the risk of having inventory levels that put pressure on liquidity.

We ended the quarter with outstanding debt of $5.6 million, which was a drawdown on the company's $25 million line of credit. This compares with $7.1 million in outstanding debt as of March 31, 2022.

Finally, I would like to close with a brief discussion on our stock value. As indicated in our April 27, 2022 Form 8-K filing, on April 25, 2022, Minim received a notification from the NASDAQ that the company no longer meets the minimum bid price requirement of $1. If the company does not regain compliance by October 24, 2022, the company may be eligible for an additional 180-day compliance period. On this front, the company intends to continue to monitor our stock price, build sustainable growth and corporate value through execution of its operating plans and engage advisers to consider our available options.

That concludes my financial remarks. With that, operator, I'd like to open the line for questions.

(Operator Instructions) Your first question comes from Josh Nichols with B. Riley.

Yes. Just to follow up on the inventory accounting issue. One, like when are the statements expected to be completed? And what's been done to kind of rectify the internal control issues? Are those going to impact 3Q as well, potentially, or no?

Josh, thanks for the question. So right now, based on all the -- we did file the 8-K, as you saw last week. We're expecting to release our filings tomorrow. Given time delay, tomorrow afternoon is the current time line. So we should have our 10-K/A, 10-Q/A and also Q2 all released tomorrow sequentially in the afternoon. So you'll see all the numbers, Josh, tomorrow around then. In regards to the impact going forward, now that we have corrected the errors, going forward, we're monitoring it. We have put in the procedures to adjust this go-forward. And going forward, it should not impact any gross margins. So we should be back at the margins that we have stated before, which we expect to be around 30%.

Great. So back to 30% margins. I guess like anything you could tell us about how 3Q is looking from like a revenue perspective, given that we've already been through Prime Day, so you should have some visibility there.

Absolutely. So from a Q3 standpoint, we're expecting, Josh, based on the modeling that we've seen from you and others, to be something close to that. But at the same time, we're still -- we're getting the news around our retailers and also from the softness of the demand based on what we're seeing. So we're cautious based on what we are trying to -- what comes out over the last --. Yesterday, just yesterday, I think Target announced inventory levels and trying to maintain their inventory. Best Buy has done the same thing. So we're watching that and maintaining our current position on what we talked about before, Josh.

Great. I know previously the thought was that inventory, right, and some other working capital and spending was going to result in a much better cash flow that kind of clearly wasn't the results of 2Q, right? You actually had inventory continue to build up. What exactly measures are you enacting to get to positive cash flow? And how long -- is that going to happen in 3Q, 4Q, or what's the time frame?

Good question, Josh. So right now, we were already well on -- because of the time it takes to get on the water and time until we get it, that was the result of us --. However, we do have a clamps down, as I mentioned in my statement earlier. We did clamp down the inventory purchases at this point, very minimal coming in. So we do have a good visibility of that already.

In terms of cash flow forecast and improvements, my expectation for inventory is going to be to improve the turns by end of the year to 3 turns. We're sub-2 at this point or even close to 1. So we'd like to get to 3 turns. We have a good process in play at this point to get the end of the year up to 3 turns. And then going into Q1 in the first half, get to 4 turns to get this back into the track. And that's the operations side, Josh, that we've got to clean up. And we have our -- plenty of controls in place to go push that ball forward at this point.

And then last question for me. You've kind of seen expenses continue to creep up here, even sequentially with revenue being down quarter-over-quarter in 2Q, particularly on the sales and marketing expense as well as the G&A line. Is there any cuts that the company is planning to implement to get those more under control and focus on profitability in the near term? Or what's the expectation for the OpEx?

Yes. So good question again. So we're looking into streamlining some of the costs, but not expecting any reduction in force any time soon. But we are looking at every aspect of vendor consolidations and things like that, that we can control quickly, and we're going to try to put that in play as soon as possible in third quarter. But my expectation is to see that run rate, even with the inflation adjustments and things that we had done for employees, to continue to be flat to prior quarter because of those cost controls and adjustment for inflation that we had to do. So between everything, and I do expect that to be flat or slightly better.

Yes. I guess I will add one more, just since -- if OpEx is going to be flat, and gross margin levels would kind of imply a breakeven. If you have $7 million of OpEx, 30% margin, you'd probably need to do like $21 million or so on the top line. And the company's pretty far off from doing that. So the rest would have to come from working capital. I guess like what's your expectation for how far down can you ratchet specifically the inventory levels, because that's the biggest item on the balance sheet where you have opportunity to release some cash.

Yes. So right now, we're way too heavy on inventory, as I've said many times. My initial goal to be aggressively get that down to 3 by the end of the year and 4, and we continue to monitor that. And if I can get even a little bit better than that, and we're working on turns with our partners, our ODM partners. And we're pretty much going to execute on a lot of those turns in terms of helping us improve those turns right now. As you know, the in-transit time has gotten worse every quarter. We're close to, I don't know, 70 to 80 days at this point versus early. Before Covid was in the low 30s -- or mid-30s to low 40s. So that also puts a lot of pressure on the cash conversion cycle. So we're working with our ODMs to help us in terms of aligning to that as well right now. And we're pretty close to getting those agreements in place.

(Operator Instructions) Your next question comes from David Tokos, investor.

There's been a lot of changes, obviously, with the management team over the last few months and actually over the last couple of years. So I've been an investor for 3 or 4 years now, and so I feel like I see a couple things. I look at the net revenues, even though I've seen a number of announcements. So I have a couple questions.

On the revenue side, I think the revenue side is where you need to do it. I know there's expenses, and you're going to be trying to manage those. But I think on the revenue side, it's like a number of announcements have been made about new places you're doing business; India, other countries and things. I'm just not -- I'm not seeing any traction there. So I'm trying to understand why you're not getting traction when you've expanded the market you play in.

Yes. Sure. Thanks, David, for the question. So right now, based on some of the trials we're in, in the ISP space in India, Indonesia and Africa, we continue to be in those trials. Some of those trials take anywhere between 6 months to almost 18 months. So we're in the mid-stage of those trials. If whenever those trials kick off in terms of -- we're in good place. As soon as we get to the next level, that's when we start to see the traction that you're looking for, and same thing with us. And it doesn't necessarily have to be a hardware solution only or software/hardware solution mix. It could be software solution as well, which has always been the strategy to be allow us to do any one of those combinations. But it takes time with some of those tractions to come to fruition, but we are in the mid-stage of a lot of those. So we'll -- hopefully by 2023, we'll try to see some of those come to fruition.

So question as it relates to COVID a little bit. I've worked for a company that's asking us to come back to the office and spend time together and stuff. It's like, I know COVID was a little bit of a problem. And I believe there's probably still supply chain issues. But at some point, we need to get past that, right, and go, now how do we proceed? This -- COVID sucked, right? Excuse my French, but it was like -- it was a terrible time for everybody, and it made a mess of the whole economy and stuff. But the question is now you need to look forward past that. Are you guys kind of past that, in your view, or on a more international view, because I'm more United States-based, to be honest. Are you -- do you feel like that's behind you now?

For most part, we're behind it. But at the same time, there is things in terms of, for example, we are -- in terms of our finished good shipments, we have plenty of inventory, as the prior discussion we just had, to be able to make it successful in any place that we want to ship.

In terms of NPI and new product launches, that's where a lot of the delays come because of the supply availability on the new technology and how do we get that. So we're marching in terms of making sure we're driving ahead of time. We've done that for -- we've been around 52 weeks lead time on a lot of those components. So we've been driving that. And we were able to close our 2 product launches of Q11 and Q14 during that COVID time and still get them launched as promised in the time frame that we had initially mentioned to the Street.

So we'll continue to execute on our strategy, continue to build on the timing. We'll continue to work with our ODM partners, and engineering team has done an excellent job to close out any gaps with operations. So we'll continue to do that, and we'll continue to do that going forward. So I think we're well positioned in that way maybe compared to some of the other competitors. But the future of the next gen product is where we continue to execute some of those -- we'll see some of those delays, but we'll continue to work with our partners and pull those forward as much as possible.

Okay. And then on -- I have 2 more questions. But the first one is, if you go to Page 17 in the slide presentation, the cash position quickly dwindles down. And the question -- it sounds like, though, you have plenty of inventory, so you don't need to spend money on that. There's accounts receivables. I hear that. And then as I think the last person who was asking questions was like, when will you go cash flow positive. So my concern is, as a shareholder -- and I own a lot of shares. I'm going to be honest. And my patience isn't incredibly high. But it's not -- it's also not $0.38. And I expect the stock today could go to $0.30 or something like that based on the results here because they're not that great. I think people were seeking improvement, and quite frankly, there kind of wasn't.

But -- so the question is, I worry that you'll run out of cash, and you'll -- someone will do --. So there's 2 questions here. You'll seek the 6-month extension of the, we're below $1, so don't kick us off the NASDAQ. That's kind of one question. But the same question is I would be terrified if the company did a reverse split on the stock and crushed their shareholders' investments. That would be terrible. So what I'm hearing is you don't plan to do that. That you think you have enough cash to get cash flow positive. Would that be a fair statement?

Well, I don't want to put -- so right now, the goal is to turn our inventory to cash, right? That has been said. That has been the goal. That has been the internal drive that --. Since I've gotten here, we've put in pressures we'll put in place in terms of fixing our internal controls to allow us to do that. So we're looking to turn that into, like I said, 3 turns to help us at least turn that back into what I expected to be cash flow neutral or positive.

In terms of cash and stock price, yes, we're going to extend our NASDAQ for 180 days because that allows us to give some more time to look at some of the options that are in front of us. I won't get into the detail of all the options, but the Board and myself are reviewing those options and we'll continue to do so. And our goal is to make sure we put shareholders like yourself and others and make sure we look at it from every angle before we make any adjustments. So please stay tuned on that, and we'll definitely deliver some news on that front soon.

There are no further questions at this time. Please proceed.

Okay. Well, thank you again for joining Dustin and myself and Jeremy on the call today, and we look forward to talking again in a few months. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.