image
Consumer Cyclical - Leisure - NASDAQ - US
$ 0.0007
0 %
$ 8.72 K
Market Cap
0.0
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2020 - Q2
image
Operator

Greetings, and welcome to the Edison Nation's Second Quarter 2020 Conference Call. [Operator Instructions]. I will now turn the conference over to your host, Chris Ferguson. You may begin..

Chris Ferguson

Thank you, everyone. This is Chris Ferguson, CEO of Edison Nation, and welcome to our second quarter 2020 conference call. Before we get started, I'd like to take this opportunity to remind you that during this call, we will be making forward-looking statements within the meaning of federal security law regarding Edison Nation.

Forward-looking statements include, but are not limited to, statements that express the company's intentions, beliefs, expectations, strategies, predictions or any other statement relating to its future earnings, activities, events or conditions.

These statements are based on current expectations, estimates and projections about the company's business based in part on assumptions made by management.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call, in particular, those described in our risk factors included in our documents that the company files with the U.S. Securities and Exchange Commission.

In addition, such statements could be affected by risks and uncertainties related to factors beyond the company's control. You should not rely on our forward-looking statements as a prediction of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law. Our discussions today will include non-GAAP financial measures.

These non-GAAP measures should be considered in addition to and not as a substitute for, or in isolation from, our GAAP results.

A reconciliation of GAAP to non-GAAP results will be found in our earnings release and supplemental materials, which were furnished with our Form 10-Q that has been filed with the SEC and will be found on our Investor Relations portion of our website. Okay. With that, thank you again for joining the call.

I would like to start by first expressing my gratitude and my overwhelming support for what an incredible job the Edison Nation team has done in really creating some really outstanding results in what is obviously a very challenging environment with the global pandemic.

I think certainly, there's one thing I can clearly say about the Edison Nation team, and to use my baseball analogy, we certainly can hit a curve.

And I think we've done an amazing job in understanding the new reality and the new normal related to the global pandemic and then taking that opportunity and seeking to put it into our business model and create, we think, some pretty interesting results in a short period of time.

So to that point, I'm going to touch on some of the items that we outlined in our most recent investor deck, which can be found on the Investor Relations site of our website and to help give some context about how we relaunched Edison Nation Medical, how we believe that, that really is a great illustration of the Edison model.

What we really try everyone to seek to understand is the foundation of the companies that created Edison Nation had a really stellar, incredible amount of experience. The businesses that are part of the Edison Nation umbrella have collectively been in existence for more than 120 years in the manufacturing, product development, sourcing space.

That experience is what we leveraged to be able to get the Edison Nation Medical side back up and running in a robust way and really able to seek and find the opportunities within this new reality, within what is happening in the global pandemic and really adjusting to that change and, as I said, hitting that curve ball and really creating what has become an interesting component of the Edison Nation business.

And how did we do that? How can I sort of give, you guys, a way to understand and absorb how we look at opportunities like that at Edison Nation, whether they are part of a global pandemic and the ability to start to source and manufacture and sell things like personal protective equipment, sanitizer, et cetera? Or is there the SHOWER LILY, which is coming out this week on Amazon, which we think, a pretty cool innovative product that we're excited about that will be out on Amazon probably next week.

So in a sense, from that perspective, we are product agnostic, right? We are about that process. We are about finding that opportunity, whether it's a new sanitizer because that's in high demand or whether it's a product that has come through our pipeline or whether it's a small entrepreneurial team like our team that works on Forever Roses.

We are product agnostic. What we do have is a great process and a great foundation to be able to rapidly integrate those kind of products into our platform, source them, manufacture them, ship them and get them in the hands of customers.

And that is how, in a relatively short period of time, really, when you look at it for the second quarter, we were maybe actually executing on sanitizer or PPE for only about 60 days, maybe a little less than 60 days of that quarter.

And we're able to quickly source, manufacture, ship and get items in the hands of a number of new and exciting customers. So very happy.

But I think really what the team is most proud of is that it truly shows how the Edison Nation operating model works, whether it's this big bulky opportunity, like obviously, PPE has shown itself to be or it's sort of that similar product that we found is innovative and we think resonates with customers.

And I think I've talked about in previous presentations or on previous meetings about those singles we love to hit. Obviously, the opportunity relative to sanitizer and PPE is much larger than a single, but still on that daily basis, we do that same thing for other products and other product lines that come into the operating model.

And it's about that speed to market. It's about that rapid manufacturing and that ability to source quickly, the ability to have that nimble team that then finds that outlet or that channel for those items. We do have, like I said, a really experienced team.

I said that collective 120 years of business, experience between those different entities under Edison is compelling. We have one of the leaders of our U.S. manufacturing team, I just checked, has been with our company for 47 years.

That just shows you that I would match up companies of our size with just about anybody out there as far as the depth of our talent, the depth of their experience, the depth of their knowledge.

And that is what really makes us have that opportunity to see moments in time like a global pandemic and then execute on them and really make that business a reality in a really, really short window of time. So I hope that comes across that we have this really deep team, which is certainly one of our competitive advantages.

But additionally, we have U.S.-based facilities. We have an Asia-based team so we have feet on the ground both here and over in Asia, which certainly, with respect to some of the things that were necessary from a sourcing perspective for getting this up and running as fast as we did, we needed both those.

Sanitizer we have is all made in the U.S., and that team did an outstanding job of getting into those factories and finding the right supply chain and finding the right quality and executing and delivering.

And then similarly, over in Asia, as there was really this almost Wild West atmosphere, we were able to get over there and source the right team, source the right factories and build that supply chain to meet our customers' demand.

So like I said, I think that way that we attacked this opportunity relative to our kind of new reality within the global pandemic and within the PPE market is really a testament to how our team functions on a daily basis.

And again, I can't express the pride that I have for everybody on this team who have done an outstanding job, a job over and above what someone would do simply to get a paycheck. But clearly, we have dedicated teams of people that were working 12, 15, 20 hour days to pull off what we did, in like I said really a 60 day time frame.

So I wanted to get that across, certainly get a huge thank you and a huge attaboy out to that team. Okay. Let me get over to our Q2 highlights. We had record quarterly revenue of $6.9 million. The Edison Nation Medical piece of that was roughly $3 million.

We have had a tremendous demand for the items that we have sourced relative to both PPE and sanitizer. Our current open purchase orders as of August 15 were $44.4 million. We secured a contract with a large municipality to supply our hand sanitizer, our Purple Mountain Clean hand sanitizer for three years and includes another two year renewal option.

And Amazon, which has made a really intricate process to get PPE and sanitizer items approved for sale on their marketplace, has approved the sale of Purple Mountain Clean, which we are excited to get that approval.

And those shipments began, and you will be able to see, this month, Purple Mountain Clean hand sanitizer products on the Amazon Marketplace. To give some more detail and some more understanding and perspective on what the EN Medical piece looks like, we did provide in our latest investor deck what sales were by product line.

So in Q2 primarily, we were able to source, manufacture and ship sanitizers. It's made in the U.S. so the timeline to get that product, get it produced and get it out the door by 6/30 was somewhat easier based on it being a U.S.-based solution.

And then again, we did decide to create our own brand, and we're able to get that out and get that into the market also within the second quarter.

So by product line, primarily up to $3 million in sales, $2.8 million of it was on the hand sanitizer side, which within kind of a 60-day time frame is a tremendous job by our team and really excited to see that side of our business continue to grow. The other pieces we did do, gloves and marks.

Again, we sourced those from overseas and the purchase orders we have that are part of the $44 million are more in that type of more normal PPE space between gloves and gowns and masks, even some wipes, I believe. So that the items that are coming from Asia do have somewhat of a longer lead time.

We were able to get some of that within the second quarter. You will see more of the shipments related to those items occurring in the third and fourth quarter. And the purchase orders that we have currently that we talked about, the $44.4 million are really around those kind of items.

The breakdown of EN Medical purchase orders for Q2 by customer, we initially won a contract from a municipality in California. We were able to fulfill that order to that customer's satisfaction, and they were excited and became really a fantastic referral source for Edison Nation.

So that first initial contract with that municipality out in California did lead to being able to source other municipalities in that region and also up at the state level. So that first really hooked into the first government opportunity ended up having an ability to sort of spread fairly wide in that space.

So the largest customer type for Q2 was on the government side. We additionally had enterprise customers, sort of large Fortune 2000-type customers, who did do some stuff for some small businesses. We did a little bit in the education space, and we also worked with some small and large distributors of different medical supplies.

So that kind of gives you a good perspective on the type of customers we're able to serve. As the quarters go forward, we do think the enterprise and the distributor side will start to really ramp up and grow, and we do still see a lot of high demand on the government side as well.

I want to touch also on our core business, right, and that understanding that we are product agnostic. So when this opportunity to source things like sanitizer and PPE came in, the team is positioned to do exactly what it did, to find that opportunity, source it, execute it, ship it, find the right channel to sell it.

So that platform is really the heart and soul of what we do and what we'll continue to do on a daily basis. Every day, that team still decides, obviously, executing on our medical side. We still, on a daily basis, execute and validate and ultimately determine, pick and choose and start to develop and ship a number of other items.

The core business for the quarter is at about $3.8 million. Typically, that, in a normal year, would have been higher because our theme park business has obviously slowed tremendously during the second quarter, the majority of global theme parks were completely shuttered or opened on a very scaled-down basis.

So on a normalized basis, the products that we do have that are not being park-related actually performed quite well. A lot of our U.S.-made side, our coloring posters, some of our U.S.-made packaging opportunities did really well.

So on a normalized basis, the core business did actually quite well, with the only caveat being that the theme park business, for obvious reasons, was quite constrained. But the momentum we're seeing, obviously, with channels like Amazon, marketplaces like that, direct, e-commerce, we have really seen the demand there increase.

We think that, obviously, trend will continue. The brick-and-mortar side, we're again, obviously challenged, but the opportunities in all the other channels were able to be strong drivers of those product sales. So that core side, we're actually excited that we had the results we did. There is a new portal we're launching called the ENovation ENgine.

We have our Edison Nation portal, which is really for the true inventor, the true innovator who has that idea that they really want to see if they can get commercialized.

And those ideas are submitted every day onto our platform, and we evaluate them, and then the ones that work for us, we launch ourselves, and the ones that we think work for our partners, we'll license that to a variety of small and large companies that look to us for new ideas and new innovations.

We also wanted to have a platform designed more for that small entrepreneur, that person that has actually taken their product, built some inventory and is really ready to scale it and take it to that next level.

So the ENovation ENgine is asking those small entrepreneurs to come onto this community and essentially apply to be part of a product on the Edison Nation platform and see if we can help you scale and get to the next level.

I think our 4Keeps Roses is a great example of a company and an opportunity and a set of entrepreneurs, that would be a perfect fit for working with Edison. When they came to us, they had some product, they had a little bit of inventory, they had some interesting opportunities.

And we took that from essentially very, very minimal revenue in the six months ending 6/30, it's now at a run rate of $1.4 million, and that's even with, obviously, the pandemic taking down some of the traffic at convenience stores and having somewhat of an impact, but even despite those challenges, that company has jumped up and has gotten those products out to the market.

And so on a run rate basis, $1.4 million of those items. And as we believe, life gets a little bit back to normal, we think that product line has a lot more to go and a lot more room for growth and a lot of other opportunities and channels that we can take what we think is a really cool innovation and roses that you can have for a couple of years.

And we've seen that customers are enjoying it and buy them still every day. So we're excited that, that is a great example of the type of entrepreneurs and the stage at which they were at, that by then coming on to our platform, I think we can accelerate and expedite their growth.

We have also found a set of relationships to help finance that first set of inventory for businesses like that.

We've established some partnerships so that core stumbling block that a lot of these entrepreneurs run into is like, "Hey, I have this great idea, and I think there's some demand for it but I can't get that first run at minimum-order client.

I don't have that $100,000 or $200,000." We established a partnership with a set of lenders who will provide that capital and really help them get to that stage where they actually have enough product that they can hit the market and see if it resonates with customers. So we are excited to see that.

That will be up and live at some point this quarter, and we've beta-tested it and the demand has been really, really exciting to see. I'd also like to touch that we have had the show Everyday Edisons on. There are some items that are now out there selling.

I think you'd see on the first episode, the SnozzlePro and Val and her team have done a great job of getting that out to the market. There are a few more items that you're, hopefully, by the holiday season, that have come off the show that you're going to see out in the market. We're excited.

I want you to tune in to see the rest of the episode so I won't kill the surprise or give away the endings. But we have some interesting stuff that we're excited to show you guys there, and we'll give you some updates on when those episodes will be out.

We're hoping to have them hit right around the holiday season and catch some of that holiday spend with what we think are some really cool items.

That Everyday Edisons side of what we do is something that we're really excited about, how we can marry media and product and how we could co-brand our item, which are made by some really fantastic entrepreneurs and have a Made by Everyday Edisons e-commerce site for things that are in brick-and-mortar, have a hang tag that explains who that entrepreneur is, some of their backstory and the caricature of that Everyday Edisons.

So we really are going to do a big push through the rest of this year and as a part of our core business model going forward, to really have that made by an Everyday Edisons become a really unique place for innovators who have great ideas but then also for consumers out there who want to support those innovators have a place, an e-commerce site where you can go and you can learn about who that innovator is and how they created that item.

And if it's something you like, you can also buy and take one home. So with that, I will turn it over to our CFO, Brett Vroman. And when he's done, we will then dig into some questions. And thank you guys for your time. And with that, I will turn it to Brett..

Brett Vroman

Thanks, Chris, and good afternoon, everyone. Although we have faced significant headwinds in 2020 in this quarter due to the COVID-19 pandemic, we were able to shift positively into new ventures and increase our revenues as well as reducing our SG&A spend during the quarter.

Our actions have allowed us to maintain our liquidity position, and we ended the quarter with $1.8 million of cash, which was up more than $1.3 million from year-end and $1.2 million sequentially from March 31, 2020.

In Q2, revenues totaled $6.9 million, up 15% versus a year ago and was up 89% sequentially from $3.6 million for the 3 months ending March 31, 2020, reflecting the positive impact of our relaunch of the Edison Nation Medical division and our entry into the personal protective equipment space through EN Medical and Global Clean Solutions, which is a 50% variable interest entity of ours.

We continue to see challenges in our amusement park business, and those operations were down approximately 56% or $1.5 million versus a year ago. Moving on to our gross margin. Our second quarter gross margin was 28.9% versus 34.3% a year ago.

The decline primarily reflects the change in our product mix of goods sold to customers through our Ferguson Containers and Edison Nation Medical operation. These margins on a gross basis are typically lower than our other branded product businesses, which were down during the most recent quarter.

SG&A in the quarter came in at $2.8 million, a decrease of approximately $600,000 of savings versus the prior year. This was primarily a result of savings due to a reduction in professional fee.

As a result of our continued cost-saving actions, including workforce reductions, we anticipate that SG&A dollars in the second half of 2020 will continue to be below our 2019 level. We will continue evaluating our service providers and make changes where we feel we can reduce the costs while maintaining the same quality of services.

From an earnings perspective, net loss decreased to $1.6 million or negative $0.18 per share for the 3 months ended June 30, 2020, from $1.7 million or negative $0.30 per share in the same period the prior year but declined sequentially from a net income of $1.3 million or $0.16 per share for the first quarter ended March 31, 2020.

The net income of $1.3 million for the 3 months ended March 31, 2020, included a noncash gain of $4.9 million related to our divestiture of Cloud b, Inc. Our adjusted EBITDA was approximately breakeven for the quarter ended June 30, 2020, which was an improvement sequentially of approximately $900,000 from March 31, 2020.

Our adjusted EBITDA does not include $907,500 of fees billed to a PPE customer as of June 30, 2020. These fees are included in accounts receivable and deferred revenues as of June 30, 2020 on the balance sheet with no impact to our statement of operations.

Had the company not made the election to defer the revenues until cash collection, the company would have reported adjusted EBITDA of approximately $900,000 for the quarter. Included in the adjusted EBITDA is approximately $189,000 of restructuring and severance costs related to the headcount and rent reduction.

In the third quarter, we will continue to include addbacks for restructuring and severance costs due to the further headcount reductions and cost-saving measures such as our relocation of our warehouse in California to Florida, which is expected to be completed in September 2020.

We will begin to see cash savings related to this in Q4 of 2020 and Q1 of 2021. Now I'll turn to the balance sheet. As a reminder, we ended the second quarter with total cash of $1.8 million. Inventory totaled $1.2 million, down 8% versus the previous quarter and 13% from year-end.

As discussed, deferred revenues and accounts receivable included $900,000 of fees billed related to one of our PPE customers related to the Medical division. Our total debt, net of unamortized discounts, was $8.6 million and we will continue to monitor our debt portfolio.

Subsequent to the quarter, approximately $1.1 million of the debt was converted into common shares. During the first half of 2020, we took actions to cut costs and preserve cash. We have lowered expenses across the organization and are proactively managing our working capital requirements.

Due to the continued cost-savings actions, we anticipate SG&A will continue to decline. Due to the uncertainties and the fluid impacts of COVID-19, these expectations could be affected by heightened effects from the pandemic as the year progresses. We continue to manage cash and liquidity and continue efforts in controlling costs.

We believe the actions we are taking will enable us to continue navigating the anticipated effects of COVID-19. At this time, I'm going to hand it back over to Chris..

Chris Ferguson

Thanks, Brett. At this time, we are going to answer some questions we received from our shareholders..

A - Brett Vroman

procurement, fulfillment or customer acquisition?.

Chris Ferguson

Thanks, Brett. Good question. Clearly, PPE is a supply-driven reality in a supply-driven business. Having access to supply at the right cost that can be delivered on time to the customers' expectations is the core to the business. If you're able to do that, customers will line up at your door. So customer acquisition is less of the issue.

Having that really solid supply chain to be able to meet those expectations, fulfill those expectations on time at the right price is what has allowed us to have success at this point, and we believe that's what will be the core requirement going forward, to be able to have that supply chain, to meet customers and fulfill those expectations on time and at the right cost.

The cost in PPE can move rather quickly, so having an ability to have a supply chain that will give you your relative allotment and hold that price for you and deliver on time is the core dynamic that allows you to be successful in that business..

Brett Vroman

Next question.

How is the client retention in the PPE space?.

Chris Ferguson

We've had excellent client retention. They are very happy when you're able to fulfill these orders because many, many, many of these clients have experienced issuing purchase orders and having those suppliers fail to deliver. So we fortunately have been able to be successful in meeting those expectations and meeting those delivery times.

And not only has that allowed us to retain the customers we have, but the best source of getting new customers for us has been referrals from those existing customers and their recommendation, that Edison Nation has been able to deliver on their promises relative to the orders we've had in-house.

So certainly, we've had great success in client retention. And over and above, our clients have been nice enough to provide referrals and get us new pieces of business..

Brett Vroman

I'll add to that, Chris. We've successfully delivered PPE products to some of our customers, and we were able to turn around and then deliver a different product in the PPE space such as masks, gloves. And we continue seeing those customers come back because of that comfort level they have with our sales team and the delivery that we've provided.

As you said, the failure of delivery on some other -- they've seen that in the space. They're getting a level of comfort with us now..

Chris Ferguson

Great point. Great point, Brett. And kudos to that sales team and our fulfillment team to be able to take an opportunity. For instance, that was a customer who wanted sanitizer and expand that to the other product lines we offer.

And we've started to see that get some traction, and we're excited to be able to sell more things to the same customer, which is a great way to grow..

Brett Vroman

Next question. Please explain whether your PPE revenue will be recognized on a gross or net basis.

And will you be updating your revenue guidance for 2020?.

Chris Ferguson

Thanks, Brett. Unfortunately, it's a complex question. I wish there was a simple answer. Many of these PPE transactions that we're part of are multiparty and can include letters of credit, standby letters of credit, escrows. And each one has its own sort of unique element.

So we have a little challenge until the quarter's done, and we've been able to sort of turn that package over to market to really be able to predict, will this one be net? Will this one be gross? So we have dealt with that in the second quarter, but we really only have kind of 60 days' worth of a track record to look back to say whether one particular transaction frames one way will be gross or net and then something with a little different tweak may have a different outcome.

So with that being said, this current quarter, the third quarter, will be our first full fiscal quarter that will help us understand the nuances of each different transaction and give us a little more visibility.

I think at that point, when we've had one full quarter under our belt, we'll be able to guide the market and kind of make that prediction, "Hey, these type of transactions do get recognized net. This type of transaction will be recognized gross." When we have that clarity, I think, is when we'd be able to update our guidance.

We are maintaining our guidance right now at $34 million. And again, when we get a little better visibility into gross versus net, I think we can then take that understanding and make it a little more predictable for when we see what we're going to do for 2021..

Brett Vroman

Yes. I agree with what you said, Chris. Each transaction is different, and they really have to be evaluated on an individual basis. And really, the question arises of principal versus agent, and we've really got to determine that on each transaction. So it's really not a blanket determination.

So it's a good question, and we will continue to update everyone as the year moves on. Next question.

What are the gross margins for PPE-related orders?.

Chris Ferguson

There are a lot of factors that go into what those margins will be.

A lot of that depends on, is it an item that is being picked up and delivered FOB at a port in Asia? Is it something that we have to air ship? Is it something that can go on a fast boat? Is it something that can go on a slow boat? Which product mix is it? What's the quantity? So there is a wide range of PPE margin.

It can be as tight as 6% or 7% gross and it could be as large as 20% or 30% gross based on all those different factors. So, it is sort of a unique business and the order size can be quite small to north of $10 million for a single order.

So, that margin and all those different dynamics will affect what that is, but the range can be kind of mid-single digits all the way to north of 20% or 30%..

Brett Vroman

All right. And our last question for the day, Chris. Please explain how the non-PPE business is performing..

Chris Ferguson

So we're really excited about the core business and the fact that certainly, what this global pandemic has done is it has, overnight, taken what might have been 5 or 7 years to change sort of the customer behavior, from somebody who would shop still somewhat in brick-and-mortar stores to obviously making the vast majority of your purchases online.

So the fast forwarding of that reality is really exciting for us because our way to get those products that we find through our various portals, through whether it's the traditional destination portal or now the ENovation ENgine portal, our way to get that on to the market, the fastest is to get it onto a marketplace like Amazon or some version of e-commerce.

So the fact that, that market has exponentially grown and there's that much more purchasing power done on those type of places and that much more customer demand really is something that, I think, is turning out to be a real win for our business model.

So we're really excited about how that core business of ours is positively affected by this shift, in this movement from brick-and-mortar retail to a larger preference on e-commerce purchases. Well, I think that's our last question. We really appreciate everybody. And there's continued support from our shareholder base.

We are excited about what the future holds and look forward to talking to you guys again in November when we report our third quarter. Thanks very much for your time, and we will talk to you soon..

Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation..

ALL TRANSCRIPTS
2022 Q-1
2021 Q-4 Q-3
2020 Q-2