FiEE, Inc. (FIEE) Q4 2020 Earnings Report, Transcript and Summary

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to Minim's fourth quarter and year-end conference call. [Operator Instructions] I'll now turn the floor over to your host for today's call, Mr. Sean Doherty, Chief Financial Officer of Minim. Mr. Doherty, you may proceed.

Thank you, Stephanie, and welcome to everyone joining Minim's Fourth Quarter and Year-end 2020 Financial Results Call this morning. I'm Sean Doherty, CFO of Minim. And today, I'm joined by Jeremy Hitchcock, our Executive Chairman; and Gray Chynoweth, our CEO. For our agenda today, we'll start with Gray, who will review our operational progress in the quarter, and then I will provide more insight into our financial results for the fourth quarter and full year. After that, Jeremy will share some high-level strategic perspective, following which Gray will share some comments on our outlook for 2021. At the end of the call, we will open the floor to questions. 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 differ materially from those contemplated by these forward-looking statements. For more information, please refer to the Investor Relations page for additional risk factors discussed in Minim's filings with the SEC. Please note, too, that today's call may include the use of non-GAAP numbers which our management utilizes to analyze our performance. A reconciliation of such non-GAAP numbers to the most comparable GAAP measures is available in our most recent press release as well as in our periodic filings with the SEC. These materials are available on our Investor Relations website, ir.minim.com. I'd now like to turn the call over to Gray Chynoweth, Chief Executive Officer.

Good morning, and welcome to Minim's Q4 and Year-end 2020 Conference Call. I'm pleased that our senior team is here with me to discuss the progress we've made in the past few months as well as our exciting plans for 2021. I was first introduced as CEO on our last conference call in November. There I shared with you my enthusiasm for combining the strength of Minim's proprietary AI-enabled software platform with Zoom Telephonics' market-leading Motorola-branded hardware to meet the demand for products that make connected homes safe and easy to use for life and work. The intervening months have provided more proof points that support our plan to drive sustainable growth. Let's begin by highlighting some of our financial metrics. Once again, this quarter, we delivered record net revenue of $13.7 million and $48 million for Q4 and 2020, respectively. We generated improved gross margins in Q4, 33% in Q4 and 833 basis point improvement over Q4 of 2019. For the full year of 2020, gross margins were 28%, a slight reduction from 2019. We grew the top line by launching new products and increasing production, which allowed us to meet the growing demand for advanced home networking products and services. We saw this demand in higher sales in November and December, especially through Amazon and other retailers. And we drove margin improvement through the addition of software revenue and cost management. Minim delivered exceptionally well for our customers during the past year, earning their confidence as a trusted supplier at a time when home connectivity has never been so essential. One of the critical accomplishments in the fourth quarter was completing the merger of Minim into Zoom Telephonics and rebranding the company as Minim. We have smoothly integrated the 2 companies across departments. In other words, we're well underway to building a vertically integrated franchise with an innovative hardware/software road map designed to attract and delight customers. As we have organized our merged company, we are bringing a very clear message to the market, the power of bundled, best-in-class software and hardware for quality, safe, home connectivity. With the merger, we gained wider addressable market through 3 key sales channels. First, Minim sells home networking, hardware and software under the Motorola brand directly to consumers through leading retailers and e-commerce platforms. Second, Minim sells products to ISPs as part of their home service offering to attract, support and retain customers. It's an exciting time to work with ISPs as investments worldwide are being made in closing the digital divide and delivering higher speeds. Third, Minim sells products to distributed businesses as they aim to secure and support the remote worker networks. Combined, these sales channels are our vast greenfield of growth opportunities in the U.S. and worldwide. The key to exceptional growth in these sales channels is to deliver outstanding products. We have always been a leader in innovation, and we are pleased to have our Motorola-branded cable products ranked in the top 3 sellers across retailers and e-commerce. Of note, Motorola was the fastest-growing retail cable modem and gateway brand in 2020. Let's look at just 1 example of the intelligent connectivity Minim offers. We are in the midst of launching our Motorola MG8702 cable modem router combo to e-commerce platforms and retail. MG8702 sales are already expanding in Amazon as consumers seek its ultrafast DOCSIS 3.1 AC3200 WiFi router performance. But what's more, they also get access to the Minim powered app with full network security, parental controls, ad blocking, speed testing, guest network privacy settings and much more. The Minim app is not only value packed, it's continuously improving as true Software-as-a-Service does. Also in Q1 2021, we launched a Minim app feature that demystifies data usage and data caps for home users. You can read about this feature set and its timely rollout in recent news coverage in lightreading.com. By empowering home users to make more informed decisions about their speeds and data needs, we are proud to showcase the explosive value delivery when powerful hardware meets advanced software. Now on to how we build awareness for our products to retailers, ISPs and distributed businesses. These efforts are led by our CMO, Nicole Zheng, who will join the Q&A section of today's call. Minim is deepening our partnerships and expanding our marketing investments in current channels, including Target, Best Buy, Walmart, Amazon and Micro Center, as well as opening discussions with new retailers. In February, we received an exciting order of our highest-speed DOCSIS 3.1 products to Best Buy, which marks the first significant order of Minim software licenses through retail. On our ISP side, we continue to grow our customer base and hardware integrations worldwide through our relationships with Irdeto and the Microsoft Airband Initiative. You may have also seen our announcement in early February that Irdeto has extended its Minim partnership to deliver Motorola hardware. The Irdeto-Minim platform helps broadband providers boost consumer retention and ARPU while lowering support expenses by as much as 50%. Through our digital marketing and industry engagement, we also directly acquired new ISP customers. To that end, we recently announced our expanded reach in Africa, Europe and North America by featuring 5 service provider customers who selected Minim. A special thank you to our ISP community. These providers continue to persevere in this pandemic, safety, financial, network utilization challenges to deliver reliable, high-quality services to their subscribers. Minim has taken a similar approach to acquiring SMB customers by partnering with a leading technology distributor and master agent, Telarus. Last quarter, I spoke to their extensive sub agent base and our impressive rates of the Summit Series event. Supporting these marketing strategies, Nicole has recruited exceptional talent in design, advertising, retail merchandising and more. And it's great timing. Last quarter, Motorola released an attractive new brand guidance that has already taken our packaging and design to the next level. Switching gears, I'd like to touch on how we are bolstering our business operations for exceptional and sustainable growth. As you may know, the heightened demand for semiconductor chips is a hot topic among several technology sectors. In response to this headwind, we are diligently planning component orders with longer lead times as well as building resiliency in our supply chain and product road map. As has been recently announced and as Sean will touch on shortly, we strategically acquired and deployed capital resources to invest in inventory to continue sales growth of our products and services. We will keep you updated on our progress. In sum, today, I am confident that we have a more resilient and better-performing business model in Minim, one that will enable us to grow our revenue base and scale our operations through a global franchise that makes everyone's home safe and easy to use for life and work. With that, I will turn the floor over to Sean to share more details on our financial performance.

Thank you, Gray. I will be reviewing our financials for both the fourth quarter and full year 2020. As Gray noted, we had record revenues for the quarter and the full year, in both cases, a significant improvement from the prior year period. Growth in our top line continues to be driven by higher retail demand associated with more working and studying from home due to the pandemic, with particular strength in sales to Amazon, Best Buy and Target during the fourth quarter. Gross margin improved in Q4, but was slightly down for full year 2020, reaching 32.8% and 28.4%, respectively, up 833 basis points and down 64 basis points, respectively, from the same periods in 2019. Q4 marked the third successive quarter of gross margin improvement and reflected the addition of software revenues as well as our success in managing product-related expenses. I'll note, however, that we incurred onetime expenses associated with the merger, primarily during the fourth quarter, and those reduced net income by approximately $1.3 million in Q4 and by $1.6 million for full year 2020. Accordingly, the net loss for Q4 was $1.2 million or a loss of $0.04 on a per share basis, compared with a net loss of $1.1 million or a loss of $0.06 per share in the fourth quarter of 2019. For the full year, net loss was $3.9 million or a loss of $0.15 per share in 2020 compared to the prior year's net loss of $3.3 million or a loss of $0.18 per share. The full year 2020 net loss includes $2.8 million in tariffs. Excluding these tariffs, non-GAAP net loss in 2020 would have been $1.1 million. We also incurred $1.5 million in temporary supplemental airfreight expense this year, $1.6 million of merger-related expenses and $1.06 million of other income related to PPP loan forgiveness. Excluding the tariffs, the temporary supplemental airfreight expense, merger-related expenses and the PPP loan forgiveness, full year 2020 non-GAAP net income would have been approximately $1 million. Adjusted EBITDA also improved on a full year basis and was a gain of $1.2 million in 2020 versus $0.1 million in 2019 when normalized for onetime deal costs, supplemental airfreight tariff expenses and depreciation and amortization. When we look at the balance sheet, we ended 2020 with $1.6 million in cash and cash equivalents, a decrease from the prior quarter and year, primarily due to merger-related expenses, but also because we chose to invest in inventory build to meet customer demand. Our cash position includes $800,000 of restricted cash related to prior period issuance of performance bonds for the payment of tariffs. Tariffs are fully paid as invoiced, and we expect these performance bonds to start being released beginning in mid-2021. You can see an increase in current assets this period, which includes inventory as we work to meet increased demand for our products. We also had an increase in current liabilities, which includes higher accounts payable, reflecting payments not yet due for the inventory purchased during the quarter to support that growth. As a result of these 2 dynamics, working capital ended 2020 $0.5 million higher compared to Q4 2019. As of December 31, 2020, the company had outstanding debt of approximately $80,000 related to PPP loan and $2.4 million drawn against the company's $4 million line of credit. After the close of the quarter, we announced in early February that we had increased the size of our credit facility with Rosenthal & Rosenthal to $5 million from $4 million. This important step aids our financial flexibility at a time of high customer demand and enables us to continue to scale operations for higher product levels and to ensure the uninterrupted introduction of new products. Lastly, in terms of shares outstanding, as of December 31, 2020, our basic and diluted weighted average common and common equivalent share count was 25.3 million shares, a 40% increase from the prior year, reflecting shares issued in the pipe transaction in midyear 2020 as well as the merger transaction in December. In sum, I am pleased to report that we managed through the unusual challenges presented in 2020, including continued tariffs, a pandemic and higher transportation expenses, with the tailwind of work-from-home connectivity demand. We are committed to using the lessons of last year to ensure sustainable growth. With that, Jeremy, I'll turn the floor over to you.

Thank you, Sean. Since I collaborated with Gray to scale Dyn, I've been motivated to consumerize and democratize home network security. After Dyn's platform was overtaken by the Mirai botnet of 2016 through the hundreds of thousands of baby camera exploits and others, I founded Minim in 2017 to advance the smart home. Minim founders wanted to give consumers the same protections on their data that was afforded by big enterprises. Soon after Minim delivered an AI-driven WiFi management platform to service providers, in May of 2019, I joined the Zoom Board. Zoom had selected Minim software to fortify their connectivity hardware because they, too, saw the consumer struggle with network security and WiFi management. Now as Executive Chairman, I'm excited that the combined company has powerful hardware and powerful software offerings to secure and manage home networks everywhere. There's no better time than now. The global wireless technology market has exploded, driven by the work-from-home movement, network upgrades, smart home adoption, over-the-top streaming, gaming, remote education, telehealth and more. There are 1.1 billion home broadband subscribers in need of software-optimized connectivity, and we know that Minim meets those needs. Gray talked about sustainable growth, and that's our north star as we drive our plans. Minim will continue to drive customer-led innovation while generating higher gross margins through the distribution of our Software-as-a-Service. This strategy will build both exceptional enterprise value, enable us to deploy capital for the best possible return. I'm confident that today we have brought together an industry-leading team with an innovative product road map, smart operational planning and a modern market approach. I'm really proud of this team, and I look forward to the continued success. With that, let me turn the floor back over to Gray to provide some thoughts about our outlook for the coming year.

Thanks, Jeremy. As you can tell, we're really excited about the opportunities we're facing, pleased with the products and technology we are providing and confident of our strategy to capture more than our fair share of the total available market. While we are not planning to share specific financial guidance today, I did want to provide some commentary on our expectations for 2021. This includes growing net sales again in 2021, increasing the proportion of subscription revenue and net sales, expanding our retail channels with key important distribution partners, increasing the number of homes passed through our ISP channels, driving meaningful improvement in gross margins, expanding our product portfolio with at least 3 significant new product rollouts, continuing our ranking as 1 of the top 3 modems sold at retail. As we move forward, we'll update you on our progress against these goals. Once we achieve a few quarters of solid track record as a combined company, we'll then once again aim to provide our investors with more specific financial guidance. With that, operator, we are ready for questions. As I mentioned earlier, Nicole Zheng, our Chief Marketing Officer, is also on the line with us today for any questions about specific marketing initiatives.

[Operator Instructions] Your first question comes from the line of Joe Wytanis, a shareholder.

I have 2 questions. The first to Gray. In the 2019 annual report, Zoom announced a license agreement signed in March 2020 with Motorola Mobility to sell consumer-grade security monitoring products with related services. The announcement mentioned that Minim licensing payments start beginning of 2021. Can you please comment on availability of these consumer-grade security and monitoring products and related services? It's been a year. It seems like the licensing starts, and I haven't seen or heard anything.

Thanks, Joe, for the question. I think the way I'd respond is to talk about the product road map that we have in place today and to let you know that it's focused mainly on connectivity. When we came into the -- when I came into the business, we took review of every initiative and decided where we were going to achieve the most short-term growth from those. And you'll see the products come out this year that are associated with those. We're, of course, mindful of that opportunity that you mentioned and see it as one that's very interesting for us, especially because of the ability to cross-sell once we have the Minim app on all of our platforms. So I think it continues to be a very interesting opportunity for us, and you'll see our products roll out this year that are connected with our strategy around connectivity and are opportunistic when we see the ability to really drive growth in those areas. I will say that we are mindful of both being very good at what we do at our core and expanding. And those are things that we're always balancing.

Okay. So does that mean you will or will not provide security and monitoring products in 2021?

I don't believe that we've released a 2021 product road map. So I would decline to make that announcement about our release of a road map -- product road map on the call. But as I said, we are looking at our products and see it as an opportunity and remain excited about it, especially given the context of cross-selling with our software.

Okay. Second question I have goes to you, Sean. I heard you lightly touched on the balance sheet. When I looked at the balance sheet, certainly, you can see that the inventory has ballooned from $7.4 million at the end of the year 2019 to $15.3 million at the end of fiscal 2020. And of course, accounts payable, as you had mentioned, also ballooning from $5 million at the end of 2019 to 11.7%. Can you share a little bit more visibility and insight on what the plan is on this inventory and accounts payable situation?

Certainly, Joe. Again, thanks for the question. You're absolutely right, we did ramp our inventory levels as we approached the end of 2020. We did that based on current and projected demand that we see in the market. That $15.4 million of inventory you see there is representative of us building a good cushion in Amazon so that we can cover all the demand that we're seeing. We fully expect to continue to turn that inventory as we have in the past. As you're well aware, as we bring things in, we generally tend to sell them pretty quickly. So we're excited about the increased level of inventory that we have, and then also a hedge against the chipset shortages that basically everybody is seeing right now. So I'm sure you've heard that in the news right now. So this is also a strategy to mitigate that risk as we continue through 2021 and continue to experience the growth that we've seen in the business.

[Operator Instructions] Your question comes from the line of Scott Weiss with Semco Capital.

Can you comment on your expectations for costs in '21? And are we going to continue to see a ramp-up in costs from tariffs, airfreight, et cetera, that you cited for last year?

Thanks, Scott. No, we don't expect to see material tariff costs since we were able to shift our production from China to Vietnam. The airfreight as well, the expense that we saw, the supplemental airfreight expense that we saw in 2020 was really a response to having to ramp back up inventory levels after supply chain issues that everybody experienced in a post-COVID world. So we'll continue to use airfreight on a strategic perspective as needed, but we don't expect to see a material impact to our P&L in 2021.

Your next question comes from the line of Aaron Sharabaika with Tolerance Capital.

Congratulations on a nice quarter. I have 2 questions. First, can you comment on the amount of cost savings that you're estimating for 2021? And the second part of my question is, do you have any updates on timing for potential NASDAQ listing?

Yes. Thanks for those questions. We're not anticipating cost savings post merger in 2021. So I would say that we don't have anything built into the plan around that. And with regards to a NASDAQ uplisting, I would turn that over to our CEO, Gray Chynoweth.

Yes. Thanks for that. Obviously, it's something we're considering. We always consider all alternatives. Uplisting when private remain where we are. I think the Board has given me direction to continue to seek sustained growth and ensure that we're in a position to provide shareholders liquidity that they need to be able to capitalize on the returns that they see in their investment in the company.

There are no additional questions at this time. I'd like to turn it back over to management.

All right. Well, thanks very much to everyone for joining this morning. Before we sign off, please note that we'll be presenting at the OTC Technology Virtual Conference on April 15 and at the Sidoti MicroCap Virtual Conference on May 20. And I hope that you'll be able to participate in those events. In the meantime, if you have questions, please reach out to Sean, our CFO, or to our IR team. We really welcome the engagement from investors and look forward to collaborating with you in sharing the vision for where we can take connectivity. Thanks, and have a good day.

Thank you. This concludes today's conference call. You may now disconnect. Speakers, please hold the line.