Mace Security International : August 21, 2023 – Q2 2023 Earnings Call Transcript – Download

International second quarter 2023 earnings call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Please be advised that today's conference is being recorded. I would like to now hand the conference over to your first speaker, Mr. Rem Belzinskas. Please go ahead, sir.

Rem Belzinskas: Thank you, Shelly, and good afternoon. Joining me on the call today is Sanjay Singh, the Chairman and Chief Executive Officer of Mace. Please visit corp.mace.com under newsroom where you can find additional materials, including the Q2 2023 financial statements, the OTC quarterly report for the second quarter ended June 30th, 2023, as well as our Q2 2023 financial overview presentation.

Before proceeding, I would like to point out that certain statements and information during this conference call constitute forward-looking statements and are based on management's expectations and information currently in the possession of management. When used during our conference call, the words or phrases such as will likely result, are expected to, will continue, is anticipated, estimated, projected, as intended to, or similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks known and unknown, and uncertainties including but not limited to economic conditions, limit of capital, resources, and disruptions in domestic international supply chains. Such factors could materially adversely affect Mace's financial performance. It could cause Mace's actual results for the future period to differ materially from any opinions or statements expressed during this call. I will now turn the call over to Sanjay for some comments about the quarter.

Sanjay Singh: Thank you, Rem. Good afternoon. The second quarter was very challenging. Net sales declined by approximately 200,000 or 11.5% when compared with Q2 2022. The majority of the decrease came from one customer, this has been the case for the last 18 months. Orders from Dollar General and direct-to-consumer and international customers nullified some of the overall decrease netting to an 11.5% decrease. The inventory levels of this one customer stated before were about 1.2 million most of last year that dropped to 675K at the end of Q1 and is now at roughly 400,000. We saw a slight uptake in orders from this customer in Q2. We announced the completion of our restructuring that was initiated in Q1 2022. This involved cost reductions, revenue expansion in specific segments that are relatively less impacted by inflation, improvement in operating

Mace, Inc. Q2 2023 Investor Call

efficiencies to nullify cost increases, and a targeted working capital reduction. Those actions resulted in an adjusted EBITDA and helped reduce losses in Q2 2023 by 267,000 when compared with Q1 of 2023.

The adjusted EBITDA loss was a negative 283,000 for the quarter ended June 30th, 2023, compared with a loss of 550,000 in the quarter ended March 31st, 2023. We lower SG&A cost in Q2 2023 by 11% when compared to the same period in the prior year. From a preceding quarter perspective, Mace achieved growth of 5% in its e-commerce platform sales, 317% in sales to international channel customers, and 270% in sales to business-to-business customers versus the first quarter of 2023. We encountered technology issues on our e-commerce platform that had an impact on sales on mace.com and caused it to be lower than that in Q1 2023.

However, sales on Amazon Seller Central grew by 44% in Q2, 2023 compared with Q1 of 2023. We ship Dollar Generals back-to-school order in Q2 2023. We expect incremental revenues from the addition of Dollar General new product expansions at three other existing retailers. Separately, we expect additional revenues effective September 1st, 2023, from our fee-based training new line of business. From a cost perspective, monthly cost reduction opportunities of $150,000 were identified and actions were taken. From a financing perspective, we are in due diligence with two commercial finance companies to arrange $2 to $2.5 million line of credit facility, this is our top priority. We closed our extension of our fifth, third line of credit in July. Also in July, we closed a $590,000 non-brokered private placement of unsecured convertible notes with board members and shareholders.

Our critical areas of focus are operate to a positive EBITDA level, secure funding, identify and execute on new sales and product opportunity, increase gross profits through cost productivity, reduce SG&A costs that are not revenue-generating, and lastly use excess inventory to reduce cash inventory purchases. I will now turn the call over to Rem, to comment on the second quarter 2023 financial results.

Rem Belzinskas: Thank you, Sanjay. Our second quarter, 2023 net sales were 1.8 million, a 12% decrease from two million in our second quarter sales of 2022. Retail sales decreased 24%. International sales increased 88%, business-to-business sales increased 41%, and our e- commerce platform sales increased 20% compared with the same period in 2022. Gross profit for the first quarter 2023, decreased 269,000 or 34% from our second quarter 2022, results. Our margin rate in the second quarter 2023, was 30% down, 10 points from margin rate of 40% for the same quarter of 2022. Margins decreased in the second quarter, 2023 over the second quarter of 2022 due to decreased sales volume, unfavorable channel sales mix, higher freight, and

Mace, Inc. Q2 2023 Investor Call

component because due to inflation and lower plant efficiencies. The effects of which was partially offset by lower manufacturing overhead.

SG&A expense for the first quarter 2023, decreased by 128,000 to 1.1 million or 60% of net sales. The decrease in SG&A expenses, it's attributable primarily to a $51,000 reduction in salaries and related benefits, 60,000 decrease in advertising expense, and a decrease of 25,000 in legal and professional expenses. Our lower sales volume and higher manufacturing costs resulted in a net loss for a quarter of 629,000, which was down from a net loss of 452,000 in the second quarter of 2022. Second quarter adjusted EBITDA was a loss of 283,000 down 167,000 from an adjusted EBITDA loss of 116,000 in the second quarter of 2022. The decline in the bottom line is primarily attributable to lower revenues. Our borrowing state constant during the second quarter of 2023 at

1.5 million. Cash decreased to 377,000 at June 30th, 2023, compared with cash of 431,000 at March 31st, 2023.

As mentioned previously, with the supply chain delays experienced in 2021 and early 2022, we had inventory orders that were in progress and could not be halted without a financial cost or implications and future inventory order fulfilment. As such, we currently have a lot of our cash tied up in convertible and saleable inventory. Inventory decreased by 158,000 compared to December 31st, 2022, as the company focuses on reducing its inventory levels. We'll now turn the call back to Sanjay for some additional comments before we take questions.

Sanjay Singh: Thank you, Rem. We are targeting $3.8 million of new business in the second half of 2023 and three new product and service offerings in the back half of this year. Revenues from those opportunities will be key to our financial results for 2023. We're going to be laser-like focused on the goals I described earlier. A quick reminder, we will not address or respond to any questions pertaining to our ongoing strategic alternative project. The company has retained financial and legal advisors to assist with this process. At this time, I will stop and open the lines for questions. I would ask each caller to limit themselves to one question with one follow-up, to allow everyone a chance to participate. If we have additional time, we'll try to get you back into the queue. Shelly, please open the line for questions.

Operator: Perfect. And again, if anyone would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate that your line is open, so just state your name before posing your question. And again, it is star one to ask a question. Our first question is coming from Andrew Shapiro. Your line is open.

Mace, Inc. Q2 2023 Investor Call

Andrew Shapiro: Hi, I have several questions. I'll ask two areas real quick and then get back out and let others in the queue and I'll rejoin. But regarding your working capital line of credit with the fifth third that's expiring at the end of December, have you paid it down? I know it's fully drawn as of the end of the June quarter with additional sales and shipments out. Have you paid it down at all or what is the latest status of your prospective lender's due diligence and the timing of a commitment letter and closing with one or more of these new lenders to understand that you're going to get the refinancing done basically in another 10 days or so by September 1st or you're going to pay the fifth, third line down to one and a quarter million?

Sanjay Singh: We are targeting to pay the loan down by September 30th, 2023, or sooner. We are right in the middle of a field exam and an inventory appraisal, so we're just three, four weeks away from coming to a close in that process at a minimum so the target date is to pay down the loan by September 30th to [inaudible].

Andrew Shapiro: Right. But fifth third has, I believe you have a requirement or you're going to get hit with another $50,000 fee to bring that loan down by September 1st, which is in another 10 days or you do you not have to take that loan limit down to one and a quarter million by September 1st or is that September 30th?

Sanjay Singh: That's September 30th.

Andrew Shapiro: Okay. All right. Second area of questioning here. I want to understand here regarding Dollar General, which was given as the one of the excuses for sizable maintenance of the inventory. I know that you built up the inventory ahead of time but on the last quarterly call in May, you expected DG shipments in June and July for back-to-school promotions. We're now here near the end of August, schools started in some states. Were more of the shipments to DG booked in June or were they booked in July? And can you provide any sale through information or insight and if and when you expect restocking the orders from DG?

Sanjay Singh: The Dollar General back-to-school shipped in Q2, so before June 30th those inventories are out in stores. What we are seeing is we have data that shows that our products are selling well in the stores that are carrying our products. Our products have not made it to all the 10,000 stores, mostly because of store personnel turnover or store personnel shortage.

Andrew Shapiro: Okay. Now, can we expect to see further reduction of inventory levels then in the present Q3 if you've shipped most of this DG out in June rather than July?

Mace, Inc. Q2 2023 Investor Call

Sanjay Singh: We're going to see reductions in Dollar General inventory recurring orders, and as the products are made available in stores. We have data that shows that our products have not made it to all the stores. So we can't predict the timing, but we are working very closely with the Dollar General team to get this back on track. So we do expect to see reductions in inventory once that's recurring, weekly EDI orders start coming through.

Andrew Shapiro: Okay. I have other questions. I'll back out but please let me back in later.

about the gross profit margins. We lost 10 points of gross profit margins and we're almost two months now into Q3. Are you starting to see some of those 10 points returning?

Sanjay Singh: The reason for the 10-point drop were two reasons or efficiencies on the plant floor was impacted adversely because of consumption of inventory and the production levels being lower than normal that it was a fixed overhead leverage issue. The second was one of our channels had lower margins and when your sales shrink, those things rise up and the impact is seen even more. Now, the good news is we're in the middle of Q3. We're not seeing those trends to that level of extent of 10% drop.

Ken Sail: Great. That's good to hear. One other question and I will back out to give somebody else a chance. Are you having any sourcing and or delivery issues of pepper spray manufacturing components? It seems like in some of the past calls we're talking about things that were delayed or having trouble getting them delivered on time.

Sanjay Singh: So we are seeing the same issues. They're not as critical as they were say, about a year ago. The new thing that we are seeing is vendors provide dates and then they're off by three weeks sometimes and for the domestic ones it's usually related to personnel. And for the international ones it's just production delays, production runs, there's a variety of reasons that have been given to us.

Sanjay Singh: Thank you.