Mace Security International : May 15, 2023 – Q4 2022 Earnings Call Transcript – Download

International Fourth-Quarter 2022 Earnings call. Currently, all participants are in a listen-only

mode. After the speaker's presentation, there will be a question-and-answer session. You may join the queue at any time by pressing star one on your telephone keypad. Please be advised that today's call is being recorded. I would now like to hand the conference over to your first speaker for today, Rem Belzinskas. Thank you. Please go ahead, Mr. Belzinskas.

Rem Belzinskas: Thank you, Katie, and good morning, everyone. 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 financial statements and the OTCQX report for the fourth quarter end of December 31st, 2022, as well as our Q4 financial overview presentation. Before proceeding this morning, I would like to point out that certain statements and information during this conference call may constitute forward-looking statements and are based on management's expectations in the possession of management.

When used during this conference call, the words or phrases such as, will likely result, are expected to, will continue, is anticipated, estimated, projected, and 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 and international supply chains. Such factors could materially adversely affect Mace's financial performance. It could cause Mace's actual results for future periods 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: Thanks, Rem. Good morning, everyone. The fourth quarter, which usually is a store quarter, revenue-wise, was very challenging. We started a quarter with a profitable EBITDA cost

Mace Security International, Inc. Q4 2022 Investor Call

structure. As the quarter progressed, orders declined further by 15% in total when compared to Q3 of 2022. However, revenues were up when compared to Q2 2022. Overall, the company's revenues in Q4 2022 were lower by 17% when compared to the same quarter last year. Adding to the organic revenues slow down, a meaningful amount of our backlog did not ship because of delays from our vendors in Asia. The orders from our larger price-sensitive customers have continued to be slower for the entire year due to higher levels of inventory that they're carrying.

This decline was partially alleviated in Q4 2022 with a 70% in e-commerce platform sales, and a 382% increase in sales to international customers compared with Q4 of 2021. In October 2022, 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, an increase in operating efficiencies to nullify cost increases, and a targeted production in working capital. Those actions resulted in a positive adjusted EBITDA Q3 2023. However, revenues in the retail sector declined further resulting in a loss in Q4 2022.

Overall, the adjusted EBITDA loss was $194,000 before the quarter ended December 31st, 2022. We lowered SG&A costs in Q4 2022 by 8% when compared to the prior year. From a proceeding quarter perspective, Mace achieved growth of 10% in sales on mace.com, 18% in e-commerce platform sales overall, and 271% in sales to international customers, versus the third quarter of 2022. Our sales to non-traditional customers in the hospitality and healthcare industries continue to be higher than last year, mitigating some of the decreases from the retail segment.

We expect incremental revenues from the addition of dollar general new product expansion at two other existing retailers that were approved in Q4 2022 to materialize in 2023. Separately, we expect additional revenues in late Q2 2023 and onwards from a fee-based training new line of business across the USA. From a cost perspective, monthly cost reduction opportunities of $100,000 per month have been identified and actions will be taken to deliver the results. From a financing perspective, we're in due diligence with a commercial finance company to arrange a $2.5 million

Mace Security International, Inc. Q4 2022 Investor Call

line of credit facility. This is a top priority. The company's focus continues to be operating to a positive adjusted EBITDA and land new business. I will now turn the call over to Rem to comment on the fourth quarter of 2022 financial results.

Rem Belzinskas: Thank you, Sanjay. Our fourth quarter net sales were $2.1 million, a 17% decrease from $2.6 million for our fourth quarter sales of 2021. Retail sales decreased by 50% with one customer accounting for the majority of the decrease due to high inventory levels. Our e-commerce sales increased 70% compared with the same period in 2021. Gross profit for the fourth quarter decreased 243%, or 26% from our fourth quarter 2021 results. Our margin rate in the fourth quarter of 2022 was 33%, down four points from a margin rate of 37% for the same quarter of 2021. Margins decreased in the fourth quarter, 2022 over fourth quarter 2021 due to lower sales volume, increasing component and freight costs, the effect of which was partially offset by lower manufacturing overhead and manufacturing efficiency improvements.

SG&A expenses for the fourth quarter decreased by $100,000 to $1.1 million, or 51% of net sales. The decrease in SG&A expenses is attributable to a $65,000 reduction in digital marketing expenditures, a $31,000 decrease in insurance expenses due to favorable insurance post-audit adjustments, and a $23,000 decrease in legal and professional expenses. Bad debt expense was $46,000 higher in the fourth quarter of 2022, compared with the fourth quarter of 2021, primarily due to the settlement of a disputed receivable. Our lower sales volume and higher manufacturing cost resulted in a net loss with a quarter of $468,000, which was down from a net loss of $313,000 in the fourth quarter of 2021. Fourth quarter adjusted EBITDA was a loss of $194,000, down $58,000 from a loss of $136,000 in the fourth quarter of 2021. The decline in the bottom line is attributable to lower revenues.

Our borrowings decreased during the fourth quarter of 2022, reducing the amount drawn against our line of credits from $715,000 on September 30th, 2022, to $515,000 at December 31st, 2022. As mentioned previously, with the supply chain delays experience in 2021 and early 2022, we had

Mace Security International, Inc. Q4 2022 Investor Call

inventory orders that were in progress and could not be halted without a financial cost or implications on future inventory order fulfillment. As such, we currently have a lot of our cash tied up in convertible and saleable inventory. We have manufactured and assembled products for our typically high-volume movers and continue utilizing targeted promotions for our slower-moving and higher inventory positions.

In an unusual manner, the supply chain challenges leading to our higher inventory level have - has better positioned us for timely order fulfillment as the selling season ramps up. We have successfully scaled back future purchase orders, and during Q2 2022, have reduced our inventory by $253,000 since September 30th, 2022. I will now turn the call back to Sanjay for some additional comments before we take questions.

Sanjay Singh: Thank you, Rem. We have our work cut out in the coming quarters. Implementing cost reductions and landing new business, and securing a new lender are key areas of focus. A quick reminder, we will not address or respond to any questions pertaining to our ongoing strategic alternatives 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. Katie, please open the line for questions.

Operator: Thank you. If you would like to ask a question, you may signal by pressing star one on

your telephone keypad. If you are using a speakerphone, please make sure your mute function is

turned off to allow your signal to reach our equipment. Once again, star one for questions. We'll go first to Andrew Shapiro with Lawndale Capital Management.

Andrew Shapiro: Hi. Well, let's cut to the chase on a few of these items here, if we can. Your Q4 retailer revenues were down again, mostly, I think it was at one to two specific retailers. Is this market

Mace Security International, Inc. Q4 2022 Investor Call

share lost or your relationship remains at the same levels, and it was just overall inventory adjustments, and have either retailer stabilized and reordered in Q1 or even now halfway through Q2?

Sanjay Singh: The majority of the increase, over 75%, was with one retailer that has consistently had very high levels of inventory going into 2020 and 2021. So this is, we don't believe this is a loss of market share, we - one of our other private labeled customers that sells to this retailer, their volume is down with us significantly for that same reason. In terms of the trends, going up in the first quarter, we are seeing - we saw that, but it was just a slight improvement.

Andrew Shapiro: So this particular retailer, the bulk of which was a sizeable revenue decline, who had the inventory issues, have they stabilized and done some reordering in Q1 or even now halfway through Q2 from you?

Sanjay Singh: They have the, the trends are moving in the right direction. They're nowhere close to where they were in Q4 of 2021.

Andrew Shapiro: Yeah, okay. Fair enough. Okay, and the other follow-up, a big kahuna here, is from reading your newly filed financial statements, I understand that a commercial lender who was going to replace Fifth Third, your current provider of your working capital line that's expiring soon, inexplicitly failed to close on that new loan on May 1st. And you have this new commercial lender you are progressing with. What is the status and timing of getting this new lender in place and what is the status and timing of having Fifth Third provide the necessary extension and time to accomplish this refinancing?

Sanjay Singh: So where we are with Fifth Third is they have given us a term sheet for an extension of up to 60 days, and we are - we owe them some information. And the new lender is expecting to close within the next four weeks, four to five weeks.