Mace Security International : May 25, 2023 – Q1 2023 Earnings Call Transcript – Download

International first 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 and you can ask a question by pressing star one on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mr. Remigijus Belzinskas. Please go ahead, sir.

Remigijus Belzinskas: Thank you, Nicole, 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 Q1 2023 financial statements and the quarterly report for the first quarter ended March 31st, 2023, as well as our Q1 2023 financial overview presentation.

Before proceeding, 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 and information currently in the possession of management. When used during our conference call, the words or phrases such as will likely results, are expected to, will continue, it 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 change. Such factors could materially adversely affect Mace's financial performance. It could cause Mace's actual results for the future periods to

Mace, Inc. (Webcast) - Q1 2023 Investor Call

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 morning everyone. The first quarter, while usually, a slower quarter revenue-wise was very challenging As the quarter progressed, orders declined further by 22% when compared with Q4 of 2022. Half of the decreases came from customer. Overall, the company's revenues and Q1 23 were lower by 23% when compared to the same quarter last year. Again, almost half of the decrease was from one customer that has been slow for the last 15 months, adding to the organic revenue slowdown with other customers due to lower food traffic. A meaningful amount of our backlog did not ship because of delays from our vendors in Asia.

Orders from a larger price-sensitive customers have also continued to be slower for the entire quarter due to higher levels of inventory. This decline was partially alleviated in Q1 2023 with a 63% growth in our e-commerce platform sales, and 105% increase in sales to private labor customers compared with Q1 of 2022. The inventory levels of this one customer that has caused a 50% drop in our revenues were between 1.2 to 1.5 million most of the last 15 months that has now dropped to half that amount or roughly 675,000 now. We have begun to see a slight upward trend in orders from them, but we do not know if we have hit bottom yet.

In October 2022, we announced the completion of our restructuring that was initiated in Q1 2022. This involves cost reductions, revenue expansion, and specific segments that are relatively less impacted by inflation. Increase in operating efficiencies to notify cost increases and a targeted working capital reduction. Those actions resulted in a positive adjusted EBITDA in Q3 2023. However, revenues in the retail sector declined further resulting in a loss in Q1 2023. Overall, the adjusted EBITDA loss was 550,000 for the quarter ended March 31st, 2023. We lowered SGNA costs in Q1 2023 by 24% when compared to the same period in the prior year.

Mace, Inc. (Webcast) - Q1 2023 Investor Call

From a proceeding quarter perspective, Mace achieved a 64% growth in e-commerce, 42% in sales to tactical channel customers, and 130% in sales to private labour customers versus the fourth quarter of 2022. We shipped our opening order to Dollar General in Q1 of 2023. We expect incremental revenues from the addition of Dollar General, shipments of back to school programme to Dollar General in June-July. New product expansions that two other existing retailers that were approved in Q4 of 2022. 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 $150,000 have been identified and actions are being taken to increase our EBITDA. From a financing perspective, we are in due diligence with two commercial finance companies to arrange a 2.5 million line of credit facility and we expect to close our extension from Fifth Third Bank, which is a current lender this week. The company's focus continues to be to get us to a positive EBITDA and continue to land new business. I will now turn the call over to Rem to comment on the first quarter 2023 financial results.

Remigijus Belzinskas: Thank you, Sanjay. Our first quarter 2023 net sales were 1.7 million, a 23% decrease from 2.2 million for our first quarter sales of 2022. Retail sales decreased 27%, private label sales increase 105%, and our e-commerce platform sales increased 64% compared with the same period in 2022. Gross profit for the first quarter 2023 decreased 489,000 or 54% from our first quarter 2022 results.

Our margin rate in the first quarter 2023 was 25% down 17 points from margin rate of 20, I'm sorry, 42% rate for the same quarter of 2022. Margins decreased in the first quarter, 2023 over the first quarter of 2022 due to decreased sales volume, unfavourable channel sales mix, higher freight and component cost due to inflation, and lower plant efficiencies, the effect of which was partially offset by lower manufacturing overhead. SGNA expenses for the first quarter of 2023, decreased by $345,000 to 1.1 million or 64% of net sales. The decrease in SGNA expense is attributable to a 36,000 reduction in research and development expenses. A $34,000 decrease in advertising expense and a decrease of 29,000 in legal and professional expenses. First quarter 2022 CGNA

Mace, Inc. (Webcast) - Q1 2023 Investor Call

expense included $220,000 of severance expense, which did not repeat in 2023. Our lower sales volume and higher manufacturing costs resulted in a net loss for the quarter of 747,000, which was down from our net loss of 584,000 in the first quarter of 2022.

First quarter adjusted EBITDA was a loss of 550,000 down 359,000 from a loss of 191,000 in the first quarter of 2022. The decline in the bottom line is primarily attributable to lower revenues. Our borrowings increased during the first quarter of 2023 to 1.5 million from 515,000 drawn against the company's line of credit at December 31st, 2022. Cash increased to 431,000 at March 31st, 2023 compared with cash of 62,000 at December 31st, 2022. As mentioned previously with the supply chain delays experienced in 2021, early 2022, we had 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. The supply chain challenges leading to our higher inventory level have better positioned us for timely order fulfillment as our sales increase. We have successfully scaled back future purchase orders. During Q1 2022, our inventory increased 106,000 in relation to inventory at December 31st, 2022, primarily in support of Dollar General. I will now turn the call back to Sanjay for some additional comments before we take questions.

Sanjay Singh: Thank you, Rem. Clearly, our focus is to execute actions to reduce costs. We'll be focusing on landing new business and securing a new lender. These are the 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 on the queue. Please open the line for questions.

Andrew Shapiro, your line is open.

Andrew Shapiro: Hi. I have several questions. I'll ask two or follow up and back out. You gave a little bit of an update on the financing status. I want to flush that out a little bit from your recent call only 10 days ago, you said you had a term sheet from in due diligence with a commercial lender who'd replaced Fifth Third. Today on this call, you mentioned now you're in discussions with two commercial lenders, and 10 days ago you thought that first commercial lender would be able to close in about four weeks, five weeks then, four weeks now. With the second commercial lender here in the path and providing all these people their own individual due diligence, et cetera. Can you give us a little bit better handle on where you stand with each lender and the timing that you expect to have that resolved? So we get a feel for my follow-up question, which is going to get to the duration of the Fifth Third extension.

Sanjay Singh: So the first lender that I referenced on our last call 10 days ago, they are going through their due diligence, they also paid us a visit at our facilities here in Cleveland. We had a good discussion, there are a few more steps that they need to go through. the timing is in that same range, four to six weeks. Meanwhile, we started discussions with another lender and due diligence information is being provided to them as well and the timing for that is approximately the same.

Andrew Shapiro: Okay. Perhaps have a competitive process.

Sanjay Singh: In terms of the extension from Fifth Third, that is a 60-day extension.

Andrew Shapiro: Okay. And with this, when was it that you expect to have that extension signed and disclosed?