Mace Security International : November 2, 2022 – Q3 2022 Earnings Call Transcript – Download

International Third 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. During this time, if you'd like to ask a question, please press star one on your telephone keypads. Please be advised that today's conference is being recorded. I'd now like to turn the conference over to your first speaker for today, Remi Belzinskas. Thank you, sir. Please go ahead.

Remigijus Belzinskas: Thank you, Marjorie. 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 OTC QX report for the third quarter end of September 30th, 2022, as well as our Q3 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 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 the future periods to differ materially from any opinions or statements expressed during this call. I will now turn the call over to Sanjay [inaudible] some comments about the [inaudible].

Mace, Inc. Highlights Q3 2022

Sanjay Singh: Thank you, Rem. Good morning, everyone. Thank you for being here on this call. The third quarter continue to be very challenging as expected. While our top-line revenues continue to trend lower than prior year, the decreases are beginning to moderate at a lower trend. Our revenues for the quarter increased by 26% versus the second quarter of 2022, including an increase by 54% in online sales on mace.com and 69% in the sporting goods segments. The orders from a larger price- sensitive customers have continued to be slower for the entire year due to lowering of inventory and demand. But we are beginning to see an uptick in orders from other retailers compared to the previous two quarters this year.

In October, we announced the completion of a restructuring that began earlier this year, this involved cost reductions, revenue expansion, and specific segments that are relatively less impacted by inflation. Increase in operating efficiencies to nullify cost increases and are targeted working capital reduction. Those action plans were completed in the last quarter. This resulted in an adjusted EBITDA of 124,000 for the quarter ended September 30th, 2022. We lowered SG&A costs by 26% when compared to prior year and increased revenues on mace.com by 144% and by 16% in the Sporting Goods segment. We expect additional revenues of two to $3 million from the addition of new retailers, new products, and other initiatives in the coming quarters, including the partnership agreement with Legal Heat to offer fee-based training across the USA.

The risks of a national economic recession may alter those projections by a meaningful amount. 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're also working on several co-branding opportunities and expect to formalize agreements in Q4 of this year and Q1 of next year.

The company's focus continues to be on the following operate to a positive adjusted EBITDA, conversion of new business including retailers, promoting both our new products to the base

Mace, Inc. Highlights Q3 2022

business while delivering on our operating efficiencies. I will now turn the call over to Rem to comment on the third quarter 2022 financial results.

Remigijus Belzinskas: Thank you, Sanjay. Our third quarter 2022 net sales were 2.5 million, a 34% decrease from 3.8 million for our third quarter sales of 2021. Retail sales decreased 32% and e- commerce sales decreased 36% compared with the same period in 2021. Sales were down across all sectors of our retail customers as point-of-sale traffic remains slow.

We knew that this year was going to be challenging given the inflationary headwinds, last year, we came into a third-quarter still with a significant order backlog coming out of 2020, resulting in sales in Q3 2021, which were higher than Q2 2021. We did not have the same level of backlog heading into the third quarter of 2022.

Gross profit for the third quarter decreased 558,000 or 37% from our third quarter 2021 results. Our margin rates in the third quarter of 2022 were 38.3%, down almost two points from the 39.8% rate we achieved in the same quarter of 2021. Margins decreased in the third quarter of 2022 over the third quarter of 2021 due to increase in component and freight costs, the effect of which was partially offset by lower manufacturing overhead and manufacturing efficiency improvements.

SG&A expenses for the third quarter decreased by 222,000 to 1.1 million or 43.5% of net sales. Professional services expense in the third quarter, 2022 decreased 89,000 compared with the third quarter of 2021, primarily attributable to a decrease in digital marketing expenditures in Q3 of 2022.

Remigijus Belzinskas: We had a $54,000 reduction in outside sales commissions, which was directly correlated to the reduction in sales. Bad debt expense was 51,000 lower in the third quarter of 2022, compared with the third quarter of 2021.

Mace, Inc. Highlights Q3 2022

Our lower sales volume and higher manufacturing costs resulted in a net loss for the quarter of 233,000, which was down from our net income of $142,000 in the third quarter of 2021. Third quarter adjusted EBITDA was income of 124,000, down $192,000 from $316,000 in the third quarter of 2021. The decline in the bottom line is attributable to lower revenues. We experienced a decrease in our borrowings position during the third quarter, reducing the amount drawn against our line of credit from 865,000 at June 30th, 2022 to 715000 at September 30th, 2022.

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 on future inventory order fulfillment. As such, we currently have a lot of our cash tied up in convertible and saleable inventory. 45% of our inventory on September 30th, 2020 to its finished goods. We have manufactured and assembled products for our typically high-volume movers and continue utilizing targeted promotions for a slower moving and higher inventory positions. In an unusual manner, the supply chain challenges leading to our higher inventory level has better positioned us for timely order fulfillment as the selling season ramps up.

We have successfully scaled back future purchase orders and during Q3 2022 have reduced our inventory $591,000 since June 30th, 2022. I will now turn the call back to Sanjay for some additional comments before we take questions.

Sanjay Singh: Thank you, Rem. The entire team performed well to execute on the actions that resulted in landing new retail customers, increased operating efficiencies, and formalizing our co-branding partnerships. Our marching orders are to operate to a positive EBITDA land at least four new retailers annually, scale the processes needed to fulfill orders for our new retail customers, and further increase online revenues.

We're excited to mobilize revenues from a recent co-branding partnership with Legal Heat and are looking to finalize other deals in Q4 that will result in additional new products. The list of initiatives

Mace, Inc. Highlights Q3 2022

is quite long and we are allocating our energy and resources to those in a thoughtful fashion. We're excited to have Margaret Jordan join Mace's board of directors for advice on business development, strategy, and lead generation, especially in the new line of personal defense training, will be very helpful.

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 advisers 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. We have additional time; we'll try to get you back into the queue. Marjorie, please open the line for questions.

Operator: Thank you, Mr. Sanjay. Ladies and gentlemen, as a reminder, that is star one on your

telephone keypads if you'd like to ask a question, we'll pause for a moment to assemble that queue. Our first question comes from Vijay Marolia.

Vijay Marolia: Hello, this is Vijay. Can you guys hear me?

Remigijus Belzinskas: Yes, Vijay.

Vijay Marolia: You talked about inflation, which I know is a big problem for everybody. Could you give us a little more color on what kind of line items, areas where the inflation is more troublesome?

Sanjay Singh: Though we are seeing inflation impact in a couple of different areas. One is freight. Just over the last 12 to 18 months, we've seen increases in our raw materials as well that are coming in from Asia. And we've also seen increases from some of our other suppliers in even in terms of new when new product introductions, in terms of tooling costs. So, it's pretty much across the board.