Mace Security International, Inc. (PNK:MACE) Q4 2022 Earnings Call Transcript May 15, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Mace Security International Fourth Quarter 2022 Earnings Call. [Operator Instructions] 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.

Remigijus Belzinskas: Thank you, Kathy, 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 ended December 31, 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 expectation and information 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, limited capital resources and disruptions in domestic and international supply chains. Such factors could materially and 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 for some comments about the quarter.

Sanjay Singh : Thanks, Rem. Good morning, everyone. The fourth quarter, which usually is a slower quarter revenue-wise, was very challenging. We started the quarter with a profitable EBITDA cost structure. As the quarter progressed, orders declined further by 15% in total when compared to Q3 of ’22. However, revenues were up when compared to Q2 ’22. Overall, the company’s revenues in Q4 ’22 were lower by 17% when compared to the same quarter last year. Adding to the organic revenue slowdown, 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 are carrying.

This decline was partially alleviated in Q4 ’22, with a 70% growth in e-commerce platform sales and 382% increase in sales to international customers compared with Q4 of ’21. In October 2022, we announced the completion of our restructuring that was initiated in Q1 ’22. This involved cost reductions, revenue expansion in specific segments that are relatively less impacted by inflation, increase in operating efficiencies to nullify cost increases and a targeted reduction in working capital. Those actions resulted in positive adjusted EBITDA in 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 for the quarter ended December 31, 2022. We lowered SG&A costs in Q4 ’22 by 8% when compared to the prior year.

From a preceding 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 ’22. 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 ’22 to materialize in 2023. Separately, we expect additional revenues in late Q2 ’23 and onwards from our fee-based training, new line of business across the U.S.A. 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 are in due diligence with a commercial finance company to a range of $2.5 million 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 2022 financial results.

Remigijus 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 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 4 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 components 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 expense due to favorable insurance post-audit adjustments, and a $23,000 decrease in legal and professional expense. 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 costs resulted in a net loss for the 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 credit from $715,000 on September 30, 2022 to $515,000 at December 31, 2022. 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 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 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 $253,000 since September 30, 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 our 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 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. If we have additional time, we’ll try to get you back into the queue. Kathy, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] We will go first to Andrew Shapiro with Lawndale Capital Management.

Operator: We’ll take our next question from Vijay Marolia with Regal Point Capital.

Operator: We’ll go next to Andrew Shapiro with Lawndale Capital Management.

Operator: [Operator Instructions] We’ll go back to Andrew Shapiro with Lawndale Capital Management.

Operator: We’ll take our next question from Mark Greenberg, a Private Investor.

Operator: We’ll take our next question from Andrew Shapiro with Lawndale Capital Management.

Operator: We’ll take our next question from Howard Rosencrans with Value Advisory.

Operator: We’ll go next to Andrew Shapiro with Lawndale Capital Management.

Sanjay Singh : Right Okay. Thank you, Andrew. Okay, Kathy, I think we are at 12:02.

Operator: There are no additional questions in queue.

Sanjay Singh : All right. Thank you very much.

Operator: That will conclude today’s call. We appreciate your participation.

Sanjay Singh : Thank you, Kathy.