Mace Security International, Inc.
Q1 2022 Earnings Call Transcript

Published: 4 May 2022

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Mace Security International First Quarter 2022 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Mike Weisbarth. Thank you. Please go ahead.
Mike Weisbarth:

Thank you, Ray, and good morning, everyone. Joining me on the call today is Sanjay Singh, the Chairman and Chief Executive Officer of Mace. Sanjay is joining us remotely from abroad. So hopefully, his connection remains clear for all of us. Please visit corp.mace.com under newsroom where you can find additional materials, including the financial statements and OTC QX report for the first quarter ended March 31, 2022, as well as our Q1 financial overview presentation. Before proceeding, I would like to point out that certain statements and information during this conference call will 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, is 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 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:

Thank you, Mike. Good morning, everyone. The first quarter continued to be very challenging as expected. We indicated previously that the turnaround in sales was going to be over several quarters, and we see that holding true. An inflationary environment, along with a slowing economy has a direct impact on the spending habits of our customer base. When more discretionary income is needed to pay for basic necessities, it reduces the spend available for impulse purchases such as Mace products at retail locations. The orders from our larger customers have been slower to date, but we are beginning to see an uptick in current orders. Hence, we concentrated on the areas of the business that we have control over. To combat to inflationary pressures, we increased pricing during the first quarter across all our customer channels and product lines. To mitigate the slowdown in orders and shipments, we remained focused on cost control measures, resulting in a 38% reduction in our base manufacturing cost on a quarter-over-quarter basis, a 34% reduction run rate at the end of 2021. All discretionary variable cost increases were directed in areas to improve customer touch points, brand awareness and laser-focused online advertising to drive top line growth. While our efforts did not resonate in our first quarter financial results, we are gaining traction with these initiatives and increasing orders in our base business and online. Our reorganized insight sales effort is better aligned to make multiple customer contacts, provide our customers with a supportive product knowledge, they desire and enhance the overall customer service experience. We have historically been missing on this front with our base business customers. We have become more granular in our B2B sales outreach programs and have been targeting very specific customer groups. We test certain products and sales packages for a particular type of customer and then roll it out to other like customers in the same industry. We are also evaluating a new line of business and hope to complete the evaluation process by the end of future. We have extended our sales efforts on the international front also. To date, we have already exceeded our full year 2021 international sales, and we are still bringing in more orders. We previously communicated that we modified our cost structure to be in line with the current economic and business conditions. Our manufacturing variances improved month-to-month throughout the first quarter, which was a result of our improved labor efficiency, but also advanced every month during the quarter with an overall 40% increase in efficiency over the first quarter of '21. Each incremental sales dollar over a $1 million monthly sales breakeven point contributes nearly 34% to the EBITDA line. We remain confident that the growth of this company will come through all 3 pillars of our sales model, retail outlets, base business customers and direct to consumables with our largest opportunity of growth coming through e-commerce sites. I will now turn the call over to Mike to comment on the first quarter 2022 financial results.
Mike Weisbarth:

Thank you, Sanjay, and hello again, everyone. Our first quarter net sales were $2.2 million, a 35% decrease from $3.3 million for our record first quarter sales of 2021. Private label sales were down 87%. This was the last difficult comparison quarter regarding the loss of a major private local customer of ours that in-sourced its filling operations beginning in 2021. Retail sales were off 42%. They were down across all sectors of our retail customers as POS or point-of-sale traffic remains slow. We have seen an increase in POS traffic at some of our retail customers in April, which bodes well for future orders. Our e-commerce sales were down 32% in the first quarter. But here again, we are seeing an improvement in the recent weeks. We knew that the first half of this year was going to be challenging with the inflationary headwinds. What further amplified our first quarter decline in sales was that the first quarter is historically our slowest quarter of the year. So any change in trends is magnified. Last year, we came into the first quarter with a significant order backlog coming out of 2020, leading to an 18% quarter-over-quarter increase. We did not have that same level of backlog heading into this year. Gross profit for the first quarter decreased $367,000 or 30% from our first quarter 2021. Our margin rate, however, was 42%, up 3 points from the 39% rate we achieved in the same quarter of 2021. We achieved this increase in spite of the 35% lower sales volume. To emphasize the point Sanjay made earlier, we have strongly curtailed our costs and drove up margins through pricing and cost controls. We are still battling increases in transportation costs, which negatively impacted us nearly a full point in margin for the first quarter. SG&A expenses for the first quarter increased by $352,000 to $1.4 million or 66% of net sales. We incurred $220,000 in personnel-related expenses that were related to the transition of our CEO role with the entire severance pay being accrued in the first quarter. We have increased our online advertising spend and have been generating over 3x ROAS or return on advertising spend. Additionally, our legal fees were up nearly sixfold as we have been addressing the unsolicited interest of a potential . We continue to invest in new product development and have our second new product being launched by the end of this quarter. We had a reduction in outside sales commissions, but that was directly related to the reduction in sales. Our lower sales volume and full year severance costs resulted in a net loss for the quarter of $584,000, which was down from our net income of $109,000 in the first quarter of 2021. Last year's first quarter net income was our second highest on record for first quarter results. EBITDA for the first quarter was a loss of $471,000 or 22% of net sales compared to our first quarter record $251,000 income or 8% of net sales for the same period in 2021. First quarter adjusted EBITDA was a loss of $191,000, down $515 from the $324,000 we generated in the first quarter of 2021. Obviously, the low sales volume dropped right to the EBITDA line, along with the incremental non account SG&A expenses. But likewise, as sales climb, it will translate into a quick rise in our EBITDA. We experienced a decline in our cash position during the first quarter. With the supply chain delays, we had inventory orders that were in progress and could not be halted with our financial costs or implications on future inventory order fulfillment. As such, we currently have a lot of our cash tied back in convertible and saleable inventory. We have manufactured and assembled product for our typically high-volume movers and have been 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 that better positioned us for time and order fulfillment as the selling season ramps up. We have successfully scaled back future purchase orders and fully expect to begin monetizing our inventory position. I'll now turn the call back over to Sanjay for some additional comments before we take your questions.
Sanjay Singh:

Thank you, Mike. Again, we're not making excuses for poor financial results, but we'd like you to understand that we are actively pursuing top line expansion through other channels during this downturn in our business cycle, while staying keenly focused on cost containment. We're moving forward on our path of new product development and expect our new product launches to have a meaningful impact with our customers and sales as we continue through the year. The Chameleon, one of our new products that was launched a few weeks back was launched online at the start of the month, the early results are encouraging based on customer input, we are enhancing some of the future skins and the packaging of this product before it is offered to our retail and base customers. As a reminder, the replaceable skins provide a customized look and cam Twist lock that allows for interchanging the skins and the pepper spray canister. It is the first personal pepper spray in our product line that allows for a changing of the pepper spray cartridge. We are receiving custom orders, both domestic and international for this product, highlighting company logos. We believe there is a lot of interest and opportunity for this unique pepper spray offering. Also encouraging, we recently announced a new customer relationship with CornWell Quality Tools, a manufacturer of quality tools with over 750 mobile franchises across the United States with access to hundreds and thousands of automotive technicians. We are also on the cusp of bringing another major national retailer online. We expect this new customer relationship to be finalized and announced before the end of this quarter. Before we get into the Q&A portion of the call, I want to acknowledge that we sent out a press release on April 8 announcing that our Board of Directors supported by management has commenced the process to explore and evaluate potential strategic alternatives to drive shareholder value. This was done in response to unsolicited third-party inquiries and preliminary discussions. As a result, the company has retained financial and legal advisers to assist in this process. We will not address or respond to any questions pertaining to the progress of this matter. So I ask that you refrain from asking for any updates. 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. Ray, please open the line for questions.
Operator:

Thank you. Your first question comes from Andrew Shapiro.
Andrew Shapiro:

All right. Questions here about the revenues and the margins on those revenues. The bump in gross margin despite a large drop-off in sales is quite impressive. What I'm trying to discern is how much more wind is to the company's back on this. What was the timing of implementing your price increases? Or what portion of Q1 sales do you feel reflects the new pricing versus old prices...
Mike Weisbarth:

Sanjay, I can start with this. Thank you, Andrew. And the price increases were made throughout the first quarter. So we still have, I think, to your comment as wind at our backs with this. They were not made on January 1, and they were rolled out during the course of the quarter. So our -- what we refer to as product margins have still remained strong since the end of the quarter.
Andrew Shapiro:

Is there any more from Sanjay or before I ask the next question, a follow-up...
Sanjay Singh:

No, I think Mike nailed it.
Andrew Shapiro:

You mentioned in your slide deck, the expectation of announcing this quarter the addition of a national retailer with 6,000 locations you mentioned it also in your script. Would this initially be for a small portion of your product line or several products? And would there be deliveries in the second quarter or even orders placed the second quarter for this new customer. One of you?
Sanjay Singh:

With regards yes, with regards to Cornwell tools, we are shipping their orders with regards to the one that we have mentioned, this is a sizable retailer. Orders have not materialized yet, but all the products have been loaded in their system, so we expect to see orders this quarter.
Andrew Shapiro:

So I guess when you say all the products, I don't know if that was answering my question, is your initial expectations with this very large retailer for a small portion of your product line or several different products? And if they -- and you mentioned you expect the orders this quarter, would there be deliveries and thus revenue recognition in this quarter, partially from sales to this new large retailer?
Sanjay Singh:

Yes. I'll take that question to question here. Yes, they will be -- this particular retailer will be carrying our most popular lines, including peppers guns. -- which, as you know, some of our other retailers have stopped carrying. And we expect to make deliveries in the quarter. Mike mentioned our stock levels. So once we get orders, we are ready to go and ship...
Andrew Shapiro:

Okay. I have more questions. I’ll go back in the queue. Please come back to me.
Operator:

Your next question comes from Ken .
Unidentified Analyst:

Thank you. Morning, guys. Question about SG&A expense. I believe it was, Mike, you talked about the expense incurred associated with the unsolicited interest of an acquirer. But there's no quantification of how much money was spent. Could you maybe give us a little more info on how much money was spent or a range, something that we can plug into our model?
Mike Weisbarth:

I'm not going to go that specific, Ken. But what I will say, obviously, doesn't exceed what we had on the personnel side. It's significantly less than that, but it was still for our size of an organization and the legal costs that we typically incur it was meaningful to our bottom line.
Unidentified Analyst:

Okay. So when you say the personnel-related expenses, are you talking about the $220 that... Yes, we... Less than...
Mike Weisbarth:

It was nowhere near the $220,000, that's why we talked of that first.
Unidentified Analyst:

So it's something greater than 0, but less than 220.
Mike Weisbarth:

Yes.
Unidentified Analyst:

Okay. One question for Sanjay. During his scripted remarks, you talked about -- I think I heard this right, a new line of business to be evaluated sometime before the end of Q2. Can you give us a little more info on that? Is that something more than just like a new product launch? Or is it actually a new line? It is a new one...
Sanjay Singh:

It's a new offering. Yes, it's a new line of business.
Unidentified Analyst:

Interesting... Interesting. Okay. Anything else you can kind of give us some info about that?
Sanjay Singh:

It's been in the works. Yes. It's been in the works for a while. And it's in light of completing our end consumers sort of buying journey. So I'll just leave it at that.
Unidentified Analyst:

Okay. Well, I look forward to hearing more about that. And I will duck back into the queue and let somebody else give a good chance.
Operator:

We have a follow-up question from Andrew Shapiro.
Andrew Shapiro:

Hi, thank you. Just for a little more clarification on Ken's last question there for you. The new line of business you're evaluating, is this separate from the next new product, which you also expect to be released here near the end of this quarter?
Mike Weisbarth:

It is.
Andrew Shapiro:

Okay. And what can you say about the upcoming new product that is -- how is this new product compelling and meet the need providing customer value? And what are the milestones and visibility for introducing this new product by the end of this quarter, which is in just only 60 days.
Sanjay Singh:

So this product was designed to address one of the needs that was raised in the Marian Stoke survey that we conducted a couple of years ago. And with the idea that the Peppertree should have a different kind of a grip and then where you can gain the spray of your sailing and not discharge it accidentally. So this product design accommodates all of that. And it's been shown to retailers, and we have received very good feedback. As far as the time line is concerned, with the new product team meets on a weekly basis and we have weekly updates on our various project milestones, and it's on target to be released this quarter.
Andrew Shapiro:

So the pro typing and molds and all that stuff, that's done. We're beyond that kind of stage, which was a delay on the most recent product.
Sanjay Singh:

Well, we had to redesign Andrew. We have to redesign the product. So it went through a couple of different iterations this year, especially in the last, I would say, 2 months. All that is behind us.
Andrew Shapiro:

Okay. And your international sales growth obviously was great this quarter. Your earnings release also said in your script also talked about future international orders remaining strong. In the past, often such sales have been bulk sales to distributors covering a multi-quarter period. To what extent do you feel these are recurring sales on a quarterly basis? And what do you see as your international sales and the prospects for Q2 and beyond.
Sanjay Singh:

So we are actively chasing our international customers that we have done business with going back several years. And that's what resulted in us farming those accounts. So these are not onetime. There are several new and there is a renewed focus on these international accounts. To be linear every quarter, not No. But I think, certainly for 2022, the momentum is there. There are client prospects, a lot of quotes. So we expect to see a fairly strong 2022.
Andrew Shapiro:

Okay. And you've had the results of a full month of Chameleon. You commented about the feedback has been favorable. What is the feedback on the new products, value-added features and very low price point. Has the interchangeable skin that you seem to focus your marketing on then the driver? Or is it the new actuator or replaceable cartridge? And I see the new product on your MACE website and at amazon.com, which you also previously said that some base business customers have placed orders. Have you got this product shipped into retail yet? Or when will you and where...
Sanjay Singh:

We have not shipped products to retail yet. The attractive feature of this product tends to be the interchangeable skins. We sold quite a few units to a real estate company that wanted their logo on it, and they wanted MACE logo as well. But -- so I think that seems to be the attraction. The price point, as I've explained to you a few times, Andrew, the that was established a while back based on the size of the unit, it's half on unit and feedback that we received from the limited market research that we did...
Andrew Shapiro:

Okay. I have several more questions. I’ll back out into the queue.
Operator:

We have a follow-up question from Andrew Shapiro. Your line is open.
Andrew Shapiro:

Okay. Maybe I'll do 3 this time and others go in the queue. This recent quarter is the company's seasonally weakest, as you mentioned, and I've known from my long-term investment here. And you've drawn a portion of the company's credit line to fund the loss and another large over $300,000 increase in inventory, the more majority of which was, as you've cited, finished goods growth. Is this inventory build against known and existing orders? And do you expect to reduce the amount drawn on the credit line by the end of this quarter?
Mike Weisbarth:

I'll take that, Sanjay. Andrew, the finished goods are built in products that we have existing orders, but I'm going to say more for those products that we know pick up as the season picks up. The raw material components portion is the piece that, in my comments, I had commented that we could not shut down some of the POs without having a financial implication, but it's all for active parts of ours. So what we have been able to do is reduce forward purchase orders because we've already got the product on hand and ready to be converted. As far inside your question regarding the borrowings, I'm going to say, no, the way what we're projecting right now by the end of the second quarter, I would expect us to be at or slightly higher than where we were at the end of the first quarter just because of the payment terms of some of our customers and as the sales ramp up during the second quarter, that won't generate cash until probably after June 30.
Andrew Shapiro:

Because it will migrate into receivables.
Mike Weisbarth:

Correct.
Andrew Shapiro:

So do you expect the inventory Okay, I hear you on that. Do you expect the inventory level to be down by the end of the quarter?
Mike Weisbarth:

Yes.
Andrew Shapiro:

Okay. And then your general receivable terms are, what? By the end of the third quarter, a good chunk of those receivables will have been brought in and that will bring the credit line down?
Mike Weisbarth:

That's correct.
Andrew Shapiro:

Okay. So the end of the third quarter is September. Last year, you guys took the renewal of the credit line down to the deadline, which I believe is November. Have you already started the process of securing an extension or lender?
Mike Weisbarth:

We have been in contact with our current lender. And yes, we've already discussed renewal. I won't go into the details of those discussions, but to let you know that yes, we've discussed that.
Andrew Shapiro:

But do you have -- I don't know what your time frame was last year when you started discussions. Are we ahead of last year's calendar? And can we expect that things will not be going down to the deadline?
Mike Weisbarth:

Yes.
Andrew Shapiro:

Okay. Thank you. I'll back out. I got more questions.
Operator:

We have a follow-up question from Andrew Shapiro. Your line is open.
Andrew Shapiro:

Okay. Last year, Mace's Guard Alaska Bear Spray enjoyed substantial growth, replacing some of the large amount of your private label bear pray business that the company lost to that customer's in-sourcing against tougher comps this Q1 2022, how did your Bear Spray revenues comp?
Mike Weisbarth:

Sanjay, I can take that. Andrew, we saw that with the cooler weather and where we are with some of our retail sales to date, Bear Spray is not as high as it was a year ago. However, what I want to point out is that the first quarter, our Bear Spray generated less than 10% of our full year fair spray sales. So it's ramping up. We're not concerned right now. We see the orders are coming. So again, the shipments just haven't occurred yet that the season is just off to a, I'm just going to say, a later start than it was a year ago.
Andrew Shapiro:

Okay. Fair enough. On last quarter's call, you mentioned that your shipments were under $1 million in December despite having orders because you lacked one of your products due to a vendor delay, and you've also said you received that product in the middle of Q1. What happened to those deferred sales? When did or will they show up.
Mike Weisbarth:

Some of those products got delayed even further. And we are expecting deliveries this month. And that goes back to that backlog from the end of the year.
Andrew Shapiro:

Okay. And seasonally or with that customer, the opportunity is not lost and picked up by some competitor and these products will still get sold and placed.
Mike Weisbarth:

Well, I mean I think some of our online customers, we've missed out on those opportunities. If it's out of stock, it's out of stock. Some of the other customers are -- we have open orders with them. So they have not canceled those orders. So they are still in our backlog.
Andrew Shapiro:

So with respect to the amount you ordered for online sales, does this mean this is going to be a bump in our inventory? Are we talking about a large amount of product here?
Mike Weisbarth:

No.
Andrew Shapiro:

Okay. And this might be for Michael. What amount of Q1's SG&A included the combined redundant cash costs obtaining the former CEO, this is the cash portion, obtained the former CEO and, of course, our current CEO.
Mike Weisbarth:

There is not a significant cash impact during the quarter.
Andrew Shapiro:

Well, wasn't the separation at least after the first month, when did it take place?
Mike Weisbarth:

It took place during the first quarter, there's arrangements and agreements and timing of agreements, Andrew, that was finalized within the first quarter, but cash did not started to get paid on that until late in the quarter.
Andrew Shapiro:

No, I'm not talking about the concept that Gary is getting paid. I mean, he's getting paid cash severance costs on a monthly basis for a year. I understand that, right? And I want to -- I'm trying to understand is that there was -- before there was a separation, this company was incurring redundant costs. It's paying Sanjay a bunch of money and was paying Gary a bunch of money. So I'm trying to get the feel for what amount of this SG&A was really -- and frankly, there's a cash amount that he got paid maybe February, March. That's part of the severance. I'm trying to understand what is redundant cash burn during Q1 that perhaps I should be backing out because it's really not a recurring basis for next year's Q1 or eventually when the severance is gone.
Mike Weisbarth:

I would say 2/3 of a quarter worth of the salary.
Andrew Shapiro:

Okay. And his salary was 240, 300? I can't remember.
Mike Weisbarth:

No. You see it in the severance portion. It was 205, per our filings.
Andrew Shapiro:

Okay. 2/3 of the 205 and then January, we......
Mike Weisbarth:

205 for the full year, Andrew... And a quarter of that.
Andrew Shapiro:

Right. And then, of course, there was still -- there still paid boats basically for 2 CEOs that went out the door.
Mike Weisbarth:

Right.
Andrew Shapiro:

Okay. You mentioned in March, you assembled an inside sales team that's making an average of 30 calls a day to your base business. Is that pace of calling continuing? And what have the results and metrics been of this new investment so far?
Mike Weisbarth:

So we have about -- we have over 2,000 accounts that we targeted. We've completed about 65% or so. The results on mix, there are some accounts that have expressed a significant amount of interest in receiving our catalogs and they have placed orders. There are others that are out of business, and there are some that are out of the separate business period. So we've ended up cleaning up the database quite a bit. This is the same database that gets our promotions and so on and so forth. So -- this has led to other one-off B2B opportunities as well. And so I would say that overall, the results have been mixed, but it has resulted in other new opportunities.
Andrew Shapiro:

Okay. Now you assembled this team and making -- they do this a broad-based mad rush, you now narrowed down the population of people who are going to get, we'll call it, callbacks, right, and follow-up. Is this inside sales team that seems to me that would be their fixed costs. Are there other initiatives that have payback to redirect what eventually will become some redundant resources.
Mike Weisbarth:

So first, they're not all fixed costs. Some are purely commission-based. Number two, yes, number two, the 2 of our inside sales 2 out of 4 are they are more project-based. Once we get to these accounts and they are cleaned up and they are ready for our sales director to go and close because that's the whole idea is we're attacking these accounts and highlighting which ones have potential, and that's our new bowls eye. And so those costs will go away.
Andrew Shapiro:

Okay. And you mentioned last quarter may double the online advertising spend, and that's part of our SG&A increase. And what's the metrics illustrating these expenditures are wise and paying back? And are they delivering at a level that supports continuing the spend or potentially increasing the spend?
Mike Weisbarth:

We have not increased our spend. I'm not sure that maybe for another quarter, Andrew, our spend has been the same, if not less, going back to Q4. We have recently seen an uptick in Seller Central Amazon activity and our low as is over 4. So we are looking at increasing our spend efficiently to take advantage of that. That is reflected in Q1.
Andrew Shapiro:

Got it... When you talk about, and this is probably my last question, the raising the -- bringing them out the second product and the timing of it, is this coming out right at the end of the second quarter? Is it something that could fall into the third quarter? What's your visibility on the likelihood and the timings if you had to throw some probabilities out?
Mike Weisbarth:

The target is by the end of the second quarter before the end of the second quarter. That's the core...
Andrew Shapiro:

Okay. Now you -- last question. You guys have signed up for and have in your Investor Relations calendar. A few additional non deal road show, if you want to call it, participations in some conferences, virtual or in person. In light of the strategic alternatives process going on, are you intending to continue to participate and attend those up to the point, of course, that the company has acquired the new owners, of course, would make that call or it wouldn't even be necessary?
Mike Weisbarth:

Yes. So that's up for discussion. Actually, Mike and I have it on our calendars to figure that out in the next few days. Meaning what exactly will be doing for the June contract and other...
Andrew Shapiro:

I think is that the next conference is the June 1 in L.A.?
Mike Weisbarth:

Yes. That’s an in-person one. So yes, I don’t – I don’t know how quickly your strategic alternatives process and negotiations with partners, prospective buyers, et cetera, how the timing of that will work out. We’ve talked to the organizers. We are in touch. Great, thank you.
Operator:

There is no further question at this time. You may continue.
Mike Weisbarth:

Okay. Well, I’d like to thank everybody for your participation today, and appreciate the questions that were out there and your interest in MACE. And if there’s no further questions at this time, we will end today’s conference. Thank you again for participating.
Operator:

Thank you. This concludes today's conference call. You may now disconnect.

Mace Security International, Inc. Q1 2022 Earnings Call Transcript

Other Mace Security International, Inc. earnings call transcripts:

Mace Security International, Inc.
Q1 2022 Earnings Call Transcript