Mace Security International : March 30, 2022 – Q4 2021 Earnings Call Transcript – Download PDF

Mace Security International Inc.

Moderator: Singh, Sanjay

March 30, 2022

11:00 AM ET

OPERATOR: This is Conference # 4367199

Operator:

Ladies and gentlemen, thank you for standing by and welcome to the "Mace Security International Fourth Quarter 2021 Earnings Call."

At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. To ask a question during the session you will need to press Star One on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Mr. Mike Weisbarth. Thank you. Please go ahead.

Mike Weisbarth:

Thank you, Sarah and good morning, everybody. Sorry for the delay. We were trying to make sure we got everybody in out of the queue. So thank you for your patience. Joining me on the call today is Sanjay Singh, our Chairman and Chief Executive Officer of Mace. I would like to direct you to please visit corp.mace.com under our newsroom dropdown where you can find additional materials including our financial statements and the OTCQX report for the fourth quarter ended December 31st, 2021, that was filed Monday evening as well as our Q4 financial overview presentation.

Before proceeding, I'd like to point out that certain statements and information during the conference call today will constitute forward-looking statements and are based on management 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, as anticipated, estimated, projected, and intended to are 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 the economic conditions, limit of capital resources, and disruptions in domestic and international supply chains. Such factors could materially adversely affectMace's financial performance. It could cause Mace's actual results for future periods to differ from any opinions or statements expressed during this call.

At this time, I will turn the call over to Sanjay for some comments about the quarter.

Sanjay Singh: Thank you, Mike. Good morning, everyone. The fourth quarter was very challenging from both an incoming order perspective, vendor delays, and a difficult year-over-year comparison. Business conditions required that we pivot very quickly, and we did. We executed on our plans of reducing base costs, which led to a run rate at the end of the year that was 34% lower than the first quarter of 2021. We experienced lower than normal revenue from some of our large retailers and expect that to continue in the near term.

We have implemented action plans to mitigate the lower sales volume by further reducing controllable costs and by increasing penetration in our base business which includes international customers, gun, and ammo stores. We are increasing our inside sales efforts to better serve the regional convenience and sports stores which are experiencing an increase in pepper spray sales driven by a spike in crimes in specific pockets of the country.

We are directing our effort towards activities that we can control, such as best in class customer service, including timely fulfillment of orders with high quality products. We cannot control inflation or a difficult comparison to prior year results aided by social unrest. We have increased pricing across our customer base to lessen the impact of increased component and transportation costs.

We continue to modify our cost structure to be in line with the current economic and business conditions. Our manufacturing variances continued to improve every month. This amounts to a potential improvement opportunity of $600,000 in EBITDA. We're also focusing on our gross to net sales deductions which amount approximately $200,000 annually.

Our existing cost model requires approximately $1 million per month in revenue to achieve breakeven EBITDA. Obviously, this is not what we're striving to achieve, but want to provide you some context as to how we have adjusted our business model.

Each incremental sales dollar over the breakeven point drops about 34% to the EBITDA line. We have a cohesive and focused team that is working very hard to improve our numbers. We continue to make investments in our online marketing and advertising, to spur e-commerce growth as we still believe it is paramount that we are committed to an omnichannel approach. We remain focused on diversifying our distribution channels and increasing our reach.

Over the past two years, our Amazon business expanded 318% when compared to 2019. We kept the momentum going for improving our operational efficiencies and expect that to continue through 2022. We have streamlined our assembly processes, allowing us to gain efficiencies with lower committed costs.

I will now turn the call over to Mike to comment on the fourth quarter and full year 2021 results.

Mike Weisbarth:

Thank you, Sanjay and once again good morning, everyone. Fourth quarter net sales were $2.6 million, which was a 42% decrease from the $4.4 million. We achieved in our record fourth quarter sales of 2020. Private label sales were down 89% during the past quarter and retail sales were off 47%.

The difficult private label comps soften after the first quarter of 2022. The sales to our larger retail customers were down significantly as POS traffic slowed, relatively speaking, and at certain retailers, Mace's products were removed on a year-over-year basis from the product offering as part of a category exit, such as guns at Walmart, along with other category realignments.

We continued to achieve strong growth of more than 100% in our Guard Alaska Bear Spray and this was over a very meaningful base in the fourth quarter of 2020. Our e-commerce sales were up 4% in the fourth quarter, which was also over a very robust base in the fourth quarter of 2020 as 36% of our full year 2020 online sales were recorded in the fourth quarter of last year.

Gross profit for the quarter decreased $822,000, or 47%, from our fourth quarter 2020 results. Our margin rate was 37%, down three points from the 40% we rate that we achieved in the fourth quarter of 2020. Our productmargin, defined as sales price over product costs, was up 7%; however, the lower sales volume leading to deleveraging of our fixed manufacturing costs, coupled with increased transportation costs, led to our overall reduction in gross margin. We have continued to lower our controllable variable costs and as Sanjay mentioned, we've reduced our monthly breakeven sales to $1 million.

SG&A expenses for the fourth quarter decrease by $24,000 to $1.2 million that was 46% of our net sales. We doubled our online advertising spend to further penetrate the DTC market and we reduced our customer penalties through focus and our customer service initiatives.

Additionally, we had a reduction in outside sales commissions correlated to our lower sales volume. All in, we were able to continue to invest in selling activities that we expect to provide future returns while reducing our overall SG&A expense.

Our lower sales volume resulted in a net loss for the quarter of $314,000, which was down from our record $446,000 of net income in the fourth quarter of 2020. EBITDA for the fourth quarter 2021 was a loss of $201,000 or 8% in net sales, compared to our fourth quarter record of $592,000, or 13% of net sales, for the like period last year.

Fourth quarter adjusted EBITDA was a loss of $136,000, down $793,000 from the $657,000 that we generated in the fourth quarter of 2020. The low sales volume resulted in negative EBITDA for the first time in our last nine quarters.

For the full year of 2021, net sales of $13.1 million were down $2.3 million, or 15%, from the full year of 2020. Net income for 2021 was $639,000, or 5% of net sales, compared to the net income of $1.7 million for all the 2020 or a decline of $1.7 million.

Our current year results were supported by a $625,000 gain we recognize from the Paycheck Protection Program loan forgiveness that we obtained back in the first half of the year. EBITDA for the year was $1.1 million including the PPP loan forgiveness compared to our record setting EBITDA of $2.3 million for the full year of 2020. Earnings per share were $0.01 per share for 2021, and was $0.03 per share for 2020.

We did draw on our line of credit during the fourth quarter, but remained debt free at December 31st and had a cash balance of $239,000 at the end of the year. Candidly, though, our cash is tied up in our inventory as longer procurement times and supply chain disruptions combined with our lower sales volume have led to a build in our inventory. Our working capital decreased approximately $200,000 from our September balance with the inventory balance shifting into finished goods from component parts.

I'm now going to turn the call back over to Sanjay for additional comments before we take questions.

Sanjay Singh: Thank you, Mike. Let me start my closing comments by stating that we are very disappointed in our 2021 financial results; however, I'm very committed to continuing to make progress and improving our results. The focus clearly is sales. So far, we have persevered and navigated our way through the new challenges that were presented to us in 2021. We modified a cost structure during the fourth quarter and continued with their changes in the first quarter of 2022.

Now our attention is on our base customers through expansion of our inside sales efforts, organic growth of our international customer base and reducing our controllable costs mostly through process waste reductions and launching new unique products. With the continuing price pressures from our international and domestic suppliers, we raised our pricing during the first quarter of 2022, more than our historical increases. This has helped us maintain our product margins at an appropriate level while remaining very price competitive in the market.

I'm excited to announce that we will be launching our new pepper spray product, the Chameleon. This is a unique item that features replaceable skins, providing our customer a customized look and a cam twist lock that allows for interchanging the skins and the pepper spray canister. It is the first personal pepper spray in our product lineup that allows for a changing of the pepper spray cartridge. We have already secured customer orders for this product, and it will be available on mace.com and on our store on Amazon. We currently expect to launch an additional new product by the end of the second quarter.

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