Mace Security International Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Mace Security International 4th Quarter 2022 Earnings Call. Currently, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. 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.

Operator

Thank you. Please go ahead, Mr. Belzinskas.

Speaker 1

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.maze.com under Newsroom, where you can find additional materials, Including the financial statements and the OTCQX report for the Q4 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 expectations and expectations in the possession of management. When used in this 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.

Speaker 1

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 Mesa'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.

Speaker 2

Thanks Ram. Good morning everyone. The 4th 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 2022.

Speaker 2

However, revenues were up when compared to Q222. Overall, The company's revenues in Q4 2022 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 shift 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're carrying. This decline was partially alleviated in Q4 2022 with a 70% growth in e commerce platform sales and 3 82% increase in sales to international customers compared with Q4 of 2021.

Speaker 2

In October 2022, We announced the completion of our restructuring that was initiated in Q1 2022. 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 loss in Q4 2022. Overall, the adjusted EBITDA loss was 194,000 for the quarter ended December 31, 2022.

Speaker 2

We lowered SG and 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 2 71% in sales to international customers versus the Q3 of 2022. 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 2 other existing retailers that were approved in Q4 2022 to materialize In 2023. Separately, we expect additional revenues in late Q2, 2023 and onwards from our fee based training, New line of business across the USA.

Speaker 2

From a cost perspective, monthly cost reduction opportunities of $100,000 For months have been identified and actions will be taken to deliver the results. From a financing perspective, We're in due diligence with a commercial finance company to arrange a $2,500,000 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 Q4 2022 financial results.

Speaker 1

Thank you, Sanjay. Our 4th quarter net sales were 2,100,000 A 17% decrease from $2,600,000 for our 4th quarter sales of 2021. Retail sales decreased 50% with 1 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 4th quarter decreased 243% or 26% from our Q4 2021 results.

Speaker 1

Our margin rate in the Q4 of 2022 was 33%, Down 4 points from margin rate of 37% for the same quarter of 2021. Margins decreased in the Q4 2022 over Q4 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 and A expenses for the Q4 decreased by $100,000 to $1,100,000 or 51 percent of net sales. The decrease in SG and A expenses is attributable to a $65,000 reduction in digital marketing expenditures, a $31,000 decrease in insurance dollar decrease in legal and professional expense. Bad debt expense was $46,000 higher in the Q4 of 2022 compared with the Q4 of 2021, primarily due to the settlement of a disputed receivable.

Speaker 1

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 Q4 of 2021. 4th quarter adjusted EBITDA was a loss of $194,000 down $58,000 from a loss of $136,000 In the Q4 of 2021. The decline in the bottom line is attributable to lower revenues. Our borrowings decreased during the Q4 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 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.

Speaker 1

As such, we currently have a lot of our cash tied up in convertible and salable inventory. We have manufactured and assembled product for typically high volume movers and continue utilizing targeted promotions for our slower moving and higher inventory position. 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.

Speaker 2

Thank you, Rem. We have our work cut out in the coming quarters, Implementing cost reductions and lending new business and securing a new lender are 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.

Speaker 2

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. Katie, please open the line for questions.

Operator

Thank We'll go first to Andrew Shapiro with Lawndale Capital Management.

Speaker 3

Hi. Well, let's cut to the chase on a few of these items here, if we can. Your Q4 retailer revenues were down again mostly, I think it was at 1 to 2 specific retailers. Is this market share lost or your relationship remains at the same levels and it was just Overall inventory adjustments and have either retailer stabilized and reordered in Q1 or even now halfway through Q2?

Speaker 2

The majority of the increase over 75% was with 1 Retailer that has consistently had very high levels of inventory going into 2020 2021. So this is we don't believe this is a loss of market share. We one of our other Private label customers that sell to this retailer, their volume is down with us significantly for that same reason. In terms of the trends going up in the Q1, We are seeing we saw that, but it was just a slight improvement.

Speaker 3

So this particular retailer, the bulk of which was a sizable revenue decline, Who had the inventory issues? Have they stabilized and done some reordering in Q1 or even now halfway through Q2 from you?

Speaker 2

They have. The trends are moving in the right direction. They're nowhere close to Where they were in Q4 of 2021.

Speaker 3

Yes. Okay. Fair enough. Okay. And the other follow-up, a big kahuna here is from reading your newly filed financial statements.

Speaker 3

I understand that a commercial lender who was going to replace 5th Third, your current provider of your working capital line That's expiring soon. Inexplicably failed to close on that new loan on May 1st. And you have this new commercial lender you are progressing with. What is the status and timing Of getting this new lender in place and what is the status and timing of having 5th Third provide the necessary extension and

Speaker 2

So where we are with 5th Third is, They have given us a term sheet for an extension up to 60 days and we owe them some information and The new lender is expecting to close within the next 4 weeks, 4 to 5 weeks.

Speaker 3

Okay. And you have a term sheet from the new lender?

Speaker 2

We have a term sheet from the new lender.

Speaker 3

Okay. I have several other questions. I will back out in the queue. Hopefully, you'll come back to me.

Operator

Thank you. We'll take our next question from Vijay Murali with LegalPoint Capital.

Speaker 4

Sanjay, do you have any plans for in terms of new marketing initiatives?

Speaker 2

We do. We'll have to line up our financing and All of that first, but we do. We have a couple of different initiatives that we are talking to an outside party To help us move some of our saleable finished goods inventory.

Speaker 4

And okay, follow-up question would be, is there anything that's going on differently on the international front?

Speaker 2

Yes, we are seeing a substantial increase in inquiries. This This all of most of last year continuing through this year, whether it's from Europe or South America, Those trends continue.

Speaker 4

Okay. Thank you.

Operator

Thank you. We'll go next to Andrew Shapiro with Lawndale Capital Management.

Speaker 3

Hi, thanks. Some follow-up questions if I could. Also mentioned in Your financials was the possible additional convertible note investment by members of Mace Board and other qualified investors That's contingent on Mace getting the refinancing completed. If the refinancing of working capital is completed, Then what is this additional debt being undertaken for and what are the terms contemplated in such additional financing?

Speaker 2

The funds are to fund future addition of retailers as well as A source of working capital, which will be provided by the new lender. So this additional raises, Call it growth capital. There are we have $21,000,000 in our pipeline of retailers that we have identified and we are Pursuing aggressively. And the way the cash conversion The way the cash conversion with the retailer works is, you procure your inventory and raw materials and that takes about 60 days For the entire production opening orders to be satisfied and then you collect in another 60 days. So The whole process takes about 120 days.

Speaker 3

And would not the working capital, the new lenders Line of credit, take care of that or cover that?

Speaker 2

Possibly, it could. It depends on what the actual line is and what the terms are. And When we look at, say, an asset based lender, it's based on receivables and eligible receivables and inventory. And given our lower levels of revenues, those could be impacted. So it depends on the exact terms.

Speaker 2

Okay.

Speaker 3

When is the amount to be raised in Terms on this supplemental financing expected to be determined. Will that be After the details of the new working capital lender and line are known so that there will not be An excessive amount of convertibles raised?

Speaker 2

It will be after the After this new line of credit is established.

Speaker 3

Okay. What's the cause for the debt levels at the end of Q4 to have risen Currently reported levels in your financials.

Speaker 2

Graham, I'll let you answer the question you deem fit.

Speaker 1

I think it's a combination of several factors. It would be inventory that was acquired to fund some sales in Q1 and just in general to fund Q1's operations.

Speaker 3

Okay. And did you not Disclosed that you've made your initial shipment to Dollar General. Wouldn't that have brought the inventory build Down. I guess it would be a receivable at the end of Q1. But we're here in May and I believe the language in your financials discussed how the debt Those were as of the date of the financial statements.

Speaker 3

Can you clarify what that I guess what that date means or How much longer are you sitting on the receivables from Dollar General from that initial order?

Speaker 1

We have not yet received Dollar General's payment. Is that your question?

Speaker 3

Well, I guess, I mean that would explain part of why the debt level is not down even though you shipped out inventory.

Speaker 2

Yes. So in addition to that, Andrew, we have another Program with Dollar General that is that will affect our revenues positively in the 2nd quarter for which inventory and components had to be purchased in order to satisfy their on time delivery requirements. And those were purchased in Q1.

Speaker 3

Okay. So your business was then expanding. Let me do one more follow-up on Dollar General and I'll back out into the queue again. I do have a lot You announced that you shipped your first order at the end of March. You initially thought you would be servicing 10,000 stores And then expand to most of their almost 19,000 stores.

Speaker 3

Do you have an indication as to how many doors in Stores, this original order shipped out at the end of March was initially supplying and have you experienced Any reorders or indications that the number of doors and stores has increased or what's the progression you're seeing? It Sounds already from what you just answered is that there's additional product lines that you're developing for them or building for them That you have orders for?

Speaker 2

So the program that I just mentioned Is the back to school program that was already forecasted at the end of Q4. The answer to your question about the rollout to stores, that's it rolled out to about 10,000 stores. It hasn't made its way to all the stores Yes, from the DCs. It takes about 6 to 8 weeks before we will see the POS Data, about how the products are doing, but locally in Cleveland, they seem to be doing well. The because we've gone out to some stores and looked at it.

Speaker 2

And in terms of replenishment orders, Yes, we've already started seeing replenishment orders.

Speaker 3

Okay. I have more questions. I'll back out into the queue, but please come back to me.

Operator

Once again, star 1 for questions. We'll go back to Andrew Shapiro with Lawndale Capital Management.

Speaker 3

Okay. I'll ask a few more than just 2 this time to let the question queue fill up and or get my stuff done, if you don't mind. Q4mace.comrevenuescontinuedsizablegrowth. To what do you attribute this to? And Can and how do you keep this momentum going?

Speaker 2

So that was because of some changes that were made to our website to Allow for better interactions with our audience as well as we targeted increasing our conversions. So it was just the overall look, the way we organize the information, the different categories, better graphics, Better assets. We promoted quite a bit on Instagram as well. It's a combination of all those factors.

Speaker 3

Okay.

Speaker 2

What is the status of

Speaker 3

the supplier delays that you highlighted contributed to the sales shortfall? And are you making any progress in local shoring your supply chain from the Asian sourcing? And Do you take over possession and its inventory on your books from the moment it hits the boats in Asia so that you have this longer cycle is More of Mesa's financing needs?

Speaker 2

So The one set of products that have caused us issues from overseas are stun guns. And we did find a U. S. Supplier that I met with at the SHOT Show. Most of these manufacturers or distributors in the U.

Speaker 2

S. Also source their products from China. So we placed an order with a domestic provider. We got an immediate shipment, but it was for a small Quantity to fulfill some of our smaller base business orders, but the larger Quantities are still being sourced from our overseas supplier and this is an issue we need to resolve this quarter. Our new domestic supplier also did not follow through on their commitments because of Issues that were beyond their control.

Speaker 2

Their products got held up in Chinese customs.

Speaker 3

Now do you take over custody and it's on your on our books and our financing of the inventory When it hit when it leaves Asia and thus if you were local sourcing, yes, there still may be a supply chain issue, but this is an issue For your suppliers balance sheet and not Mesa's?

Speaker 2

Well, So the shorter lead time from a domestic supplier would definitely help our financing needs. However, We because number 1, we have to pay in advance to overseas vendors. But number 2, we only take ownership on our balance sheet when we receive the products in house. Rem, you can confirm that.

Speaker 1

That is correct. And our overseas suppliers payments prior to the goods being shipped.

Speaker 3

Right. So it's just the advance payment. It doesn't so it's going to be a prepaid and not on your inventory, Sounds like until it hits the shore. So but either way, it's still a cash need and a cash use,

Speaker 2

Correct.

Speaker 1

That's correct.

Speaker 2

Okay.

Speaker 3

Your co branding, these are activities in a sense that shouldn't require as much cash From Mace and could or alternatively otherwise provide high margin Revenue streams in a sense because you're leveraging off the Mace brand. Let's talk about legal heat and then F3 here. On the last call you explained the rollout strategy was twofold. 1 being a high margin license royalty revenues generated on legal heat created sales And the other being direct revenues netted against cost of generating those revenues. As this product offering is closer to rollout, Can you provide an update and an elaboration of how you see this new co branded product being marketed and the timing of generating revenues and Cash flows to this company.

Speaker 3

And do you still feel this is a $10,000,000 incremental revenue To MACE addressable market and why?

Speaker 2

So The launch is delayed. And our partners have mentioned that the Courses are complete, but when they were doing some tests, they were running into instructor errors. So this is the last update that we received last week. We feel that this is a very, very good opportunity for Mace both in terms of product sales by these instructors of Mace products as well as The actual training in stores and through webinars. I don't have a definitive launch.

Speaker 2

I mean The launch was supposed to be in the Q1, at the latest by March 31, which did not happen.

Speaker 3

Right. No, I mean that's the benefit I guess of getting high margin royalty is I mean that's the cost of high margin royalty is you don't have as much control. On F3, When you announced the new co branded product at the same day as last quarter's November call, you would hope the product would be released and starting To generate some orders before the end of that Q4. And I'm not sure whether that was for commercial vehicle defense light trucks Or for passenger vehicles, but did the introduction occur and for which commercial or passenger vehicle offerings?

Speaker 2

The introduction Was not formally in play at the end of Q4, but it was in Q1. We have several orders in house In Q1 and the sales team is continuing to work on going after larger platforms.

Speaker 3

And the orders that you've been taking here in Q1, what's the turnaround time to deliver and book the revenue? And Were these in both commercial or in the passenger vehicle product offering?

Speaker 2

They were both, Mostly in the passenger vehicle, but there was an issue with one of the components that nationwide was on A backlog of several weeks. We have now resolved it with a replacement component. And as of Today, the products can all be shipped.

Speaker 3

Okay. So no revenues in Q1 then from this, But you had orders.

Speaker 2

No, no, no, because of that the issue with That one component. And we have to do all of Right.

Speaker 3

So nothing in Q1 Right. So nothing in Q1, but Q2 is going to have revenues from this. And you said you'd be offering the Vehicle perimeter defense product to your many automotive segment retailers. Did any of them take actions on those offerings As of yet or what's your visibility on the prospects of ramping up that channel?

Speaker 2

So we have partnered with a very large automotive parts Distributor to that will be carrying our F3 lines And that has already been secured and they have placed their 1st quarter. As these units move to other locations, The value the revenue values will go up.

Speaker 3

Okay. Now as I see this as a natural benefit of This new product is that have you gained any penetration into the truck stop vertical market With this product offering as well as Entre for your broad line of other pepper spray offerings, which I don't think are regularly Seen on the books at the truck stops?

Speaker 2

The truck stop folks are on our list. There are ongoing conversations.

Speaker 3

Okay. Again, I'll back out in the queue. I have other Questions for you, please come back to me.

Operator

Thank you. We'll take our next question from Mark Greenberg, Private Investor.

Speaker 3

Thank you. Sanjay, could you give us an update on the Sustainability of Mace on the OTC exchange and if it's going to be removed, What are the implications of that?

Speaker 2

Rem, can you take that question?

Speaker 1

We did file a notification of late filing for our Q1 'twenty three Financial statements, once we file those, we will be returned to OTCQX.

Speaker 3

And Kareb, can you elaborate on the implications of being dropped?

Speaker 5

From OTC to Pink?

Speaker 2

Yes. Is that in jeopardy?

Speaker 1

It's only in jeopardy if we don't file our Q1 financial statements. We'll continue to sit on pink. Okay. But we have no intentions of doing that and we're diligently working towards Completing the Q1 filing.

Speaker 3

Okay. And you've indicated that you anticipate that to happen within the next couple of weeks?

Speaker 5

Yes.

Speaker 2

Thank you.

Speaker 1

The time range date is May 20th June 5th, possibly sooner.

Speaker 2

Thank you.

Operator

Thank you. We'll take our next question from Andrew Shapiro with Lawndale Capital Management.

Speaker 3

Hi, thanks. On the November call, you said you started to get orders from the new partnership with Midstates Distributing And it's a very large network of farm retailers. Did Midstates orders and reorders continue through Q4 And your recently completed Q1?

Speaker 2

Yes.

Speaker 3

Hi. Similarly on that November call, you said you started to get orders from Cornwall. Did these orders and reorders continue through Q4 and your recently completed Q1? That is yes. We completed Q1.

Speaker 2

That is yes.

Speaker 3

Okay. And then lastly, I would like a little more elaboration rather than yesno, because these results were not as anticipated. Is Your slide presentation for this quarter said that your program with NAPA is on hold for the moment. Can you elaborate and Why or how you use the word hold rather than gone as to your expectations and what's going on, so we have a little better clarity?

Speaker 2

Yes. So, NAPA, basically they onboarded us In terms of we were in their system, they gave us a forecast, Then they had an internal rollout. Out of all the stores that they own, I think the NAPA Corporate owns maybe 20% of the entire in all the stores. And During the rollout, there were a lot of questions from other store operators And then they came back to us to help us provide them some support. And we did in a variety of ways.

Speaker 2

And They came back and they said that they were not ready to do the rollout yet. So We were asked to just be patient and wait until the NAPA as a company was ready to roll out these The pepper spray products. Now we were also told that This often happens with the franchisors with other products And they have to just get the owners get their buy in That takes time. So at the moment, it's on hold and they tell us that this is a never, never thing, then we would appropriately communicate that. And what's interesting in this case is, there are other Automotive manufacturer retailers that carry pepper spray and we walk them through any of the concerns and That other retailers have expressed in the past and how we got past it.

Speaker 2

So but the culture of Napa is different And they're cautious and they want to make sure that their Stores function well and that's our impression. So that's where we are at NAPA. Okay.

Speaker 3

So when you shipped you did ship and make some revenues, but only to the company owned Stores or that didn't happen either. And what was the factors that have caused them some concerns? Can you share?

Speaker 2

Yes, it was the idea of people who are underage being able to buy Sweat their stores, how do they monitor that? It's your typical issues that Retailers run into and not being corporate owned that there's There's a certain amount of independence that the franchiser has in terms of carrying these types of products. Yes.

Speaker 3

Okay. And, okay. You mentioned if you're experiencing continued growth in costs, Presumably your competitors are as well. Can another round of price increases get put through that would be Accepted by your retailers and not further hurt your unit sales?

Speaker 2

So There are the cost increases have begun to slow down In some areas. And there are others where we are now working with alternative suppliers To get much better pricing from our vendors. And we've made some progress there. But in terms of another price increase, I don't believe so. I don't think those will be welcome with any of the Line reviews that I've been directly involved in, the retailers are asking for more cost reductions.

Speaker 3

Okay. Now even after a sizable amount of tax loss carryforwards expire in this Coming period here, you still have around $50,000,000 of tax NOLs to shield future income, But that obviously needs pretax income to monetize and use this asset, okay? I think you're trying to create high margin royalty streams from your valuable brand name, Okay. But what's the focus? On the November call, you discussed 3 other co branding opportunities.

Speaker 3

The first one you had already formalized, you said, But had delays in the supply chain on the product. So you hadn't announced it, but had hoped to introduce it in Q4. Of course, here we are in the middle of Q2. This is the product you described as a product to protect or aid people who ride bikes, motorcycle riders, People go on walks, people take their children to the playground outside of the home. Now I don't recall seeing any announcement, not only Q4, but even in Q1, on that product and I have a few other questions on the other 2nd and third co branded ones that you said hadn't then been formalized.

Speaker 3

But on this one that had already been formalized, What happened? Can you tell us more about the product and its timing, etcetera?

Speaker 2

Yes. So with that particular product that has an order has been placed with our vendor. We don't have the products in house yet. There is a 13 week lead time on the product And there is a variation of that product that is being worked on. So there are 2 versions of this product and We don't have the product in house yet.

Speaker 2

In terms of other co branding opportunities, yes, those conversations are continuing. But this whole revenue decline and restructuring our costs again and I mean, we had to change our focus quite a bit. That's a lot just given the size of our team.

Speaker 3

And then the second and third ones that you had described in the November call that hadn't formalized. The first of these 2 was described as a product launch by a woman who was very big in personal safety space, Especially in Active Outdoors segment and the other one that not was not yet formalized was described as a product that would appeal to people Who again go on daily walks or hikes. What's the status of these two opportunities? Have they gone by the wayside? Have they progressed?

Speaker 2

No, we are still in conversations. Some opportunities take some time, Andrew. There's a lot of back and forth. Yes, there's also the idea of capital allocation.

Speaker 3

Okay. And not counting these co branded opportunities, that I've asked updates on, Can you provide an insight on any other initiatives that are in the works to leverage on this well known Mace brand name or our Reportedly strong distribution channel?

Speaker 2

Yes, there are 2 others that we reviewed in Q1 And we are continuing our discussions in the second quarter that they probably won't materialize. Maybe one might materialize in the 4th by the end of the year because that particular one is We're helping the designers, the inventors come up with the whole Supply chain strategy because they want us to provide all the manufacturing and then We are trying to raise some capital and to come up with a prototype. So that's where we are with the opportunity. Very early stage. The second one, we have a prototype, but there is a substantial R and D Expense or the inventor is looking for a reimbursement, which is significant.

Speaker 2

And at this time, The company really can't get into those types of ventures without showing any immediate sales or EBITDA. So we have to try and figure out a different kind of arrangement and that's ongoing.

Speaker 3

Okay. And regarding the new products, you had a new product this last year, well, 2 of them. The one we haven't heard much mentioned and not sure how well it's done is the Cameleon product, But you had more quarters under your belt. And have you had and delivered any meaningful custom orders of the product yet that Take advantage of the unique inserts And are you making sales of replacement canisters yet? Or do you think it will end up being this is a product that ends up being Exposed of a not generating replacement cartridge sale.

Speaker 2

We are selling both these products are selling online. That's Where it's primarily selling. The Pocket Personal has done Okay. And the Chameleon has done okay, but neither of the products are anywhere close to our original projections.

Speaker 3

Okay. And PocketHero, you discussed on the call you were working

Speaker 2

PocketHero is the one which we yes, We call it the Pocket Personal. Those are selling online. It's very attractive to the younger female category And that's who we are promoting it to. But in terms of Ongoing sales? There are ongoing sales.

Speaker 2

Both are selling actively.

Speaker 3

Okay. But you said on the call, you're working on a newer version of the Pocket Hero or now your Pocket Personal, with a much improved design from the 1st generation and that was slated for introduction late Q4. Did that occur and is that what you're marketing now or when will it occur? And if it's been introduced, how's this reception been? You initially had this product at not just on mace.com, but in AutoZone Has interest inside of AutoZone paired off or is it still doing well there?

Speaker 2

The interest has gone down. It's not doing well there. The redesign was done because the changing of the cartridges was the problem. It was Consumers found it hard to change the cartridges. So we changed the design and it now just has pepper And those are selling.

Speaker 2

But again, it's mostly a direct to consumer program at the moment.

Speaker 3

Okay. And then your slideshow talks about some new products. Is it new products that are like new, new or are these just expanded SKUs?

Speaker 2

They are just product line extensions. Okay. And

Speaker 3

when are you expecting those to be rolled

Speaker 2

Those are going to be rolled out In the coming quarter, so by the end of Q2.

Speaker 3

Okay. I'll back out and I have 1 or 2 more questions. If you can come back to me if there's time.

Operator

Thank you. We'll take our next question from Howard Rosenkranz with Value Advisory.

Speaker 5

Hi, guys. Thank you. I tuned in quite late. Just wondering about the financial resources or your access to money or I see you went $500,000 into a line. How much further is there on the line?

Speaker 5

What sort of Do you have to hit some sort of EBITDA or something to that's the gist of it? Thank you.

Speaker 2

Howard, we have a $3,000,000 line of credit. So we are 500 Into it as of Q4, we do have an EBITDA covenant, which we missed In Q4.

Speaker 5

So you said you missed the covenant. Okay. What is the covenant? How much?

Speaker 2

It was a cumulative EBITDA of $100,000 a quarter starting in Q2.

Speaker 5

I'm sorry, starting in Q2 of 23 or Q2 of 2022, I'm confused.

Speaker 2

Sorry, Q3. Q3. Rem, do you have the specifics?

Speaker 1

Q3 of 2022.

Speaker 5

So starting in the Q2 of 2022, You had to be EBITDA positive every quarter $100,000 Yes or no, please.

Speaker 1

Starting Q3, I believe is a starting point.

Speaker 5

Okay.

Speaker 2

Excuse me?

Speaker 1

And we failed it in the Q4, as Sanjay said.

Speaker 5

Okay. So does that mean you are not allowed to go deeper into the line?

Speaker 2

No, no. We still have access to the line.

Speaker 5

Okay. I'm not that smart. So please tell me how that works. I don't understand that.

Speaker 2

Well, that agreement is expiring at the end of May. So we are Trying to find another lender and we are in our positions and in due

Speaker 5

Okay. So it's May 15. If you don't find another lender in 16 days, we call it quits. I'm Trying to understand the ramifications of that.

Speaker 2

Yes. We explained it a bit earlier, but I'm happy to do that

Speaker 5

Okay. My apologies. I didn't tune in on time. My bad.

Speaker 2

We are in conversations with our current lender To extend our term by 60 days.

Speaker 5

So to extend okay, I'm not exactly so I'm sorry. There are certain I don't deal with companies that are this financially challenged. So let's try to get into the nuances. If everybody else understood it, which I sincerely doubt, That's fine. But why don't you entertain me and simplify it for me?

Speaker 2

Sure. So your point is valid. We have 16 days to come up with another lender. So we need time. And so we are working with 5th Third to get us an extension for 60 days until we can We had a new vendor.

Speaker 5

So just so that I understand.

Speaker 1

If I

Speaker 2

can just finish the call, that might be helpful. That'd be helpful if I can just finish my thought here. And obviously the extension will come with its own requirements, Which may be which may include a reduction in our access to the line. So that's where we are. Go

Speaker 5

ahead. Okay. Apologize for cutting you off. My bad. So Okay.

Speaker 5

So that may come with a Okay. So in the next 16 days, you have to negotiate an extension and there will or will not be new covenants Or access to additional money beyond how much you're into them now. We are now May 15. So every other reporting company As already reported, Q1 and we're halfway done with the Q2. So again, apologies for not tuning in earlier.

Speaker 5

Did you guys give us any insight into how it's going this year? Are we still doing like $2,000,000 in business on a quarterly basis?

Speaker 2

We didn't give any specific forward guidance, but the trend is the same as Q4.

Speaker 5

Okay. Alrighty. So we're just in search of a new line or other financial alternatives. Okay. I get it.

Speaker 5

Thank you for the color. I really appreciate it. Thank you.

Operator

We'll go next to Andrew Shapiro with Lawndale Capital Management.

Speaker 3

Okay. Since there was back and forth and interruptions, and I asked this question earlier and I Got teased out of you at least some additional information that Sanjay you didn't share again with Howard, which I can understand why he's in limbo on this. Did you not answer my question that it's not just that you're getting a 60 day extension from 5th Third With its own particular terms, but that you already have in hand a term sheet from a replacement lender that you thought Would be resolved and done in the next 30 days. Is that what isn't that what you just you told me at the beginning of the call when I

Speaker 2

We have a term sheet Yes. We have a term sheet and yes, and we are in diligence as I explained to Howard and You didn't explain

Speaker 3

it to Howard, which is really Sanjay, you didn't explain it to Howard, which is really frustrating and does not lend To anyone's comfort, when I mean, I understood Howard's question, I understood Howard's concern, I understand why he asked the question since he was late to the call and didn't hear the detailed answers I pulled out of you, But I just am frustrated by the fact that you didn't provide the complete picture and left Howard and others In the lurch by not saying that you have a replacement lender and you have a term sheet from them unless It's not a real term sheet and you're hesitant to say it again, but I'm just I don't know why you wouldn't be more clear about that in the first place to bring it full circle. I mean, But yes, you say you have a term sheet and in the next 4 weeks this issue should be kind of resolved. Does the timing of that Play into the timing of when you guys are likely to report your Q1 Because you'll have perhaps the debt refinancing picture clearer at the time you make your filing?

Speaker 2

We should Excuse me?

Speaker 1

No, I was going to say, I think we're viewing the 2 separate events.

Speaker 3

Right. But they're not so But you can you don't have to wait for any audit anymore. So you guys can turn around Q1 and get that out of the hopper pretty soon, right?

Speaker 2

Yes.

Speaker 3

Okay. I mean, I'm just I'm guessing frustrated by some of these little nuances and it almost seems like you're Everything is going to hell in a hand basket to facilitate some kind of like management cheap LBO buyout here. And I'm not liking it. So I just think that When the questions are asked that you should more fulsomely answer them Sanjay Then leaving things in the lurch, because Howard's question was pretty darn clear.

Speaker 2

So All right. Thanks, Andrew. I mean, All right. I tried to answer the best I could, but no, I understand that.

Speaker 3

Okay.

Speaker 2

He was asking a specific question. I understand. I don't want to get into a debate on this call. I understand. Noted.

Speaker 3

Okay. Lastly, on the What success have you been making, if any, in further addressing the new vertical markets that were brought up Last quarter's call, that's like in the hospitality industry, the real estate agents, security guards, Healthcare, is it just the personal alarms or are you making headway with other a broader line of personal defense products now?

Speaker 2

At the moment, it's personal alarms, but we expect to see an interest with our training, Safety training as well in the future.

Speaker 3

Okay. All right. And With respect to the convertible financing that you're talking about to provide supplemental growth capital for all these revenue generating opportunities you say that Need funding that may be beyond the new working capital line of credit lender. How is the governance set up to ensure that the terms of the new financing That would go on and be funded by Mace Board members and other qualified investors Are in fact arms length and satisfy Director's duty of loyalty towards All the shareholders who might not be able to participate in this, private financing?

Speaker 2

We're being advised by our public securities lawyer on how to go about this Capital raise and we're following his direction on it. And in the future, we will Likely be working with an investment banker to help us do that as well.

Speaker 3

Okay, great. All right. Well, thank you much. I know the strategic alternatives process is something that we can't talk about, but I would hope that You get your refinancing done to get the strategic alternatives process moving again because Until the financing is done, the new working capital lender dealing with 5th Third, So that's done. I think the alternatives things on hold or should be on hold, so that you're dealing with and negotiating from a position of stability Rather than your backs against the wall.

Speaker 5

Thank you.

Speaker 2

Okay. Thank you, Andrew. Okay, Katie, I think we are at 12:02.

Operator

Please proceed. There are no additional questions in queue.

Speaker 2

All right. Thank you very much.

Operator

That will conclude today's call. We appreciate your participation.

Speaker 2

Thank you,

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Earnings Conference Call
Mace Security International Q4 2022
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