Mace Security International, Inc.

Thank you, Tiffany. Welcome to Mace Security International's 2011 Results Conference Call.

My name is Steve Rolle, and I am the Corporate Controller for Mace. Also with us today is Mace's Chief Executive Officer, John McCann; and Mace's Chief Financial Officer, Greg Krzemien.

Before I turn the call over to Greg, there are some general housekeeping matters that we want to address. Certain statements and information during this conference call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

When used during this call, the words or phrases will likely result, expected to, will continue, is anticipated, estimate, projected and intend to or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks, known and unknown, and uncertainties, including, but not limited to, economic conditions, limit of capital resources and the ability of management to effectively manage the business and integrate acquired businesses. Such factors could material -- adversely affect Mace's financial performance and could cause Mace's actual results for the future periods to differ materially from any opinions or statements expressed during this call.

Additional discussions for factors that could cause actual results to differ materially from management's projected forecasts, estimates and expectations are contained under the heading Risks Factors in Mace's SEC filings, which includes its registration statements, and its periodic report on Forms 10-K and 10-Q. All statements made during this conference call should be considered in conjunction with the financial statements and notes contained in Mace's annual reports on Form 10-K and quarterly reports on 10-Q.

You can access these reports on www.mace.com through the Investor Relations section of the website. You can click on the Investor Relations button.

With that, I would like to now to turn the call over to Greg Krzemien.

Thanks, Steve, and good morning, everybody. Thanks for joining us again on our fourth quarter and year-end results call, as Steve mentioned.

I'll be covering results for the fourth quarter and the year-end versus the same periods in the prior year. From time to time, I may also do some comparisons to the sequential quarters in 2011.

those being the car wash segment, which we currently, as of today, only own 2 remaining sites; and our digital media marketing segment, which we sold back in November of 2010.

I'll make some brief references to these discontinued operations in -- towards the end of my comments. As for our security segment, I want to kind of highlight that we operate in 3 operating units or distinct divisions.

We have our electronics surveillance equipment operation, named Mace Security Products, Inc., where we sell both professional and more do-it-yourself type home and small-business electronics surveillance equipment. Our most noted division is our Mace Personal Defense operation, which is our famous Mace aerosol pepper spray division, and we also operate in a third division, our wholesale security monitoring business, Mace Central Station, Inc.

We entered that business in April of 2009 with our first op-based [ph] acquisition.

Up to about October last year, we also had an additional division, known as Industrial Vision Source, which was really a distributor of specialty cameras and conferencing call equipment. We sold that, as I just mentioned, in October of 2011.

As I previously mentioned, also, we've recently filed our Form 10-K. And in that 10-K you'll notice that these discontinued operations, the digital media marketing and the car wash segment, are accounted for as discontinued operations, and in essence all of the line item's in the income statement, from revenues through all the expenses including the prior period, are stripped out of those line items.

And the bottom line of the net results for those discontinued operations are reflected as one line item on the bottom of the income statement. This way the income statement provides a pure picture of just the continuing security segment.

Additionally, on the balance sheet, all those assets and liabilities related to the discontinued operations, which are held for sale, are segregated and pulled out into 2 separate balance sheet line items, which I'll talk about in a few moments.

Again what I'd like to do now is cover some financial highlights on the results for 2011 and the balance sheet, and John will follow-up my comments with some additional discussions on our operations and adding little bit more color to my financial comments.

First off, I'd like to talk a few minutes about the balance sheet, couple of points of interest. We have working capital of about $17.6 million at the end of 2011 and about $23.3 million in assets -- I'm sorry, the working capital is $11.2 million.

The net worth was $17.6 million at the end of the year. Of that net worth of $17.6 million there's about $0.30 per share of our stock outstanding.

In that total assets and working capital, we had about $7.9 million of cash as of the end of 2011.

As far as debt goes, as of the end of 2011, we had recorded debt of about $1.53 million. Obviously, the lowest that we've had in many, many years.

This was versus about $3.5 million as of the beginning of the year. This $1.53 million is net of about $550,000 of the value of the conversion option and certain warrants related to $1.4 million debenture note.

That difference is recorded as equity in our financial statements, and it's accreted as a noncash interest charge over the life expectancy of the $1.4 million debenture note. So we'll continue to accrete that $550,000 into interest expense -- a noncash interest expense and increase in our balance through 2016, which is the new maturity date for the $1.4 million debenture.

As far as the debt goes, as I mentioned, it was about $3.5 million at the beginning of the year, about $1.5 million at the end of the year. That decreased just a little under $2 million.

It's net of a few things. We borrowed about $1,350,000 at the end of 2010, as a result of some issues with our prior CEO from Merlin fund.

We paid that debt off during the year, so in 2011 we had debt reduction of $1,350,000. We borrowed another $1.4 million for Merlin to affect the acquisition of Security, a monitoring tuck-in company, in March of 2011.

We paid down some debt through the sale of assets. We sold a Lubbock car wash in 2011, and we sold our Texas warehouse in 2011, paying down those mortgages, and we have routine debt payments of about $275,000.

So all in -- the net of all that was bringing our debt down by just a little under $2 million.

With this debt reduction, sitting today, we're down to about $1 million of recorded debt. Again, that's more like $1.5 million when you look at the roughly $0.5 million of remaining unamortized conversion options and warrant value that's in equity.

So out of that $1.5 million on a gross basis, $1.4 million is the Merlin note I mentioned that we took out in March to buy our tuck-in operation, and the remainder balance of about $130,000 is just some minor small capitalized leases and equipment notes for our security segment. So again, we're just about debt-free at this point with the asset sales and with the rights offering that we did last year.

So really happy to report that.

With this debt pay-down, just want to mention a couple of things. Our relationship with JPMorgan Chase continues to be strong.

With the pay-down of the debt, we restructured some of our agreements. We eliminated a covenant in the past, which was to maintain at least $1.5 million of cash balances reserves in the company.

We do have a cash collateral account of about $439,000 right now. That has some restrictions against it by the bank to collateralize our letters of credits and line of credits that we have with Chase, and we'll continue to work with them on that item as well as we've focused on becoming cash flow positive in the future year.

From a balance sheet standpoint, one last I'll mention is our assets held for sale decreased about $3.9 million, up from beginning of the year to the end. That was a result of the sale of the Texas Warehouse in December, the Lubbock car wash in March that I mentioned previously.

But we also did some write-downs of our remaining 2 car washes in the third and fourth quarter to the tune of about $511,000. So that really was a reduction in assets held for sale, and our current liabilities related to assets held for sale dropped about $1.5 million in 2011, and that's directly related to paying off the mortgages for the Lubbock car wash and the Texas warehouse that we sold in December.

our operating section, which we decreased cash about $2.9 million through losses, reduced some by some positive impact on other working capital items; our investing activity generated about $286,000, and that really was a positive effect of generating cash from the sale of the Lubbock car wash and the Texas warehouse, less the cash that we paid for the tuck-in operation we bought in March for our monitoring company; and we generated net cash of about $7.9 million in the financing side. That's the effect of the $8.2 million we generated to the rights offering and the security sale that we did in the August time frame of this past year, less the net effect of the pay-down of debt of about $300,000 that wasn't related to debt pay-down from assets sold.

So again, nice to have the cash balance back up in the high $7 million to $8 million range.

I'm going to make a couple of comments on revenue next, focusing on our income statement. For the fourth quarter, versus the fourth quarter last year, our revenues dropped about just a little under $1.8 million or about 35%.

The key point there, I think, is that the bulk of that drop is in the IVS division, which we sold. And the reason why we sold that, obviously, was largely because of the drop in revenue, which was affected by a couple of key events that happened last year.

We lost our distributorship with Sony, as we previously disclosed. We had difficulty getting product from other distributors with some of the disasters that went on in Asia earlier in the year.

And then, we lost our general manager of that operation earlier in the year.

So with those items, we sold IVS. That was our lowest margin-producing division in the security segment, producing product margins in the 13% to 15% range.

So again, we exited that business, and that reflects about 82% of the drop in revenues for the quarter-to-quarter. For the year, our revenues dropped about $4.5 million or about 24% and probably about 78%, 79% of that drop, again, was because of the IVS operation, which deteriorated during the year and then we ultimately sold in the October time frame.

What that, I'm just going to drill down a little bit by the divisions on the revenue. On the Mace Personal Defense operations, on a quarter-to-quarter basis for the fourth quarter, we're up in revenues about 5.4%, which we're really, really excited on that.

From the third quarter of '11 to the fourth quarter of '11, we were up sequentially in those quarters by about 11%. So again, just really happy with the growth we've seen in the fourth quarter in that -- one of our key divisions.

Our growth was strong on the aerosol side. In the fourth quarter we had about 5% growth in aerosol.

That was offset slightly by some decreases in our non-aerosol, which is a small wireless electronic component. We feel, based on what we're seeing, that, that was just a temporary item, just needs of our major customers, and that's gone back on a stronger track here.

On the year-to-date basis, we were down slightly in the Mace Security Products division -- I'm sorry, the Mace Personal Defense division by about 2%. And aerosol, which is our main product, was strong.

It was almost a 6% increase 2011 over 2010. Again, where we saw the softness was in the non-aerosol home security wireless system and somewhat in our TG Guard, which is our big embassy-type, prison-type pepper spray dispensing system.

And again, based on what we know about current operations, we feel pretty strong that they were very temporary decreases, which has started to turn the quarter -- at the end of the fourth quarter, and we feel good about them as we speak here.

Looking at the electronic surveillance operation. That's where we saw one of our biggest decreases on the quarter-to-quarter basis, for the fourth quarter, down about 31%, almost 50% for the year.

That's the operation that we've done a lot of strategic things to. Last year, I guess, I was saying, we felt the pain of the last couple of years and ended 2011 from slower construction, competition increasing, especially from the Asian manufacturers selling directly here.

We lost a significant customer in early part of 2011. And really as a management group, we started to focus more on the do-it-yourself home and small business type of equipment, which requires less attention, less service, less overhead than the higher cost, more needy professional line of business.

So some of the reduction was also just focusing more on consumer-retail type products and growing that and letting the professional, that we weren't getting as good a margins on, move aside.

So with that, we've made some more significant cost reductions towards the end of last year. I mentioned, I think, in the last quarter call that we reduced some more overhead, some more positions.

We've challenged our expenses in that operation. We sold the warehouse in December and moved to a leased facility about 1/3 of the size, which saved us about $100,000 on an annual basis.

So when you look at all these costs, we feel we've cut back the expenses in operation probably about $600,000 on an annualized basis. So -- but with that cutback and despite the drop in revenue, we're in a position where we're achieving close to breakeven results now in that operation, which is one of the goals we set out.

Again, IVS, I mentioned, we sold that in October for about $517,000, disclosed that in the 10-K. With that, we recorded a gain of about $56,000.

So we're able to monetize that operation, which had low margins and was really deteriorating. One of the key components of that was an earn-out for $100,000, which we've corresponded with the buyer.

And we've agreed that the company has earned that $100,000, and we're currently just working out some post-closing minor things, payables or receivables, and wrapping up that transaction. But good news on the IVS front and the sale of that division.

Lastly, and but not least by any means, is our wholesale monitoring division. Mace CS, Mace Central Station, which is comprised of 2 items.

I mentioned we got into this business in April of '09 by the acquisition of Central Station Security systems, CSSS. We bought a tuck-in in March of this past year called TCCI, The Command Center, Inc.

And with those 2 operations, we now operate a security monitoring wholesale, which means we deal with dealers versus the end-user. We have about 490 dealers currently with the 2 operations combined, and with that, we have end connections of a little over 70,000.

So operation has grown nicely, the end connections in December of '10 was only about 43,000 end connections. So again growing nicely and we're pleased with that.

Our revenues for 3 months, December of fourth quarter of '11 versus the fourth quarter '10, is up about $225,000 or 30% and for the year, were up about $650,000 or 24% and probably about 90% of that growth relates to the acquisition of the accounts with TCCI. However, we still did see some organic growth besides that.

So we're very pleased with that.

Looking at gross profit margins for a couple of minutes. We're happy with what we're seeing here, when I look at it from a 3-month basis.

And as recorded, we had gross profit of about $1.3 million for the fourth quarter. That was about 41% gross profit margin.

For the same period last year, we had about a 31% gross profit margin. So we improved by 10%.

For the whole year, we were at about $4.9 million as reported. And as I mentioned last quarter, and we disclosed in the K, we wrote down inventory.

We took a charge of about $200,000 in the third quarter for some inventory that we're liquidating, currently as we speak, through some auction mechanisms. If I exclude that $200,000, our one notable kind of item, our margins for the year would be about 37% for this year versus about 30% for the whole year.

So a nice 7% improvement for the year, 10% when you just look at the fourth quarter.

And it's largely related to a couple of things. Large part of it is mix, by getting rid of the IVS sales, which I mentioned, were 80% to 90% of our decrease for the reported periods, and really focusing more on our Mace Personal Defense, which has a gross profit margin of 46% to 47% range.

Our Central Station we're in the 35-plus percent range, and our professional and home and small-business electronic were in the 28% range for the year. When I look at the fourth quarter, those margins are pretty much the same for MPD, Mace Personal Defense, and for the monitoring station.

But when I look at the professional and then home and small-business electronics, we're up to about 36% margins there versus 28% for the year. So that's the impact of these changes we started to making towards the end of the year in increasing the profitability there.

So very pleased where gross profit margins have gone.

SG&A costs, continuing to work on those. If I look at reported SG&A costs for the year, down just a little over $900,000 or about 11%.

But when I back out, what I call the notable items, last year, we had -- in 2011, we had some severances for Dennis, our ex-CEO, and for John, up in Vermont, Goodrich, who retired. We also had some other fees that we spend in the third quarter to clean up some matters.

And then prior year, we had some notable items.

But when I back those out, our SG&A has dropped on a kind of a current basis, with our notable items, by about $1.3 million, almost $1.4 million or about 15% from 2011 -- for 2010 to 2011. And when I look at the quarter, again, we reported a decrease of about $763,000 or about 31% in SG&A costs.

But to be fair, when I back on notable items, that decrease is about $540,000 or about 25% to 26%. So the percentage decrease is much more significant, again, in the fourth quarter as we continue to make some hard decisions in the third and fourth quarter of last year which would carry in into the future here.

SG&A costs. We work on them on the corporate side.

We're down for the year about 20% there. MSP, we're down about 30% for the year, and on the Central Station, we're up a little bit on SG&A costs.

We've added about $60,000 to $70,000 a quarter with the acquisition of The Command Center in March. But again, net-net, we're seeing some nice reductions in SG&A costs.

Operating losses, again, I'll mention some comments on a -- as I say, without the notable items, to bring it more to a comparable basis. So I eliminate out of both years, impairment charges and the arbitration costs that we incurred in 2010 with our CEO from a couple of years ago.

Our operating loss, actually despite the drop in revenue that I mentioned, stayed at about 22% of revenues, so that was encouraging. And when I look at it from a fourth quarter standpoint, it improved.

The loss for the fourth quarter, operating loss as a percentage of revenue, we have down about 10%, where it was almost 14% in the prior year fourth quarter. So definitely making some good headway there, that impact.

It reflects, definitely, right directly towards our EBITDA, our cash flow.

Our EBITDA for the most recent quarter, being December, we had that to a negative $270,000. When we backed out some notable items, we had it down to about $220,000 of negative EBITDA coming off of the year, having negative cash flow of about $3.6 million and about $2.4 million less notable items.

So considering our negative cash flow without notable items, it was about $2.4 million for the year and only $221,000 for the fourth quarter, We definitely made some strides there.

Headcount. We're down from about 120 people at the beginning of the year to about 110 at the end of the year.

So we continue to look at that and make changes and adjustments as needed.

Just a couple of comments on discontinued operations. As I mentioned, that's all pulled down to the bottom of the financial statements.

Our loss for the current year, that was reported at $621,000. I want to point out and I mentioned earlier that $511,000 was write-downs of the remaining 2 car washes.

We wrote down one of the washes by about $450,000. We're getting very aggressive at moving that last owned car wash.

We have it written down to get rid of it within the next 2 months to 3 months at most. If we get rid of it at a better price, that will be good, but we wanted to make sure that we had it at a conservative position.

We also wrote off about $60,000 related to our leased site, so that site is now on the books at 0.

So without these impairments or cash flow drain, that was about $110,000 last year from the car washes, and $72,000 of that was costs related to getting the sites that we did sell last year ready for sale. So really our operating loss was about $30,000, $40,000 for the year excluding those notable costs.

So we have the discontinued operations under control, and as I mentioned, we're focusing very aggressively on getting rid of those last 2 sites in the next couple of months here.

In 2010, net loss was a lot bigger from discontinued operations, almost $8.3 million. And again, the bulk of that was impairment charges on the digital media company and on the car washes, but we still had a cash flow drain in 2010 of about $1.1 million, up from discontinued operations, so narrowing that to almost nothing last year was a good feat.

A couple of comments on asset sales, and I kind of mentioned these through my other comments, but we sold -- in the last couple of quarters, we sold the IVS division. As I mentioned, we recorded a gain on that.

We also sold our Texas warehouse, I mentioned that. We recorded a small gain on that and paid down debt.

And as a subsequent event, we've disclosed the sale of our Colonial One car wash in Arlington, Texas. That, we sold for $2.1 million.

We paid off debt of a little over $0.5 million, and we netted cash of about $1,575,000 and a small gain on that. So we're happy to move that and added some cash to the bank accounts here, so brings us in a stronger net worth and working capital position.

One last comment I'll make is our operating losses, NOLs. We're at about $51.3 million, but they expire anywhere from 2012 to 2031.

So again, we have definitely some intrinsic value built in those operating losses as we proceed into the future here.

With that, I'm going to turn the call over to John McCann. Again, John is our President and our CEO.

And then, John will add some additional color to my comments and to the operations. John?

Thanks, Greg. So I really don't have a lot of comments, because it's about 2011 and I started in the middle of January of 2012, other than to say I'm very excited to be on board.

It's a tremendous brand. I've visited all the divisions, and we have a tremendous amount of opportunity.

We still have some work to do on the cost-cutting side and some synergies that we can create, but then we have a tremendous amount of growth potential for the future. So that was really it.

We can turn it over to questions to kind of keep this rolling along. I think Greg covered a lot of the financials.

So I'll turn it back over to you Greg, if there's any questions.

Tiffany, we would be happy to open up for questions.

I have a few questions. I'll ask -- if you get out in the queue to let others ask but, please come back to us.

Trying to stick to the big picture here initially. You said your cash flow for Q4 had -- your burn had been brought down to less than $250,000.

Are there seasonal factors in there? Or is that kind of your current steady-state burn rate?

And were there months in which you were positive within the quarter? Have you gotten to a positive cash flow month yet?

And when do you think you might be having some positive cash flow quarters?

I'll initially answer, and then let John add anything he'd like. And I think you're correct.

We did have our cash burn, again less the couple of notable items, down to less than $250,000 for the quarter. I think your question was on seasonality.

There's a little bit of seasonality. I think what we see a little bit is sometimes in the Mace Personal Defense operation, and I think it has to do probably more with the holidays than anything.

The September quarter is usually our strongest there, with sporting goods and a lot of the retail stock restocking up for the holidays. But we do have a little bit of a low in the fourth quarter more because of the holidays.

So I think there's a little bit seasonality, but not much. As far as, can we have any months in that December quarter that we actually got cash flow positive?

I'll say no, but we got close. But it's getting exciting that we're getting closer.

I think we'll continue to have some small burn for a couple of quarters here, and we're really working towards trying to eliminate those as we get towards the end of the year here. So that's all I think I feel comfortable saying at this point, and I'll let John add anything he'd like to add.

Right. The only other thing I'd add is that it's a daily reminder that we need to be cash flow positive.

And so our goal is to be cash flow positive as soon as possible, and we're working on that goal as we speak.

Now your predecessor, the interim CEO, made a bunch of cuts following the substantial cuts that Dennis Raefield has put in place, and some of those cuts might impact the top line, and others were trimming the fat, now maybe trimming muscle. Do you feel having been in here, John, for, I guess, its 3 months now, that the company is down to the bone or that there are still pockets of inefficiency or consolidation or synergistic cost-cutting activities that can be created?

And without maybe giving the timing of that, do you have maybe a quantification or scope of how much additional cost or improved profitability you might be able to create without the assumption of further revenue growth?

So to start at the beginning, I think there's some more efficiencies that can be had within the organization. I don't think we've cut to the bone that's affected sales.

I think there is a little bit of maybe tweaking of roles and responsibilities that'll help us, and then, I'd be remiss to quantify it at this point. I think there is some ideas I have that I am working on currently but I don't want to quantify yet.

But to answer it, I think, we can continue to grow the brand and yet there are some more efficiencies that we can drive towards.

Okay. And with a few of the remaining things here to get rid of, Greg or John, the status of the 2 remaining car washes are -- here we are in March, you've mentioned the desire or goal that this will -- some of this will be extricated from in a matter of months, maybe quarters.

It sounds like before the end of summer, and I think that there's seasonality issue involved anyway. So are these washes presently profitable as a whole, profitable individually, one of them and the other one burning?

What's the cost to extricate out of these things before we could, let's say, be done with a segment that has a lot of human resource and many other SG&A costs to go along with it from the corporate side?

So that's a good point. We'll just let Greg talk about the financials because we're working on that.

Our goal would be as soon as possible, but no later than the back half of the year to have moved the last 2 car washes. We are working very aggressively to make it work.

We've put in place 5 or 6 different strategies, and I think we'll be successful within the coming weeks to be able to move them as to exact timing because of -- with any acquisition and whatnot, there's always obstacles and delays. But our goal, I think, is pretty solid, and I think we can achieve it.

Greg can talk a little bit about the financials because we have looked at both ways. If we didn't operate them, what's the cost there?

And operate it, what's the cost? So maybe I'll let him talk a little bit about that.

Yes, sure, John. And we have spoken, I think, before in the past, is that what we do every month we look at these operations, we know exactly what the cost would be if we locked the doors, basically, your real estate taxes.

We had the lease payments on one of the sites, some minimum utilities, guard service. Just those minimum costs, we look at that and we are definitely operating at a smaller loss by keeping them going than shuttering them.

Our loss, we seem to not been able to contain it to 0. We seem to always have some weather factors, but we've been able to contain it in kind of the $5,000 to $12,000 a month cash flow drain, and I think that's really the reason why.

And obviously, we've been committed to getting rid of these by trying to get rid of them sooner than later even if we have to take a bigger cut to do that, but again trying to maximize the cash we get for them. So we're trying to do everything to keep them as tight as possible, losing the least amount of money.

But definitely, they are still sort of small cash drain that we watch in on very closely.

I've mentioned on the last call about a rush to get into the commercialization of pepper spray in outlets such as Walmart, Target, Kmart, et cetera, that I thought that would be great potential for us under the present environment and seems like we still have not moved toward that yet. Is there any reason with your commercial experience that we haven't moved there?

It's a timing issue. But with respect to Kmart and Sears we have a -- we had a small little program, but we have been able to expand that very nicely.

So this upcoming year, we basically tripled the offering. With Dick's, we have expanded our offering, too, so we've increased our distribution at those clients.

With respect to Target, we have a long list of customers that we're going after. Some of them we're receiving the field as you speak right now to make sure we're successful.

And I think, before the back half of this year, we'll have breakthrough distribution on some of those accounts. It's twofold though, because at the same time we're getting distribution, we want to make sure that we have sell-through and the sellout, that we're also working on the marketing of the brand to make sure that not only does it have the distribution, but people know where to find it if they are looking for it and they know how to use it.

So at the same time we're working with, for example, at Target I'll be up there in a couple of weeks, and we've had a nice conversations but no distribution yet to -- there's no distribution going, but we want to make sure the sell-in and the sellout both occur.

All right. Do you think in this present environment where more pepper sprays are being used and the possible continued clash warfare figure that almost a major protection for anyone, not being a gun of course, would be the ability of just many, many individuals, college women, et cetera, using the Mace spray and it being almost a must item to have, how was the -- is that philosophy way off or seemingly the timing for just the use of almost a necessity for people to have that as protection is appropriate, a philosophy off?

No, I think your philosophy is right on. I think there's a couple of things that we have to do.

And I just met with Vermont State Police Department, a retired officer to kind of start that process of education. In the world today, you'd rather a person have Mace than a gun because both people can survive in that type of environment, and so what we're trying to do, and we will do, is educate the public that the product is safe.

It's the best deterrent, not only gives you personal safety that you have it, then it also is a great deterrent because if you bring it out, you're less likely for something to happen. But with that, we're trying to make sure that we educate the public because, to your point, you might have reached that point, but I don't think everybody's reached that point yet.

And we want to make sure that when we do reach that point that they go for the product, that they go for Mace. I think we have the branding.

Now we just have to really have the marketing strategy behind it, and we're working on a variety of ideas to do that: identifying the market; making sure that we speak to the market needs; then work on an advertising vehicle, whether it be a direct response or advertising or sponsorships that allow people to associate our brand with personal safety and home defense; and then have the right distribution with the right retailer so they know where to buy it. But I think you're 100% right because given the situation in Florida and given other situations, if Mace had been used instead of a lethal weapon, a nonlethal remedy is clearly more desirable than a lethal weapon.

How far along do you think the market is in understanding that there are alternatives to the lethal weapon? And that -- it just seems -- so if I had daughters in college right now, I'd want them to have Mace spray in their pocket book.

So what do you think it's going to take to move us over the goal line on that? And with that seems like that would move up the company into an entirely different ballgame.

Yes, to your second point it would have to fully move us into an entirely different ballgame. And the first point I think we're getting very, very close.

I think more people are aware, not only in the world of personal defense but like also if you're just jogging, with animal attacks and whatnot that are becoming more common than ever before. We make a jogger unit, for example, that does extremely well for people that are jogging.

But I think we're not there yet, but we're very, very close. And what we're trying to do through PR efforts and marketing efforts is to raise that level of awareness in a positive way.

And then also, we're putting together kits, what we're calling them training kits, so you get a unit that's inert. It's pressurized water, so you can shoot it.

You can spray it. You can be very comfortable with it, then you get a real unit you can put it in your pocket purse -- pocket book and be able to use.

So I think we're very close. I would say around the corner.

I think with the recent events, we're closer than ever before. And for us, internationally, we are -- more markets, Italy and some other markets are now opening it up to civilians being allowed to carry Mace.

So that's also to our benefit. We do have some work to do, I would say it's on the lobbying end of the industry for nonlethal technologies, in general.

Nonlethal devices, nonlethal products that we have to work some governance issue to raise that level of awareness, which I think will help us, and we're also working on some strategies to do that with not only Mace Security International, but with our competitors to make sure that laws and legislation work in our favor.

Last question, there's no legal issues relative to carrying Mace, but someone just walking to a store and buying it, is there?

Just in Massachusetts and New York. The only 2 that are known today, which being somewhat illogical, if you look at you can walk in New York with a gun but you can't walk in with Mace.

And I much rather somebody have Mace than a gun.

A few. So if I could follow up a little bit more on this rolling out the new products and plans, if you could.

Last year, there was a patent pending on your pepper gel. Did that patent get issued?

Or when is the application in patent expected to be issued?

We're still working on that, Andrew, and we hope to have some news on it in the next -- in 2012. These processes are very slow.

We have to keep going back and proving certain things to them about the uniqueness of the product to us. Now that is still pending and has not gotten all the way through, but it's something that we're continuing to work on.

And hopefully, we'll get through it in the next year.

So your feedback is that the back and forth, it would be within the year?

[indiscernible] the patent office, like that examiner making the final, final. But more to that, Andrew, is with the patent or without, is the marketing of it.

Make sure people understand that this is the best way. Like I can speak from, just yesterday, a meeting with the Vermont state trooper.

He thought gel would be tremendous. So in his classes that we've started sponsoring in the state of Vermont, with him and some of the associates, he's bringing the gel to those classes and explaining to somebody that this is the best way to do it, and I think that will help also.

But with the patent that it's going to be -- we have to push back the patent there and the examiner, to make sure that they follow up and give us the information that we need. So I can work on trying to get you more exact time frame to when that can happen, but I guess, that's just working government agencies, which could be quick or long.

No, I was wondering just on particular milestones, just like there's always FDA product milestones and things like that, just to follow its progress. Within your new products, it looks like you have some new products Pen Defender and a Keyguard self-defense spray.

What are these? And are there any other new recent products that you're rolling out?

I can't speak to the prior history of them much because they're all somewhat new to me, but I can speak to that, that the time has been very effective in smaller locations where people want something that they can grab quickly. The Keyguard has been very good because a lot of people they just have it on their keychain.

What we've done is expand some of the colors. Some of our hottest selling items right now are in our pink line.

In our jogger models where they are easily accessible in your hand and also, readily available. Our next step is there's quite a few products.

We're doing a SKU rationalization over all the products. So I'll say it's -- we're more looking at a distribution base, of growing our distribution base, than analyzing the products and because there's some products that should leave the assortment, while other products will get a different focus.

Okay. In terms of -- and speaking of distribution, moving out from the Personal Defense side to a segment that is in security but has dogged this company for the last few years.

And there were not one but several attempts to build a direct sales force and grow a direct sales force to move it out, and that's in the, we'll call it, the video surveillance segment and maybe that's in the higher end of the professional side. The results have -- hadn't been great in the last year.

I know it's before your watch, and all -- you're coming from a consumer side. What are your thoughts that you formulated or your plans regarding the distribution or the growth of that video surveillance segment?

Or is it something that will be kind of further shrunk down? Are we going to make another shot at investing in direct sales?

Is it something we'll be using third-party distribution? What's your mindset towards this?

It's twofold, that we're still, George and I, who's been running that division and has a lot of product knowledge and experience, are still formulating the plan. At the same time, like I was just down with him, he has a 2 people that are doing a lot of direct sales today and doing it more successfully than we have in the past but to say exactly, it might be a combination.

But on the direct side, I could tell you from both the securities products, so the high-end surveillance all the way down to the Personal Defense products, it is a goal to strategically build our direct-to-consumer channel of trade because we can control the message, we can control the branding, we can also control our margins a little bit better. So as we build out some distribution, we will still maintain and try and grow a direct-to-consumer segmentation.

Advertising will fit in with that, with the drive to web and a drive to an 800 number so we can capture some of these sales as we put some of our advertising efforts around our commercial efforts.

Okay. And where does that then place, I guess, we'll call it, the dealer end of this?

And how does that then fit going across the country to where our call monitoring business is and even across synergies?

There's a tremendous amount of synergy with what we have now with the central monitoring business because when you go into a retailer and you say not only do I produce products, I distribute products and market products, I also protect people on the backside with our monitoring station. That's very helpful because it allows us to show that we're deep into security systems, and we understand the segmentation of the business.

The other thing is, is that, quite honestly, we have not done a good job marketing. The first part of selling something is marketing, knowing the brand, knowing the message, knowing what you're going after, knowing who your consumer is.

And now having spent quite a bit of time in Anaheim with those folks, we're putting together messaging that will allow us to grow that end of the business. I still think there is a tremendous amount of growth left in that business because we do have the technologies.

We're not maxed out in our capabilities within the arena to add more dealers. So we're just at the ISC West show.

We have very good conversations with several dealers about using us in their central station. At the same time, I think one of the first times we've also talk to those dealers about being -- becoming a dealer for selling our Mace products over the counter at their locations and working on ways to allow them to sell Mace Pepper Spray into 2,000 -- or 20,000 connections that they currently have and creating a pipeline there where we really capture the synergies of the Mace brand.

To your point, on the central station side, it's twofold. We can leverage that business with our other businesses yet, and by the marketing efforts behind it, which synergistically, I can grab from within the organization that exists today, we can create a better message of why our Central Station versus somebody else's central station.

Okay. Greg, in your script and your discussion moving back and forth for the full fiscal year and then some comments you made on the Q4, you made some references to sequential gains of this subsegment and that subsegment, and it was a little bit confusing.

And I was just wondering if you can clarify because when we compared full year versus 9-months results -- because I don't believe you really provided in either in the press release -- or in the 10-K, but in the press release either, the fourth quarter results we're getting some flat to down performance sequentially from Q3. Can you clarify when you talked about sequential gains?

Were this subsegments within Personal Defense itself? And then do you have some specific Personal Defense professional, the video surveillance and then the call monitoring, fourth quarter revenue mix breakouts so that we could understand which ones were up year-over-year -- I mean, excuse me, sequentially, to hone in on asking about some areas here where there was growth or where there was weakness and why?

Sure. I'll try to highlight.

I think your question is on the revenues. Yes, the different segments, if I look at -- I'll start with MPD.

I mean, for the fourth quarter, we were up about $79,000 or about 5.4% over the fourth quarter of the prior year. And what I also mentioned was sequentially, we were up about 11-plus percent from the third quarter of 2011 to the fourth quarter of 2011.

And quite frankly, the first 2 quarters of Mace Personal Defense, the aerosol operation were fairly weak. I mean, we made some management changes there.

We had a major salesperson who passed away, and we had to hire somebody to recover our international and the law enforcement operations. And so for the year, we were down a little bit on that operation by about 2% year-to-year, but again in 2011, we showed sequential growth every quarter with about 11% going from the third to the fourth quarter.

I'm most interested in the trends. How are we trending here in Q4 versus Q3, in light of the seasonality, just to know?

And this is a company that's constantly in transition. You went from the new 3-year CEO, replaced Paolino, to an interim CEO, who did his things, and now we have John who hasn't even had an impact on the reported numbers to date.

And so I'm just wanting to make sure that we're continuing on the right track by subsegment or where we're not to -- and understand where and how and what's being done about it.

Yes, and I think -- I mentioned on MPD. Let me just guide on what kind of revenues by quarter made it as a whole, Andrew.

But in MPD, the -- again, Personal Defense, we were about $1.1 million in the first quarter of last year $1,164,000 in the second quarter; $1,395,000, almost $1.4 million, in the third; and $1,542,000 in the fourth.

That's what I want, the fourth quarter. Okay, right.

Yes, so we had a nice job. And as John mentioned, we did a lot of good things in Vermont in the third and fourth quarter, started by Mike and John has just taken it -- continues to take it to another level and one of the things that we didn't even mention there was the packaging, that's a new fresh look.

In addition to adding some new product ideas, we've revamped that and made it more an image -- I guess I'll say that it looks similar and done a lot of work on that, and we've got great responses from retailers on that already. So now really focus on not only getting, as John said, more SKUs in stores.

We've focused on working with our retailers are getting more space within the stores. We focused with retailers on just getting more on their stores.

So yes, we've done really good positive things there. And John is working hard with the team and [indiscernible].

What about the quarterly revenues of the other 2 continuing subsegments?

Sure. In Mace Security products, which is the electronic surveillance, that has gone down.

But for really 2 reasons, the biggest part is, again, the IVS operation dwindled significantly in that operation during 2011, with a loss of distributor, by the loss of general manager. And really just, we just got to a point -- we just sold it in October.

So that went from $1.6 million in the first quarter to $1.3 million roughly in the second quarter, to about $1 million in the third quarter, to about $700,000 in the fourth quarter, which at that point we had none of the IVS operations in there. And we definitely lost some revenues on the professional dealer side, with the loss of the big customer that we had and really somewhat of a conscious decision that was started to focus more on the do-it-yourself consumer side of the business, which entailed -- or enabled us rather to cut back the operating cost there.

Those professional dealers required a lot more handholding and customer service and people to manage it. So kind of trying to move more towards consumer-oriented products, which is -- works nicely with our Vermont Personal Defense operation, and it is clearly John's expertise and forte.

So electronic surveillance subsegment. Greg, so electronic surveillance subsegment during Q4 did only $700,000 in revenues, is that right?

That's correct.

Okay. And its run rate for the coming year -- we're done with March, can you just give a focus?

Is that about the run rate that, that subsegment is kind of looking at about $2.8 million a year kind of run rate?

We're looking at a lot more than that, Andrew. And like I say, it's significantly more but we're looking at more than that, and really it's the strategy of -- kind of hit its low point in the fourth quarter.

We're seeing revenues not going any lower than that, and we're going to continue to work on improving that by growing, again, the do-it-yourself home and small-business. And we have some great products that George developed in the past, a nice unit that have a good shelf presence, and working, as John said, to integrate those more with our other businesses.

As far as [indiscernible] grow from where we, I guess, hit bottom in the fourth quarter.

And how about wholesale alarm call monitoring? What about its quarterly results, should be -- have been aided by the most recent acquisition?

We hit about $800,000 in the first quarter, that was before acquisition. Our revenues were just a little over $1 million in the June quarter, which had the acquisition in there.

Jumped to about $1,060,000 in the third quarter, so we added some dealers in that quarter. And we added some -- we have some equipment sales, a product called Videofied, which is a nice product that one can install in their house and it can be monitored by our Central Station upon motion of video monitored.

And so it's a nice product that we started selling, so we have some impact of that. And our sales were roughly the same in the fourth quarter, not real growth.

But we did get some -- we did have some new dealers enter us in the fourth quarter, and traditionally, when we have a new dealer entering, as we've spoke before, we do have a couple of months discount that we provide. So without getting into a lot of detail on the revenue for 2012, I will say that we'll come into 2012 a little bit stronger than we left 2011 because of those new dealers that we added and the discounts [indiscernible].

And what was the fourth quarter for the call monitoring subsegment?

About $1,050,000.

$1,050,000, so flat with Q3?

Roughly, yes -- up a couple of thousand. It was really more because of the Videofied products sales there kind of a little bit.

Not that they're significant dollar, but they kind of do go up and down $5,000 to $10,000 a month, but we're relatively flat.

Okay. And IVS was in your Q4 results or it was below the line as a sold business?

It was in our Q4 results.

And what was IVS's, I guess, 1 month, 6-week or so contribution?

I think the total sales were about $17,000, if I remember correctly, for the whole fourth quarter, and we got rid of it 2 weeks into the quarter, so it was pretty much not there.

And its operating loss for the fourth quarter was what?

For IVS?

Yes. I was just wondering if it caused a loss or not for the -- if it contributed...

Not really. I mean, we got about 13% margins, and there's not a lot of overhead that ran with that company.

So it wasn't bleeding us, Andrew, it just wasn't contributing.

It was a non-impact in Q4?

Yes, it was a non-impact.

And it's departure in Q4 similarly is a non-impact for Q1?

Yes, the biggest impact is a positive one and that our profit margins have gone up. But as far as loss of any cash [indiscernible].

I'm focused on cash flow. I don't -- margins are nice, but at the end of the day we got to stop the burn rate here sooner, rather than later, so...

No real impact, Andrew, on cash flow.

We'll let Andrew back in the queue then.

When we're taking a look at your 10-K '12 results versus your 9-month Q3 results, we're coming up with like $650,000 cash outflow from investing for acquisition of a business net of cash, et cetera. Are we looking at these numbers right?

Was there some kind of investment of cash outflow that's allocated or classified as such?

Andrew, I'm not sure I have that on my fingertips. I do know we paid out some amounts.

I don't remember what month they run the deferred payments on the CSSS acquisition.

Okay. And that's where it would...

That could have been that difference.

What covenants now are you remaining subjected to with the Chase borrowings? And how much is still borrowed from them?

Right now with Chase, we have actually borrowed, I believe, less than $20,000, $30,000 of actual debt outstanding. We have letter of credits with them.

We have our line of credit which are reduced to $250,000 at the end of the year, and then one -- a line out there that we weren't using, and we really use it very sparingly for international letter of credits for importing some of our inventory. We have about $150,000 worth of outstanding letter credits for some of our insurance coverages.

So we have that off the book type of exposure but actually debt would be less than $25,000 at this point.

So they shouldn't have any covenants?

We have very minor covenants. We have the covenant -- we have $1 million CapEx covenant and covenant that provides financial statements.

And we're also working on those. We just -- we're trying to get a lot of stuff done at the end of the year and now working with the bank.

I certainly understand the financial statement one, but for a bank that has that kind of loan of credit line with us, I don't see how they should have their fingers in our CapEx budget for anything.

As I kind of mentioned, that's one of the things we're working on with them as [indiscernible].

I would hope you would implore upon our esteemed large shareholder and chairman, he could pick up a phone and probably clear up that matter pretty darn quickly because that seems -- we're a public company, it's a little ridiculous on that.

It's not even a matter of clearing it up, Andrew. It's a matter of getting paperwork done at this point, and that's what we're working on, so it can't be [indiscernible] written 100%.

Now this Vermont lease option extension comes up in May of 2012, which is also when the owner of the property and our former divisional head is being sentenced on his -- on the environmental charges. Are there plans to continue the lease?

And does it depend on his sentencing in any way?

We -- I've conversations with him. We're not really making it depending on the sentence.

And it's kind of -- I don't want a disruption in the business, so it will work on a short-term solution within that facility. And then, we're working on a longer-term solution for the pepper spray.

Okay. And you've had a little bit of turnover at Central Station.

Over the last year, you made one acquisition. Obviously, the rights offering was partially marketed with the concept that with these new moneys would come in and get allocated towards acquisitions of accounts that would then get added to our existing state-of-the-art platform that had substantial excess capacity to take on more accounts.

And a lot of time has passed, have seen some acquisitions that were thought to be reachable weren't. We're exercising an investment discipline in what we want to look to and buy.

But can you give us a little bit of a layout or thoughts, or I don't know if Mr. Barone is on the line or not, what the Board of Directors is thinking with respect to areas of focus for allocating the moneys that were raised in the rights offering so that we could accelerate this company's return to sustainable profitability, but also that we could start optimizing the value of the company's sizable NOLs, which is a follow-up question, Greg, as to what the NOL balance is now -- the tax NOLs are up to?

Probably the last part first, Greg, the NOLs.

The NOLs, Andrew, are at about $51.3 million, right now.

Okay. You got $51.3 million, which we unless we turn sustainably profitable are worthless.

But if we could return to sustained profitability, the sky is no limit as to how long and how much shield we have from taxation. That $51 million goes a long way.

Exactly. And I can't speak for Richard, I'm sure he can cover off the past.

But I can tell you with the departure of Morgan, Morgan is working with us to close out some of the software implementations and et cetera, that we had initiated last year. I can tell you that now, spending some time with the staff out there, that the business development director, the gentleman that's running our administration and a couple of the other folks, are tremendous.

And basically, it's like a new day out there, that if a light bulb went out, they can be aggressive. They can go out.

I know I have spent more time that I had anticipated in the Anaheim location, but I feel energized about what we're capable of doing out there. And so with that regard, we are aggressively looking at what opportunities exist in that space and how we can go after them.

And I know Michael, who has over 28 years of experience in that operation, is like a fresh college graduate in his approach to dealers, new opportunities and also, new territories, so from that standpoint. But we are looking at that, that it has to have sustainability and profitability built into it, and I think we can do that.

So no particular acquisitions in the near-term horizon identified for bringing in new accounts.

Not close that I could speak to -- not close enough that I'd be comfortable speaking to. But I can tell you that we have some plans, and if they come to fruition, it would be tremendous in my opinion.

The issues that you're finding is that there are acquisition opportunities that exist that are either too big or the price movables, the RMR moveables are too high or there's just still a shortage of acquisitions, period?

I think you could say all 3, but I think my -- and this is like 3 months and a couple of visits out there. One is attitude because there's always a deal out there if you want to work hard enough to get it.

Two is allocation of resources that when prior you had one guy really trying to do that work and look for it. And three, is being aggressive from me on down that selling what we do, marketing what we do, explaining what we do to other folks, I don't know if that was really done in the past to be honest with you, Andrew.

I don't think people realize what capabilities we have within that discipline, and I don't think we ever talked about the great people that we have running that end of the business. So in my mind, it'd be too early for me to surmise to say it's this, that or the other thing.

I do know I'm bringing a much more aggressive, don't-take-no attitude to that organization, and they've responded extremely well.

Okay. I saw that the days outstanding on those inventories improved, but they still seem quite high at year-end, Greg.

What are the remaining risks of this industry? And what division is the biggest remaining risk, and why?

I'm assuming its video surveillance. I don't think monitoring has really got inventory.

And someone mentioned on the call earlier about close-out auctions and things like that. Have the risk on that inventory valuation, at year-end, already been taken into account?

Or is there a potential write-down coming?

Yes, Andrew, I think the risk gets minimized. As you mentioned, there's no real inventory in the monitoring station.

The Vermont operation Personal Defense pepper spray has very minimal risk. We pretty much buy just in time our products, and we almost manufacture just in time for shipment.

So there's really minimal risk there. The bulk of the inventory, as you mentioned, is definitely in the surveillance side of the business.

At the end of the year, we have that down to about $1.3 million with reserves. If you look at it, if you try and pull that apart, about $250,000, give or take of that number, is really the net amount of a much larger number that we have currently staged for and is actually in the process of being auctioned off.

We have about $1.6 million of inventory, again, written down to somewhere in the neighborhood of about $0.85 on a dollar that we're auctioning off, and we hope to get that completed within the next couple of weeks. Saying that, what have we left at Mace Security products is a little bit less than $1 million worth of products, which is equivalent to still a slow return than we'd like, but more recent products that we've developed or just in the last, say, 6 to 9 months.

So I think our risk has been minimalized. I think we have good reserves, adequate, and I really don't see -- because you're pretty conservative, I really don't see us having future losses or hits on the inventory.

And I think we will turn what we have now. We've really kind of stripped out the products that we're not currently selling anymore and really focusing on those more current products.

And that's taken, although as of the end of the year, what these auctions are occurring now in Q1 ended March or they're actually going to be Q2 ended June?

The auction will be actually in Q2, but actually kicked off on Sunday morning. We are going to a process where we're doing an electronic auction with an auction company, and we'll go through several stages of that.

And then in the couple of weeks, we'll end up with whatever is remaining at physical auction at our warehouse. So our goal is by the middle to, I guess, say, third week of April to be concluded with the auction.

Okay. And write-downs and reserves, so we're taking as needed by the December quarter reporting?

That's correct. We try to estimate as best working with the auction company, what we think our potential results are.

And we've recorded those write-downs as of the end of the year, really recorded most of them in the third quarter and minor kind of adjustment in fourth quarter.

Well, thank you very much, everyone, for joining our call. Again, this call will be available on the website for the next couple of weeks.

There's a dial-in number in our press release that we've put out last week, with that dial-in number. But it will be available 'til May 5th, if you want to relisten to anything.

And as always, if you have any questions, please contact John McCann or myself, and we'll try to be as helpful as possible. Again, thank you very much, and have a good day.