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Edited Transcript of MACE earnings conference call or presentation 2-Apr-19 2:00pm GMT

Q4 2018 Mace Security International Inc Earnings Call

HORSHAM Apr 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Mace Security International Inc earnings conference call or presentation Tuesday, April 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Medved

Mace Security International, Inc. - President & CEO

* Mark Elliott Barrus

Mace Security International, Inc. - Senior VP, CFO & Secretary

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Conference Call Participants

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* Andrew Evan Shapiro

Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member

* Thurman Willis

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Presentation

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Operator [1]

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Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Earnings Release Conference Call.

(Operator Instructions) Thank you. Mr. Mark Barrus, you may begin your conference.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [2]

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Thank you, Julie, and good morning, everyone. With me this morning is Gary Medved, President and Chief Executive Officer of Mace. Please visit mace.com Investor Relations/Transcripts & Presentations where we've loaded materials for this call.

Before proceeding, I'd like to point out that certain statements and information during this conference call will constitute forward-looking statements and are based on management's expectation and information currently in possession of management. When used during our conference call, the words or phrases will likely result, are expected to, will continue, is anticipated, estimate, projected and intended to or similar expressions are intended to identify forward-looking statements.

Such statements are subject to certain risks, known and unknown, and uncertainties, including, but not limited to, economic conditions, limited capital resources and the ability of management to effectively manage the business and integrate acquired businesses. Such factors could materially and 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.

I'll now turn the call over to Gary to comment on the summary of the fourth quarter.

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Gary Medved, Mace Security International, Inc. - President & CEO [3]

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Thank you, Mark, and welcome, everyone. This is our first earnings call as a new management team here at Mace. I am thrilled to be part of the company that has such an iconic brand and is a market leader in the consumer, law enforcement and tactical markets. When the board asked me to step into this role, I looked forward to the challenge of profitably growing this company by better understanding our customers and their needs. In the short time, since January of this year, that I have been CEO we have refocused on understanding our customers, their needs and how we can create better products to fill those needs.

With that, being said, our financial performance of 2018 was not acceptable, and our team is committed to understanding and fixing the causes underlying these results.

I will now turn the call over to Mark to discuss details behind the financial performance.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [4]

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Thank you, Gary. As to the financial highlights themselves, fourth quarter net sales were $2.836 million compared to $2.935 million of last year, a decrease of $99,000 or approximately 3%. This is also a sequential decline of 18% or $610,000 from third quarter sales of $3.446 million. The modest decrease in quarter-over-quarter sales was due to a combination of factors, primarily softness in our international sales and some softness in consumer sales, partially offset by strong performance in our custom business.

Gross profit for the fourth quarter of 2018 totaled $655,000 with a 23 percentage point gross margin compared to $1.423 million and 48% gross margin in 2017 and a gross margin of $1.497 million and 43% in Q3 of 2018. This represents a year-over-year quarterly decrease of $769,000 or 25 margin points. This is primarily due to inventory write-downs in the Q4 2018 of just over $400,000 as well as a shift in sales from higher-margin businesses to lower-margin channels.

Selling, general and administrative expenses for the fourth quarter were $1.306 million compared to $1.348 million in the fourth quarter of 2017, a decrease of $43,000 or 3%. Most of this decrease was attributable to the lower salary expense in the fourth quarter, partially offset by an increase in advertising expense in our e-commerce-related channels. As a result of the above, the company reported a net loss after tax of $1,859,000 for the quarter compared to a $30,000 loss in 2017, a $1,829,000 decline. EBITDA for the quarter was $1.749 million loss compared to an EBITDA -- a positive EBITDA of $74,000 in 2017, which amounts to a $1.823 million decline.

Turning to the full year 2018. Net sales for the year were $11,490,000 compared to $9,983,000 last year, an increase of $1.507 million or 15%. The increase was due to increased sales in our e-commerce channels, particularly our Amazon sales, and reflected a full year of sales from the Vigilant acquisition in October of 2017 and Washington Labs in March 2017, partially offset by softness in the International and Tactical.

Gross profit for 2018 totaled $4.356 million with a 38% gross margin compared to $4.403 million and 44% gross margin in 2017, a decrease of approximately $47,000, 6 margin points. Gross margin was impacted by the $406,000 inventory write-down in the fourth quarter and the sales mix of increased sales and our lower-margin custom business, partially offset by increased e-commerce sales in 2018, which carry a higher gross margin.

Selling, general and administrative expenses for the year were $4.754 million or approximately 41% of sales compared to $4.12 million or 41% of sales in 2017, which is an increase of approximately $632,000. Higher advertising and Amazon fulfillment expenses were the chief contributor to the overall increase, but SG&A as a percentage of sales was flat, in part due to increased sales.

Net loss for 2018 was a loss of $1.946 million compared with a net loss of $65,000 in 2017. On a non-GAAP basis, EBITDA in 2018 was a loss of $1.523 million compared to income of $248,000 in 2017.

Adjusted EBITDA was $172,000 in 2018 compared to $377,000 in 2017 after considering adjustments primarily for impairments in note receivable, slow moving and obsolete inventory adjustments, certain other noncash asset write-downs and an adjustment for noncash compensation expense.

I will now talk -- turn the call back over to Gary, who will discuss outlook and priorities for 2019.

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Gary Medved, Mace Security International, Inc. - President & CEO [5]

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Thank you, Mark. As stated previously, we are not satisfied by the financial performance in 2018, but we are encouraged that we have recognized many of the issues on our balance sheet and have a good starting point in 2019.

Unfortunately, in Q1 of 2019, we expect to recognize additional expenses (inaudible) our performance due to contractual severance arrangements and related legal fees relating to our CEO transition of about $300,000. We do not foresee any further financial impact from this transition.

On a more positive note, we believe that we have now closed the book on our successful acquisitions of Washington Labs and Vigilant and that those acquisitions will help grow the top line, as previously discussed. The Washington Labs acquisition will serve as a platform to help us grow our custom business, which allows us to serve customers that we would not otherwise would be reaching. Vigilant has also helped us grow our e-commerce channel, which is increasingly important as the traditional retail industry continues to evolve in the face of e-commerce and online shopping.

We intend to focus on better understanding our customers and their product needs as well as to invest in promoting and our industry leader -- leading Mace brand in 2019. We have engaged outside branding and content marketing experts to help us engage and understand our customers as well as better tell our brand story. We expect these actions will result in immediate paybacks through increased sales, better traffic to our e-commerce sites and increased traction with customers.

In addition to the management changes announced in January, we have also recently strengthened our internal management team and capabilities by adding a talented Vice President of Sales, Julie Koenig, who will bring strong retail sales leadership to Mace.

We have also improved our operations team by rededicating Carl Smith, who previously led both finance and operations, into a pure operations role. Carl is rebuilding -- is building our operations teams, and we are currently working on shop floors and operational improvements using both in-house and outside resources. We expect this to result in measurable cost improvements in 2019.

Regarding our 2019 outlook, we completed the small previously announced Tornado acquisition in Q1, which we have largely integrated and are now working on expanding and growing customer relations with Tornado customers. I expect we will pause any significant new acquisitions while the new management team continues to work on our customer focus, brand and operational initiatives.

We also expect to return to a positive EBITDA position in 2019, although we will not be providing any specific guidance this time.

At this time, I will stop and open the line to questions. I would ask each caller to limit themselves to one question with one follow-on to allow everyone a chance to participate. If we have additional time, we will try to get you back into the queue.

Julie, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Thurman Willis, a private investor.

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Thurman Willis, [2]

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My question is with the vast experience that you 2 gentlemen have and your accomplishments in the past, why did you choose to come to Mace? And what do you see going forward?

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Gary Medved, Mace Security International, Inc. - President & CEO [3]

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Thank you, Thurman. This is Gary. The #1 thing that stood out for me, first and foremost, was the brand. This is a brand that we all know has been around for decades. It was the original, it's the authentic pepper spray. It has a history of innovation. And when I was first reached out to about this opportunity, my initial homework told me very quickly that it was under-leveraged. I thought the company could be doing a lot more in a lot more channels. The brand just looked like it needed lifted and my history has been, Thurman, one of taking on challenges and really digging down to bedrock and starting to build from that point. And it's been everything as I expected since I come in here and not a moment goes by that I'm not happy that I took this role. It's an exciting challenge and a powerful brand to be working with. Mark?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [4]

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And I would just add to that, Thurman, that I was attracted by the same things that Gary saw. I was also attracted. I think the business fundamentals here are very strong. This is a conservative balance sheet. There's not a lot of debt on the balance sheet. It has shown -- the company has shown the ability to increase sales in the core businesses. Once it's pared back to the core businesses that we now have over the last several years, the -- I think there's both a tremendous undervaluing of the company as well as a tremendous opportunity to increase financial performance. And I think our -- for example, our top line growth year-over-year has shown that this is a business that's very capable of stronger, increased financial performance in the coming years.

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Thurman Willis, [5]

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And if I could ask my follow-on, I know that both of you gentlemen, with your backgrounds, have done this turnaround before. 99% of the public, in my opinion, view Mace as a spray on a key chain and have no idea of the vast array of products that Mace has. What are your plans to educate and promote our products to increase those sales?

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Gary Medved, Mace Security International, Inc. - President & CEO [6]

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Thanks, Thurman. This is Gary again. There are basically 6 parts to the sales cycle. And the first 2 are awareness and education, followed by get it on the shelf and hopefully, somebody buys it. I think, Mace, over the years, the recent history has been the step 3 and 4, if you will, with not a large focus on the first 2 steps of that process. And since we're now working with an external marketing group, that is their primary role, is to establish awareness of the brand and educate the public through multiple channels, okay, not just online but through advertising, podcasts, whatever it may be. But as time goes forward, you're going to see and hear more about the Mace brand, and it's going to be primarily focused on the awareness and the education side. We have a huge opportunity out there. When you think of the generation that developed the Mace brand versus the generation that's out there today, more apt to purchase a product, there's a huge opportunity for us to create that awareness, educate them on the different products we have and ultimately, driving sales either online through one of our e-commerce channels or brick and mortar. And I think it's all going to start with the awareness and education process.

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Operator [7]

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(Operator Instructions) Your next question comes from the line of Andrew Shapiro from Lawndale Capital Management.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [8]

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Can you hear me okay because I'm calling in from the road?

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Gary Medved, Mace Security International, Inc. - President & CEO [9]

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You sound fine, Andrew.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [10]

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So on prior calls, since Roll-Kraft became the lead investor and Chuck and Sanjay headed up the board, it was discussed that a long-term strategic plan was in process of development. It's been a full year since their purchase from Ancora and the board leadership change, and we've now had a hiring of a new CEO and a CFO. And certainly, they interviewed you guys extensively. And then you've been inside and formulated your own views along with the vision they've shared with you. I had asked this several quarters ago. There's time that's come by now. I'm hopeful there's not a long period, if there even has to be any period. But can someone provide us some insight into the strategic plan? Or at least what products and/or segments or channels are to get greater resource allocation and lesser resource allocation? There was a lot of emphasis on the delayed or missed opportunities regarding Mace Tactical. I don't really think in your script there was much mention of it, so I'm going to specifically ask about Mace Tactical. But can you guys provide us some insight on the strategic plan or the focus that you're formulating in carrying out the vision that I'm sure the board has shared with you when they interviewed and screened you guys and decided you were the leadership team to run with going forward?

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Gary Medved, Mace Security International, Inc. - President & CEO [11]

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Thank you, Andrew, Gary here. First and foremost, from a strategic standpoint, okay, product -- as I mentioned earlier, product was getting on the shelf in certain channels. If you want to just look at brick and mortar retail or whether it's consumer sporting goods, there's a difference between just getting product on the shelf and truly engaging with your customers, okay? And I'm talking about potential customers, customers that never thought they would need or want your product and so forth. And I think, first, brick and mortar retail offers us a huge opportunity for placement out there, but we got to step back and actually develop a strategy on why would a consumer need or want this product. And I think once that's developed and working with our marketing group and again, creating the awareness and the education out there, the 2 really go hand in hand. I can tell you, after the first 10 weeks on the job or whatever it's been, that I'm even more excited about our opportunities out there. And we do have a lot in the chamber, so to speak, that we're developing. And there's a full slate of projects. We're not short on projects in terms of pure retail. We look at e-commerce, whether it's one of the big marketplaces out there or our own website, mace.com, and the opportunities and the growth that we've experienced there. And as time goes forward, more and more people are shopping online, and we're setting ourselves up to be ready for that. And again, it's going to get back to the awareness and education of we'll be able to do more of that on mace.com than we would on other marketplace sites out there.

To touch on the Tactical side, first and foremost, the law enforcement -- the LLM market to us remains a very valuable part of our portfolio. I'm continually -- continuing to evaluate it. We do have some pieces in place. And as time goes on, working with -- closely with tactical folks on the outside of the company, we are developing a strategy that, for the most part, right now, it's being implemented, okay, as we speak. I realized the program itself has had stop and go over the last few years. There are reasons for that. And just when we really got in saddle and started kicking it into gear this year, then we had the government shutdown, which impacted ATF and paperwork and so forth. But now we have every -- we have the right people in the right seats, on the right track going in the right direction. I'm not going to say we're done with the evolution of that program, but we are continuing -- we're going forward with it. Like I said, it's important. I see some growth opportunity there. And we're just in the beginning phase of getting this thing rolling.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [12]

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And I'll add to that, Andrew. The board was -- in the few meetings that we've been part of early has been extremely clear and extremely focused on their expectations to improve financial performance. So one of the first things that I wanted to do was to take a very hard look at our balance sheet to ensure that we're where we need to be and that we're not going to have a lot of noise impacting performance further on down the road. And that's why for the fourth quarter of 2018, we did an extremely detailed review operationally of our inventory all the way down to things on deposit across the world, amounts that we had capitalized in prior periods and really took a hard look and said, "What is the benefit for those? Are those still good assets? And is this still good inventory?" So as a result of that review, you saw that we took a fairly significant inventory charge that was not only related to inventory but also some of those other deposits that resulted in a noncash charge. But by the same token, we took a hard look at 2 of the bigger assets on our balance sheet, which were those from 2 of the businesses that were divested several years ago. And unfortunately, both of these particular notes were called into question really in the fourth quarter. I don't want to go too much into the details about what has transpired, but rest assured we're going to actively pursue the obligations under these notes. From an accounting perspective, we felt there was enough significant doubt on their flexibility that we reserved not quite in the entirety but the vast majority of the amount. So our starting point is we think we have a clean balance sheet going into the second quarter of 2019.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [13]

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Okay. So it sounds like those things now still remain as a -- we'll call it highly contingent assets. But with the write-off of those notes receivables and other early-in-license deals, what are your views regarding monetization and licensing of the Mace brand? That seems like a huge high-margin opportunity that's not been effectively exploited. And also kind of over the next 3 years, no one's asking for near-term guidance, what do you see as a realistic EBITDA margin target for the reenergized Mace that you both envision?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [14]

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Andrew, I'll tackle a little bit of that. So on the licensing, I think we all fully realize what the performance that -- financial performance that could happen in the business, specifically from licensing. You're absolutely right. If we're able to bring in royalties or other arrangements that would result in, call it, relatively quick returns on the income statement, that would have the advantage of not only helping financial performance and adding resources but also absorbs some of the tax net operating loss. Having said that, we have to be very careful with the value of our brand, which is our biggest asset, and be cautious with licensing transactions. We have some experience in the past with licensing transactions and we want to continue to learn from the past. So I think it's fair to say we're going to be pretty selective. We certainly see that licensing is an attractive, call it, additional revenue stream or additional channel, if you will. I think at this point, we're going to be fairly cautious on that.

And in terms of sort of projecting where we go, we're still new here. The vision is certainly that there will be a compounded increase in EBITDA year-over-year, which will come not only from top line, but also performance in the expense category and pretty much all throughout the company. It's really too early to say. I can say that we do know early on -- it's the end of the first quarter. We are in the process of wrapping up the first quarter, but we're pleased to see that we had a very nice top line performance in the first quarter that the percentage increase year-over-year from '19 to '18 is very much in line with the 15% growth that resulted annually between '18 and '17. So we're continuing to see that increase in top line performance here in the first quarter of '19. I think beyond that, in terms of EBITDA, it's very hard to say where things will go year-over-year, and we'll continue to keep an eye on that.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [15]

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Okay. I'll back out. I have some other detailed questions, but you've addressed the tax NOL. Can I just quickly ask what the level of the tax NOL is? And how much is expiring in the coming year or 2? And then I have other questions, but I'll back out.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [16]

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Okay, sure. I'll cover that one real quickly. So the tax net operating loss coming into 2019 is just around $60 million in gross, which, obviously, we wrote it off on our balance sheet so you won't see it there. But if you consider a 20%, 25% tax rate, that gets you in the mid-$20 million value with that asset. Expirations beginning '19, and they're a couple million dollars a year. The actual -- there's actually a schedule back on Page 27 of our financials that shows the specific NOL year by year. So we have to figure out where we are in '18 tax-wise. And hopefully, we won't be adding to that, although we're not 100% sure on that. If we do, it probably won't be significantly. The real -- as you know, Andrew, the real key to the tax net operating loss is to monitor, can anything happen to it? New NOLs don't have expiration dates, but these old guys do. So we keep a very close eye on ownership changes that could potentially limit the use of this. And we do have a little bit in the bag of tricks to play with near-term expirations. Unfortunately, there's not a ton of things that you can do with a company the size of ours. So really, we look at it like the most important things are make money as soon and as quickly as possible to help absorb that, and then keep an eye on the ownership changes.

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Operator [17]

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Your next question comes from the line of Thurman Willis, a private investor.

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Thurman Willis, [18]

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I have 2 other questions. You've talked about branding. And the Mace brand alone, to me, appears to be worth the market cap of the company, which is around $20 million. So I'm saying that the stock, to me, is highly undervalued. What are your specific plans to get more fans in the stands? In other words, what are your plans to get new investors involved with Mace? Because the limited investors now have been around for a long time, and we just seemingly don't have any attempts in the past to bring new investors in the fold. So what are your plans for doing that, please?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [19]

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Yes, Thurman, this is Mark. I'll cover the investor one, then I'll flip it to Gary to kind of talk about strategy a little more specifically. So the investor one is a tough one. Given the size of our company and given the OTC trading market, it's very difficult to attract institutional investors to a company of our size, and so the traditional bigger company approaches of Investor Relations don't work too well here. So what -- the main thing that we're going to do is to increase our performance so that over time, the company becomes more valuable and that the bumping around in the stock price that you and others have lived through for quite some time can be overcome. And that with increased performance, that will attract more investors. But in terms of concrete things, we're not, at this point, going to go out and have a big, heavy-duty, third-party-funded Investor Relations bonanza in terms of hiring parties or trying to make a big splash. We just don't have a great story to tell. I mean, we have a great company and a great brand name and great assets, but they haven't frankly been capitalized on to the degree that the performance is there. So to -- our plan is to prepare ourselves to be ready for when our performance increases, and we'll do that through potentially things like selective roadshows, participation in selected OTC conferences. We'll do it very cost effectively. We don't -- again, we don't want to spend a lot of money on that given all those handicaps, but we want to be ready for when performance does turn, that we can capitalize on that. So Gary might have some more thoughts on that.

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Gary Medved, Mace Security International, Inc. - President & CEO [20]

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Thank you, Thurman. To kind of piggyback on what Mark was saying and kind of flip it a little bit to more on the strategic side, you heard our plans already and what we're doing for just pure retail, whether it's brick and mortar, sporting goods or whatever, consumer. And I touched a little bit on the tactical side of the business, but other growth opportunities that we have here include our international segment, which I am 100% fully dedicated to growing this segment going forward. We continue to add new distributors in select markets. I don't want to wind up with 50 distributors in one market. We're being selective on who we're going to keep as a so-called master distributor, if you will, and opening up in new markets where we don't have a distributor at all. And the one thing I know for sure is this brand has worldwide recognition. We were at SHOT in late January right after I came on board. I met with a large number of international distributors that are current distributors as well as want-to-be distributors, and it didn't matter what part of the globe they were from, the Mace brand is well recognized. And in addition to the international side, we touched earlier on the e-commerce side. Whether it's one of the large -- very large marketplace sites that you can go and find our product or mace.com, this is being -- the e-commerce plan is being headed up by Mr. David Happe, who's been with the company since the Vigilant purchase. He continues to drive e-commerce, and this whole segment is going to marry very nicely with the marketing program that we've recently kicked off working with an outside firm.

And I think the last piece of business that has largely gone unnoticed has been the private label side, from the Washington Labs acquisition. This acquisition provides a huge opportunity for us to get into other areas where we might not get in with the Mace brand to serve customers that have their own brand, that don't have filling or assembly, packaging, production. It goes -- it taps us into international audiences that do have their own brand and they just want to purchase filled products from us. And I think since the acquisition, it's largely gone unnoticed in terms of just having a growth strategy of its own, and we're currently working on that as we speak also. So when I look at all these channels, whether it's retail, international, e-commerce, private label or the tactical side, we really have some strong rocket boosters here for this company. And as I mentioned earlier, it's about getting the right people on the right seats on the right track and everybody going in the right direction, and that comes with focus and discipline, and we're bringing a fair amount of both of those to the Mace brand. So although it may appear that we're doing a -- to the outside audience that we're doing a reset of sorts, we are in different areas because it required us to do so if we wanted to grow. Some channels, we got a couple products out there. I'm not happy with having a couple products out there when we could have more products. And I spent a fair amount of the last 2.5 months in digging down and trying to uncover the issues prohibiting us from having more than a couple products in any channel out there. And we're in the problem solution mode at this point. And like I said earlier, we -- I pretty much dug down the bedrock that I feel that I have something firm that I can start building on now. And with these latest talent acquisitions, if you will, we have the right people in the right seats to help us with that. So I hope that gave some clarity on the overall strategy as well as Mark's comments on the investors side.

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Thurman Willis, [21]

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It does. If I could just briefly be a little more specific. I fully understand that we're too small for institutional ownership or -- even though there are micro institutions that purchase stock, but what about -- I'm willing to do a nondeal roadshow in Atlanta with individual investors. And I think many individual investors, if we have weekly conferences with potential individual investors, they like to pick up stock before the revenues increase and -- on the hopes and the talent that you bring to the table that it will happen. So I see that there are many people out there that if knew about Mace, individually would buy the stock. Can both of you just briefly comment on that?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [22]

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Yes, Thurman. I think that we are open to nondeal roadshows that are cost-effective, where we can reach out to people. I guess I will comment that we do have a fair amount of inbound interest at this time that we have been fielding inquiries, more than one, from people that are interested. So I don't want to make it seem like there's -- we're ignoring that. We have -- certainly there's a network of investors that are interested in the company. And, as you said, I think a lot of them perceive that the time is right. The challenge that comes up from there, obviously, with the trading volume that we have, it's very difficult to add any significant stakes. True to the market it is really more efficient and pretty much needs to be done through private transactions. So we're always happy to help, to the extent we can, connect people that may be interested in our company. But I do want to make it clear that we receive inquiries fairly regularly from people that are interested in significant stakes that do inquire about becoming investors.

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Operator [23]

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Your next question comes from the line of Andrew Shapiro from Lawndale Capital Management.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [24]

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To drill down into a few of these items that, Gary, you to just kind of answered either mine or Thurman's questions on. Can you guys discuss with a little bit more color the recent acquisition of Tornado Security, past relationship, if they're a fill customer? What are the benefits now of acquiring a fill customer in terms of customer -- their customers acquired? Any unique products acquired? I think, Gary, you talked about looking for products to put into different channels. Tell us -- can you tell us a little bit more about that acquisition and I guess, where it would be? Is it more personal defense on the consumer side?

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Gary Medved, Mace Security International, Inc. - President & CEO [25]

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Thank you, Andrew. To the extent that I can speak specifically, what I can tell you is Tornado, first of all, so far has been successful. It's been integrated into our operations here. I guess I can just qualify it as a small but strategic acquisition. It, first and foremost, gave us another brand that was recognized out there in some markets around the country, maybe not nationally or globally, but there are some hot pockets of opportunity out there. Number two, it did open us up -- it got us into a couple channels, if you will, that we weren't in prior to the acquisition. And then if I look at the nature of the business going forward, there is opportunity to grow that brand with the products that they had and the channels that they were in and complementing it or kind of leading it -- using it as a lead-in to get even more products into those channels. So I think when I look at it overall, it wasn't a huge acquisition. But again, it was small and strategic. We have plans going forward for Tornado that I can't get into details right now as we're speaking, but you'll see those evolve as we go forward. I think the Tornado brand is going to play a pretty solid role going forward. Now that being said on the brand and the channel side, there were a couple products who came over that they were being developed. We're kind of like in the middle of researching those and really doing an in-depth analysis of what we have and what we can do with it going forward. There are products that they had on the drawing board, so to speak, and -- that weren't finished and we're delving into those as well. That's about all I can say about Tornado at this point, other than to just summarize once more, small but strategic.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [26]

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Okay. And sticking on kind of the consumer side but segueing over to the Internet. With your new website, it was activated at the end of June. At the November call, which was Q3, we didn't have all that much visibility on it, but the visibility that was reported was some really nice growth in metrics and things. Did the growth in metrics in Q3 continue and so that you have some pretty decent growth numbers to report for what the website did like year-over-year? On Q4, the average unit price, was it continued to either stay at that higher level or even grow further? And what do you need to do to expand on and increase online sales further?

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Gary Medved, Mace Security International, Inc. - President & CEO [27]

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Thank you, Andrew, Gary here. First, let me say that the website, as we look at it, we realize that the improvement that was made mid-last year, I think we have some ideas and thoughts on how we can make it even better going forward with minimal amount of effort and cost. That there are things that we'd like to do differently. That being said, you're right, the growth did step up in online revenue at the third quarter mark of last year. What I can tell you without getting into specifics is fourth quarter continued that trend. And the first quarter of this year, working with the outside marketing group, because their efforts have been kind of like in place since late last year, if you will. We've seen even a higher increase in the first quarter of this year than we were experiencing last year, a notable improvement. In addition, the average ticket price has increased substantially also. So I'm not one for sharing detailed numbers. I don't like to do that. But suffice it to say, we've continued to grow in both traffic, click-through, user conversion, average monthly users, average ticket price. The trends are really nice. And I think it's only going to be better across all e-commerce sites as more and more of the marketing program kicks in.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [28]

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Yes. And I think to follow on to what Gary said, I think that -- and we track 1 million statistics around our website, but it's important to think of the e-commerce channel in general. So e-commerce, we don't break it out. It's in our consumer customer types in our disclosure. So it's logged in there with many of our other channels. But it's important to think of -- we sell on Amazon, we sell on Walmart, we sell on Dick's. We sell on a number of very well-known e-commerce channels. And the web -- our website is a very, very small piece of that. What's important to the website is not so much -- direct sales are nice, but what's important, it's the front door of the company, it educates about products, it tells people where things are available, and it really tells the story of the Mace brand. And then they may choose to click through and purchase from Mace, they may choose to go on Amazon because they're more comfortable with Amazon. So it's a piece of the strategy that's important. But at this time, it's not a significant contributor, although, as Gary said, it is growing in terms of actual sales revenue. But it's much more important to us on an overall e-commerce basis.

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Gary Medved, Mace Security International, Inc. - President & CEO [29]

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And keep in mind, Andrew -- excuse me?

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [30]

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No, go on, I stepped on you.

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Gary Medved, Mace Security International, Inc. - President & CEO [31]

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Just one final comment to wrap that up is the mace.com site is where we have the most control in content. And as time goes forward, that's really going to be the portal for educating our audience out there. We can do a lot more with that site, and we're excited about some of the programs that the marketing folks are coming to us with. And just stay tuned, okay? But I think it's going to keep growing nicely and get even stronger as we go forward.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [32]

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Moving over into Mace Tactical. Where is the company on the ability to store and sell an expanded line of less lethal munitions and other consumables? Can you discuss the barriers, approvals and the milestones that are still in front of the company? Or are they now done? And did that happen in time to get rolled out for the SHOT Show? Or is there something that -- where there'll be some other shows we're going to have to wait for Mace to roll that out at and when might that be?

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Gary Medved, Mace Security International, Inc. - President & CEO [33]

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Thank you, Andrew. The -- in terms of storage and rules and regulations, ATF involvement, that's all completed, okay? We have a government-regulated storage facility that is online manned with Mace brand employees. And with a product line, we just recently updated our catalog. The print version, we're going to wait to come out at the end of this year for 2020, but the digital version is finalized. Our price sheets have been finalized. Our product line has been finalized. The website is going through some changes. Those are kind of like ongoing. We have our selling organization in place. And SHOT, back in the third week of -- I'm sorry, third week of January was kind of like the relaunch of the initial relaunch, which was a relaunch of the initial launch, that we're probably 70 days into a hard launch with people in place, product in place, facility in place, regulatory environment, all the boxes have been checked. And we are actively out there now. So there may be other products we add down the road, okay? It's like every product line that we have is going to get constantly reviewed going forward. But I think we have a nice, stable product line right now to give us a start out there. And for the audiences that we're focusing in on, I think we have the right mix of products for that audience.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [34]

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Excellent. And it's longer sell-through, but is there any initial feedback now that you can offer the full menu that was said to have been the impediment before?

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Gary Medved, Mace Security International, Inc. - President & CEO [35]

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Yes. The -- first, you're correct. It's a longer sell-through. This isn't an impulse buy. And as you know, whenever you're working with any government agency, whether it's a City Hall, police force, whatever, there's a process that you have to go through. We've been at it long enough that I can tell you, we've narrowed it down to how long our selling cycle is, we know what our average order is and we know what our potential market size is. And that's what we're going after. And the feedback, I can tell you, has been positive, okay? One of the folks involved made a comment a couple weeks ago that since she's been involved with this the last 2 or 3 years, that this is absolutely the most traction that she's seen, the most conversation going on, the most inquiries coming in. So whatever we're doing, it's working or starting to work, okay? And I can't go into too much more detail than that. But once more, I think we have the right people in the right seats going in the right direction at the right time, so.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [36]

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Okay. the Mace Alert 911 was a product that had -- it seems to have a bunch of potential. I'm trying to get a feel with Chuck and Sanjay or Roll-Kraft and the board and now you guys feel as to where it fits in and to what extent do you see take-up that it'll be worthwhile to deploy marketing and other sales resources to move that product? Or is that one of the products that -- were there any products that have -- that you decided to excise with the inventory flushing?

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Gary Medved, Mace Security International, Inc. - President & CEO [37]

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Thank you, Andrew. First, the product has not been flushed, okay? The -- there's a couple different issues here. One is the current technology right now for the Mace 911 uses a 3G network. And as we know, that's an old network. LTE is the thing now. 5G is coming, spotty around the country, but that's going to just cover the occurrence in Wi-Fi when it's fully implemented. As far as the current Mace 911 that we have, we continue to sell at a modest pace, okay? Technology being what technology is as it goes on, it just keeps getting better, faster and so forth, not only in the transmission but in the product itself. And if any of you out there have the newer iPhones, the iPhone 8 or whatever, just hold the 2 side buttons, one on either side, for a few seconds and your 911 comes up on your phone. So the cell phones go -- keep getting better and faster, and the company is recognizing that there's a need for everybody to have access to 911 in a matter of a couple seconds. That's going to start curbing the appetite for a pure product like Mace 911. Also, the cost that comes with the Mace 911 is not a cheap item, and I think there's a hurdle for that. So the product is out there. I'll be honest with you, it's not getting a huge amount of attention right now from us, but it is out there. I think we have much greater opportunities in other areas and other products and other channels and let technology play this one out as time goes forward.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [38]

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Well, I appreciate that rational response that we hadn't heard in the past. So that's good to know. Mace launched a safety kit and other products for schools, homes, businesses that included your Pepper Gel product, which is something that's effective from 25 to 30 feet. So you start getting to a distance that there's some standoff capabilities. Can you talk more about the inroads that your pepper spray and other products, in particular, and what you're doing to address the large and sizable market need for school and business safety -- security, I guess?

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Gary Medved, Mace Security International, Inc. - President & CEO [39]

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Thank you, Andrew. This is one of the areas that's high on my radar, okay? And if you give me a few months, I can talk about it more down the road, okay? We do have the products, we do have the technology. I love the Pepper Gel. As most of you know out there, it was invented by Mace. The trademark was trademarked by Mace back in '05. And the thing I can tell you concerning Pepper Gel, we're looking at all aspects of it, how we stack up to competition or more so, how they stack up to us. We're looking at the branding of it. We're looking at the trademarking of it. And I think we have a powerful story there. And I think it also has its place in different markets out there, whether it's school or business or whatever. So this is something that's going to get more attention going forward, but we're just in the very early stages right now of a brainstorming strategy at that point -- or at this point.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [40]

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Okay. So I mean, I'm glad you're able to articulate. This is what I was getting at early on in the questions, like where is the focus? Where is it moving forward? Where is it -- I understand 911 might not get resources versus it sounds like you're excited about the Pepper Gel in the school and business or site security type of opportunity. So that's good to get a color on.

And on international, and then I'll back out in the queue, can you discuss international? Kind of, I guess, what is working or what is not working? And if the international numbers that you had talked about were -- which were flattish kind of in Q4 or maybe down, it wasn't clear, what was the currency impact on the international, if any? And if there was some, what was the year-over-year local currency revenue experience?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [41]

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So I'll tackle that quickly. We sell in U.S. dollars, so there is very minimal from international direct sales impact on currency. And year-over-year, it's about a 3% growth, so it's relatively flat in terms of what we see. But again, this is -- I think it's early days in some of the reorganizations in the sales network that Gary talked about, and international orders are starting off pretty good in '19. So more to come on international.

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Gary Medved, Mace Security International, Inc. - President & CEO [42]

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Andrew, just more detail on the overall market. The -- what is working -- I can tell you what is working is, number one, the thirst for the Mace brand in the international arena is working. I think Mace, over the last couple years, has had some hiccups in terms of deliveries or shipping or whatever we want to categorize it as. My approach to international is similar to what I've done in the past in previous companies. And it started with an analysis of the distributors that we've had on the books for a while and their performance gauged against what their performance could have been given their, say, country size, state of politics, so forth and so on. And I think as we go forward, we're going to wind up with dealers that are -- or distributors that are large, have done a great job with Mace and are doing a great job in terms of building a brand in their market. I think what hasn't worked in the past is just, for whatever reason, lining up every distributor that ever wanted to sell a product without doing a fair amount of due diligence on their company. And we kind of go through that screening process now. When they first contact us, a lot of the information gets sent up to my office. I strike up a one-on-one, communicate with the principals of that company, and we go through -- and I'm looking at their -- what is your strategy for growing, how you can reach out to the far corners of your country, talk about your marketing support, trade show support and so forth and so on. And as Mark said, '19 has started off strong on the international side. We've got a number of new distributors starting off. And these guys -- their feet is going to be held to the fire in terms of initial minimum orders, subsequent orders and your annual targets. I'm not a big fan of one and done, okay? So on the international side, I'm just taking a longer-term strategic look at the markets that they serve and coupled with the due diligence information that we have from them and their strategies and then making determinations from there. So I think like a few of the other programs we have, there -- these things need time to ramp up. They need time to get legs. They need time to catch on to things that we are -- buoyed by the initial results, okay? So I'm going to file that under the category in future calls we can share more information and hopefully, it'll be satisfactory. But I think we're on the right track right now for international.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [43]

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Now international seemed to have had a kickoff or was doing some work in Europe. But also, there was press coverage of India that may have had enough quarters to have any legs or it may be that, that was an example of not having the, we'll call it, the thoroughness and the backup wings to its back that you are looking for in future distribution arrangements. Has India continued to grow or has it gone flat?

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Gary Medved, Mace Security International, Inc. - President & CEO [44]

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Well, thank you for touching on India, Andrew. India, right now, India wouldn't have met my criteria, okay? It would have required a lot more work. And all I can -- let me end the call with this comment, that India is on hold right now.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [45]

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Okay. I know you're going through everything that you inherited here and so I'm just trying to find out what -- what's a keeper and what's not.

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Gary Medved, Mace Security International, Inc. - President & CEO [46]

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Absolutely. It's a very fair question because I know it was out there over the past year. And I think, strategically, we just need to take a harder look at it right now and see where we're going to go with that one. But for the time being, the market's on hold.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [47]

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Well, I'm looking forward to hearing the initiatives that cross through and pass your criteria and then get the appropriate support and legs.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [48]

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Julie, I think at this point, we're pretty much out of our time.

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Operator [49]

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Okay. As a reminder, the recording of this call will be available 2 hours after this call has ended. The transcription of this call will be available in 2 business days. Thank you.

I will now turn the call back over to the presenters.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [50]

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Thank you, Julie. So at this point, that wraps up our call. Thank you all for your participation, and have a good day.

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Operator [51]

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