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Edited Transcript of MACE earnings conference call or presentation 8-Aug-19 6:00pm GMT

Q2 2019 Mace Security International Inc Earnings Call

HORSHAM Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Mace Security International Inc earnings conference call or presentation Thursday, August 8, 2019 at 6:00:00pm 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 day, and thank you for standing by. My name is Lee and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Earnings Call for Mace Security International, Inc. (Operator Instructions)

It is now my pleasure to turn the conference over to 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, Lee, and good afternoon, everyone. With me this afternoon is Gary Medved, President and Chief Executive Officer of Mace. Please visit mace.com Investor Relations/Transcripts and Presentations where we have 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 expectations and information currently in the 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, adversely affect Mace's financial performance. It could cause Mace's actual results for future periods to differ materially from any opinions or statements expressed during this call.

I will now turn the call over to Gary to comment on the second quarter 2019 financial results.

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

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Thank you, Mark. First, Mace continues its process of transformation. In the second quarter, we made progress on rolling out our new brand identity, our package redesign and we completed our website upgrade, while at the same time introducing our recent brand partnerships, Kuros! and USPS to our customer base.

In the second quarter, we also made a difficult decision to discontinue the less lethal munitions business. We made this decision in order to redeploy our resources in businesses that show a higher margin and more robust sales growth. We are continuing serving our less lethal customers in the [LE] and tactical communities through our Take Down Gel, Stream, Spray and (inaudible) products. This decision will free up approximately $20,000 per month of capital to redeploy. We have recognized the charge of $140,000 in the quarter for exit obligations, which are substantially complete at this time. The quarter also contains an increase in the reserve for uncollectible accounts, of which 2 are now in litigation to pursue recovery.

I'll turn the call back 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, second quarter net sales were $2,967,000 compared to $2,842,000 last year, an increase of $124,000 or 4.4%. 6-month sales increased to $5,679,000 from $5,207,000 in the 6 months ended June 30 2018, an increase of 9.1%. The increase in second quarter-over-quarter sales was due to strong performance in our custom, B2B and international channels, but was partially offset by softness in our brick-and-mortar and our e-commerce channels. The second quarter of 2018 also had $150,000 in revenue from a television shopping channel that we elected to not participate in, in 2019.

Gross profit for the second quarter 2019 totaled $957,000, with a 32% gross margin compared to $1.216 million and 43% gross margin in the same period in 2018. The 2019 period includes the $140,000 charge from manufacturing cost attributed to exiting the munitions business, which are booked in cost of sales during the period. This contributed to approximately 5-percentage-point drop in the margin. Remainder of the margin drop was due to an increase in manufacturing overhead and labor variances. Several of these variances we do not expect to recur such as a $50,000 rent catch up for a property tax case that was on appeal and the munitions exit cost of $140,000 as discussed above. We also expect these variances to improve as we've devoted additional resources to manufacturing efficiency and supervision. The actual direct margin for product sales before overhead was comparable period-over-period versus 2018.

For 6 months ended June 30, 2019, gross profit declined to $2.027 million from $2.204 in 2019, an 8% decline and is influenced by the same manufacturing overhead variances occurring in the 3-month period. Product margin before our overhead was also comparable in the 6-month period in 2019 versus 2018.

Selling and general administrative expenses for the second quarter were $1,408,000 compared to $1,085,000 in the same period last year, an increase of $323,000 or 29%. This increase was primarily due to higher accounts receivable reserve as previously discussed and the detail of this increase is reconciled in our OTC report in the MD&A discussion.

The 6-month SG&A costs for 2019 were $3.213 million compared to $2.298 million in 2018, an increase of 39%. The second quarter investments in our packaging redesign and website enhancements of approximately $50,000 are part of the net $32,000 decrease and the other factors discussed in the MD&A.

As a result of the above, the company reported net loss after tax of $606,000 for the second quarter compared to a $41,000 profit in the same period in 2018, a $647,000 decline. 6-month net loss for 2019 was $1.462 million compared to a loss of $293,000 in the same period in 2018. EBITDA for the second quarter was negative $481,000 compared to EBITDA of $140,000 positive in the second quarter of 2018 for a $621,000 decline. 6 months ended June 30, 2019, EBITDA was a loss or a negative $1.217 million compared to a $83,000 negative EBITDA in the same period of 2018.

Second quarter adjusted EBITDA showed a smaller decline of only $190,000 from $185,000 in '18 to negative $5,000 in 2019. 6-months adjusted EBITDA declined to 280 -- a negative $228,000 in '19 versus a $1,000 loss in 2018.

From a liquidity perspective, we saw a net decrease in cash and cash equivalents of $47,000 from December 31, 2018, to the end of the second quarter. Our line of credit availability was $650,000 as of June 30, 2019. We still anticipate CapEx spending for the year to approximate $100,000. Finally, our tax net operating loss carryover was approximately $60 million available for the second quarter 2019, which is unchanged from Q1 as we have not yet finalized our 2018 tax filings.

I'll now turn the call back to Gary, who will discuss outlook and priority for 2019.

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

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Thanks, Mark. Turning to operational issues. We continue to vigorously dialogue with our customers about our refreshed packaging, branding, our new branding partnerships. Some of our large brick-and-mortar customers have cautioned us about an overall category weakness in personal safety and we have not been immune to that. At the same time, we are investing time and funds into improving our e-commerce capabilities, improving our search results, website user-friendliness, product and category awareness and improved social media awareness. We believe these efforts will help us earn a greater share of the e-commerce channel going forward.

At this time, I will stop and open the line for questions. I would ask each caller to limit themselves to one question with one follow-up to allow everyone a chance to participate. And if we have additional time, we will try to get back into the queue. Operator, 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) And your first question is from Andrew Shapiro.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [2]

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My first question -- my questions initially here are about the new partnerships that you announced at the Annual Meeting and Investor Day and recently in a separate release regarding more detail about Kuros!, and I'm assuming down the road, you'll have more details about the U.S. Postal Service partnership. Regarding the Kuros! partnership, can you elaborate a little bit more on the partnership that you recently announced and what is expected from, I guess, basically both parties and the opportunities you see the company having in front of it to take advantage of?

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

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Well, I think first and foremost is the mission behind Kuros! and providing women in undeveloped nations pepper spray that allows them to defend themselves and enhances their personal safety as well as their mobility once they have these products in their hands. And we're proud to be a partner of an effort such as that and what it does for us over in the United States is it is a strong opening to brick-and-mortar retail in all the presentations that we've made and continue to make. That is our lead-in, explaining the program, the mission behind the program and it's been extremely well received.

Look, what we've done differently is we have redesigned the packaging and we've added 2 additional SKUs to the product line. Instead of just a pepper spray, we now have the alarm, and then we offer the alarm and the pepper spray in a 2-piece kit. We are looking at promotional PDQ displays, developing those, also being very well received by brick-and-mortar retail.

So I think to wrap it all up it's a strong mission – it is a powerful mission, we're proud to be partners with Kuros! and we just felt that there was a better opportunity to expand the product line and clean up the packaging design and make it just a lot more appealing to the consumer. So that's where we are with the program.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [4]

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So just for a little bit more clarification, is the initial placement or much of the placement where historically Kuros! brand product was already offered in the retail and now it will be a Mace Kuros! product? And if that's the case, what was the historical Kuros! revenues in their product line and the channels that Mace will now either produce or completely take over responsibility for?

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

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Well, those that are familiar with the program probably know that the previous partner of Kuros! has switched out the product. I would say switch off the product. They have a very similar-looking product that they, over time, have introduced to brick-and-mortar retail where the Kuros! product was. So as it stands, there -- that SKU or that hook space is being occupied, and we have to go into each of these brick-and-mortar retails and explain in detail about the new partnership and they're looking at holistically the Kuros! program as well as the Mace program combined. So their decisions have not been made yet on all fronts on where they will be launching the product, where they will be placing the product. It would be really beautiful if there was just one switch that they would shut one off and turn the other one on but as it is, they have a competing product out there right now that we have to deal with. So that's where we are with the program, but it's getting in front of all brick-and-mortar retail, all the buyers have seen it, that we talked to and continue to talk to. So it's a program that has to basically be reintroduced to them all over again.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [6]

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Okay. And is there already some takeaway about the fact that Kuros! and Mace in this joint partnership have a -- we'll call it a socially conscious brand and you are the ones who are providing pepper to women at risk in these developing countries and the former partner or supplier for Kuros! is not doing that. Is that giving you headway and feet in the door?

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Gary Medved, Mace Security International, Inc. - President & CEO [7]

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Yes, it does. But at the same time, they get it, they understand it. Where they did not have the program, they embraced it. Okay. But we're still waiting on buyer decisions and where they did have the program, as I said, there is a competing product in there, not Kuros! branded but Kuros! look-alike and we have to contend with getting them displaced before we get ours in there. As you know, Andrew, in retail, once something is in, something's got to come out.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [8]

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I guess really to add to that. It is -- the product is available in our e-commerce channel at the present time. So you can see it, purchase it on Amazon and on mace.com among others. So there has been -- that switch over has occurred already.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [9]

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Okay. And can you share what the minimum level of commitment or take Mace is obligated on as part of this agreement? And by when must that level be satisfied?

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Gary Medved, Mace Security International, Inc. - President & CEO [10]

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It's not really like a take-or-pay. It's a 12-month number that was negotiated, frankly, based on what the product had already been doing with a negotiated ramp-up period in it. So again, it's not a take-or-pay, there is no minimum commitment, but we set a level together with our partner that was felt by both parties to be pretty comfortable. It ramps up over time to get to a larger number after the first 12 months. So we...

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [11]

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It's a number you're comfortable with, it sounds like.

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Gary Medved, Mace Security International, Inc. - President & CEO [12]

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Yes. It is.

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

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Okay. And can you expand -- this is the last question on the Kuros! thing and I'll back out. Can you expand on the various, I guess, channels that this partnership then is expecting to generate revenues for Mace? And what products are kind of full retail revenue versus wholesale filled revenue, if any? And the timing of this revenue generation seems set to move this question forward. You've already said you're offering it on mace.com, amazon.com and maybe other e-commerce partners, and is it already offered and available in some retail? Or when does that start to occur and the revenues from that and are the margins from this net of the royalty comparable to the retail? Or are they more like the wholesale margins?

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Gary Medved, Mace Security International, Inc. - President & CEO [14]

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Well, there are a number of questions in there. First and foremost on the retail side, there's -- your mass retailers, your sporting goods retail, your hardware channels, they have all seen it. But as I alluded to on -- at our Investor Day Meeting, most of those, if not all of them, don't do their category resets until early next year. So from a meaningful revenue standpoint, we expect to start experiencing that first quarter next year in the second quarter when all these placements take place. And it's already available, as Mark had mentioned, on the e-commerce channels, mace.com and amazon.com, and if anybody adds a product quicker, okay, then all the better. But these major retailers, they all have a calendar that they go by when they do their category reviews, when they do their category resets, and so all we can do is control the stuff that we can control.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [15]

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And to the margin point, Andrew, I think as you probably know, the e-commerce channels are a lot closer to full retail margins where we capture most of that ourselves and, obviously, when we sell through brick-and-mortar, we are selling at a wholesale price. And I think, as I mentioned at maybe on the last call, the royalty number is -- it will contribute a bit to margin decline, but it is still in the neighborhood of all in what we would see overall for similar products. So it's not a burdensome margin by any means. It's something we're very comfortable with.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [16]

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And is this -- and then the other channel is international. Is that a product channel that we -- Mace Kuros! joint branded is offered into? Or are we just a fill on those?

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Gary Medved, Mace Security International, Inc. - President & CEO [17]

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No. International [is an opportunity] -- actually as Kuros! does his traveling around the world, he's meeting with our distribution partners. He's in -- I think he is currently in Africa right now and he met with our distributor over there. They are welcoming the program. And he was in the Philippines a month ago and took the program for them, and they're going to add it. And then speaking of international, we -- ultimately, I want to have one person in house that handles international with all our large distributors, and I'm close to getting that first and when we do, the Kuros! product line will become part of their offering. So it will get more attention than it has up to this point.

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Operator [18]

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And your next question comes for Thurman Willis.

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Thurman Willis, [19]

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For those that were not at the Annual Meeting or the Investor Day, it was well presented and Gary, you guys did a really good job. I was glad to see that one thing that came from that was inside a reporting advice and that one of your -- or several of your directors and/or owners bought over 1 million shares. So I appreciate you doing that, but it was -- it was an excellent program.

If I -- I've asked this question before and I didn't really get satisfactory answer from prior management, so I'm going to ask it again and if you could be specific in what you're going to do. One of the directors there commented that it was your goal to have Mace in every home in America. And I was most impressed if I might compare it to a sporting event and that you have a good Board or you have good owners, you have good coaches or managers in your situation. You have a good team and good products. You have a solid game plan for the future growth earnings and revenues, but you have no fans in the stands. People just absolutely do not know about Mace, and if you could please comment on what you plan to do differently in the way of maybe having weekly calls with wealth managers, non-deal roadshows? And at what point you plan to get fans in the stands? As this could bridge the gap between the revenue increase that you're expecting to have our stock trade at a fair price.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [20]

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Thanks, Thurman. This is Mark. I'll tackle a couple of those on the IR front. So we -- there is not a tremendous amount of things we can do completely differently, but we do believe that there are some things that we can do period. So we have gotten -- made some progress in our external news sources and our communications with newswires and are trying to be more visible in that space with regard to releases that are important about the company. We don't want to flood the newswires every other day with not important information, but things like the Kuros! partnership and things like the significant purchases by our directors are important for people that follow the company. So that's one thing we're doing.

Another plan that we have, now that we've been in place with new management for almost 6 months now, we are going to begin to be more visible with some of the external investment community in the way of smaller, very targeted participation in investor conferences that speak to the microcap market. It does no good to be in front of groups or institutions that are not interested in microcap stocks that are traded over-the-counter. So we're going to participate in several targeted conferences with the goal of getting our story out there a little bit more. And then very importantly, the follow-on to that because the conferences are nice, but if you get a bunch of business cards and sort of walk away and never make anything further of it, you probably haven't capitalized on your time. So we do also have plans to engage in discussions with a number of IR third parties, that why I don't envision that we will have any significant spend in any type of outsourcing IR or any type of very significant, call it, formal program with a third party. I think there are best practices that we can probably adopt as an OTC stock that will help with investor relations. So that could result in non-deal roadshows. We do get a relatively steady, but modest inbound flow of inquiries from potential investors and I personally return all those calls and speak to those. We have had several meetings here in place for potential investors and that dialogue continues periodically with them after the initial meeting. So rest assured, as we get inquiries, we do make every effort to provide them all the information we can.

I guess, lastly, our social media, and we'll kind of wrap it into content marketing and social media, which both talks about our products and to a degree our company. We feel like we have continued to push along the social media awareness side. We aren't where we want to be. We are engaging in having some additional resources or more realistically different resources for our social media and our brand awareness that will bring both again, our products as well as our company. So we're going to have to do things a little bit differently, I think, than we've been doing the last 6 months in terms of social media.

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Thurman Willis, [21]

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If I could do the follow-up on social media. And just some tremendous missed opportunities not by existing management but by past management, but there's been 256 mass shootings that killed 3 or more people. Maybe I don't understand, but I get the same question from everyone that Mace products are the only deterrent to possibly reduce these horrific situations and save lives with a nonlethal product. I'm fully aware it's not the only deterrent, but if everyone in all households had Mace products, hopefully, these nightmares could be reduced. If I might be a little more specific. The El Paso, let's say there were 500 people in the store and probably 1 out of 500 had a Mace product. If 250 had, then I think there would be a much better chance to have curtailed that particular situation. If the public had knowledge of Mace products, then revenues would skyrocket.

I've sent you and -- last year on the Today show, there was an interview with a felon that was behind bars that had committed hundreds of attacks, and he stated what he'd look for. It was a very thorough interview by the Today show. He said screaming, spitting, throwing rocks, cameras, none of that ever scared him, but if he saw a person that had mace that deterred him and he would not attack them. I wondered if you guys had seen this, and then to social media, why in the world would we not have that throughout Fox News, Home Shopping Network, and various places that people could become aware because in schools and churches, in I believe 8 states, they are going to allow teachers to carry guns. I can assure you most teachers don't have a clue about how to shoot a gun, but they could have a Mace product or your Gel Gun and this is a nonlethal way. So tell me what I'm missing and why we're not executing on that because I know it's a belief that we get the revenues up, the stock goes up, et cetera, et cetera. Well, it's going to take months to get the revenue up, but this way, if we got the word in social media that this was an idea, that is the best idea I know of. I've heard a commentator just comment, say, "Well, it'd have been nice if that Walmart has had cameras." Well, I'm sure that Walmart had plenty of cameras. So I'm just not understanding why we miss, not you specifically, but why we miss these opportunities with these mass shootings to let people know we have the product that will work. So tell me what I'm missing here?

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Gary Medved, Mace Security International, Inc. - President & CEO [22]

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Well, there are a lot of tentacles here, Thurman. You're talking about very early on in the selling cycle of awareness and education. And that is what Mark was alluding to at the social media side that even on social media, there is only so much we can do. Because of the nature of the product, we cannot advertise it. Okay? So you'll less organically grow your audience, but you can't pay to advertise on Facebook or wherever because of the type of product it is. So there are limitations there. I've long contended that when retail stops looking at this product, and you heard it at Investor Day, as a pure impulse buy, hiding it on 1 or 2 hooks in various departments and areas of the store, and actually puts it out front and center as a destination category, all things personal safety, that is when the needle is going to start moving in terms of the public being aware of the product.

There were -- some estimates put it as high as 3,000 people in that Walmart store down in El Paso. I think 1,000 to 3,000, they weren't sure how many, but a lot of people were in that store and the irony is we sell Mace products right there in Walmart. So it is a harder sell than one would imagine in the school systems. They're on a completely different -- they all want to stop it, but how they go about it, they don't have a handle on it and just to go in and offer Mace products to them, they just don't open up the checkbook and then you're talking public school, by school, by school across the country and that takes a tremendous amount of resources to do that.

So our contention is we get a program out there in major retail where it gets a lot of attention. It's not hidden back in the automotive section in the back of the store or hidden in this section of the store at the other corner, but you get it out there where people can actually see it. And we'll do what we can on social media to get the message out, but there are even limits to that. So it's a challenge, I'm not going to lie to you, but I think our best bet is to get it into every brick-and-mortar retail place where we can get it and get it front and center and get a type of display where a lot of people see it every year. And...

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Thurman Willis, [23]

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If I could -- Gary, if I could make one follow-up for that. Three years ago, I took previous management to the largest lobbying company in Washington, introduced them to the firm. They thought it was an absolute great deterrent to mass shootings. They kept the contract with the lobbying firm, which was going to introduce it to senators and going to introduce it to the House of Representatives and after 2 months they dropped it. And so while it may be difficult, I don't think it is as difficult as we might think to let people know on social media and on certain programs. We just, in the past, have failed miserably on being known as a deterrent to mass shootings.

I can assure you if you asked 1,000 people, maybe one would even know about the Mace Gel Gun, and while I understand your limitations in advertising, et cetera, I don't understand why senators, congressmen, et cetera, and we can't get this on some social media. We have the interview with the Today show where the felon stated the story I'm trying to preach, and I just hope this management team does not ignore the obvious answer to the products that you have and the need to get it into social media and it would make retail box store sales compared to e-commerce a absolute nonevent.

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Operator [24]

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Your next question is from William Rankin.

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Unidentified Participant, [25]

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I've been an investor for probably a little over 3 years and one of the biggest frustrations is this very low trading volume and I really appreciate your comments when you're addressing the need to attract more investors. And it seems like when you get on the calls, it's usually the same few people -- nobody new is really coming into the calls or I don't think many people are reading press releases or hearing about the positive changes that are taking place in the company, and there are low cost ways to get the Mace story out, again, just as -- to give you an example, could you share with me how many people are on the call today?

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Gary Medved, Mace Security International, Inc. - President & CEO [26]

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No. I prefer not to do that, but there's a similar number over the last several quarters. So t's just a steady volume.

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Unidentified Participant, [27]

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All right. Well, just you know from my seat I think there are (inaudible) company and spent -- been in your shoes and a small company and there are some ways that you can get the story out to people that aren't expensive and may find more people on the call and could get caught up in the potential of the company and become investors and that's what all of us -- all of us as investors want to see is the company to succeed, perform and see an appreciation in the value of the company and the stock price. Thank you for your efforts.

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Operator [28]

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We have a follow-up question from Andrew Shapiro.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [29]

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Okay. I have some questions here about the Postal Service partnership and I appreciate you may have to be circumspect about some details as of yet. But others, hopefully, since you've unveiled it at the Annual Meeting and you have a signed agreement that there's some big picture things you can shed some light on. So can you elaborate a little bit more on that partnership that you discussed during the Annual Meeting with where and how you will be -- the current agreement has you placing the product. For example, the Postal Service has 30,000 managed retail post offices or outlets, that's a huge amount, and 800 million retail customer visits in a given year to those outlets. It's obviously a well-known brand. I think you said you're going to offer it on your website and things like that. Just can you explain what you got going on at present? And what your agreement calls for down the road? And if you competitively are comfortable? What your hopes are that this relationship evolves to?

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Gary Medved, Mace Security International, Inc. - President & CEO [30]

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I think the program in general, Andrew, is geared towards a specific channel that we're looking at. I don't want to get into that level of detail right now, but it is being presented. We made a couple of presentations that favorably received and we have a couple more presentations that we'll be giving over the next month or 2. And the -- it's a limited product line. There are 3 SKUs to it. And it's really geared towards a specific channel that I just don't want to get into at this point. Once it's placed in -- once it's placed out there, you'll see where it's going. The brand is well recognized and we are able to sell to the Postal Service, that channel is open to us. But that is an effort in itself to get something into the post office. So it's on our radar and it will be. We will present to them -- we're going after a certain channel right now, which is -- which will step up quicker than the post office will. So that's about as far as I can go with it. It is being presented and but like everybody else, when categories are reset, that's on a calendar and all we can do is once more control the controllable and we can be ready, but we have to wait for their calendar to come along and tell us when. So we'll have further detail on that, I'm sure, on the next quarter.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [31]

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Okay. And with respect to the agreement that's already been signed with this semi-governmental entity, can you describe at all what is expected and the obligations, minimums, et cetera, are between -- from each party and the timing and obligations of the party? And also can you describe the duration of the agreement you signed so far?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [32]

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I'll give it a shot. So it is -- it's a no -- there is a very low fixed fee amount for the use of the license, call it a minimum royalty, along with a modest royalty charge. This is a very, very manageable number for us in terms of the fixed minimum. The contract duration, actually, I do not have it in front of me. I want to say it's 3 years. I'm not 100% certain on that, but I believe it's a 3-year arrangement and it is exclusive to us. So there is no specific volume target or whatever that we have to hit during that period. It is -- the royalty number, which I don't want to disclose, but it is also a very comfortable number for us. So we do feel like, all things considered, this is when you take into account that it really is a completely different look and feel and market, if you will, that Gary referred to this particular channel that we're going into, it's something that very, very modest cost to do that. So it should be a win-win all around.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [33]

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Right. It seems like this is a natural for the retail channels of the office product type of retailer or things like that. You mentioned on the last call that you might be able to provide a narrow date range from the program rollout and the revenue generation timing would be starting to kick in. Have we reached that point? And are you able to narrow the date range and window out when this will be formally rolled out with a more disclosive press release as well as products, I guess, would be available on the mace.com website?

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Gary Medved, Mace Security International, Inc. - President & CEO [34]

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The USPS brand we probably won't make available on our website. It may be available on Amazon. As far as the rollout to the retail channel, it's probably going to be -- once more we have to follow their calendar, so the presentations are being made. If somebody accepts the program and they have the calendar -- category reset in November, we'll ship in November. But more than likely, it's going to be in early -- the first 2 quarters of 2020 is where we're learning everybody has their resets taking place.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [35]

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And just to elaborate on that too, I know that seems like a long time between the announcement and the expectation of revenue. And you think of Kuros! as well, which, obviously, was a little bit more ready to go because it already had placements. But there is a lot of behind-the-scenes work that has to go into delivering these products and having them ready and having them completely ready to go so that when a retailer does place an order, and they are big orders, that that's a very seamless thing. So you have to do everything from designing the package to designing the colors to producing working models to work with. And all that in addition to, of course, getting the introductions at the various channels that we're looking to. This is not an excuse making statement, but it is a statement that from the time of signing an agreement and getting the go-ahead from say the Postal Service, if they agree with your design to actually rolling it out and collecting revenue from it, it's something in the neighborhood of 6 months is a pretty decent cadence to think about. So at Kuros! obviously, we're a little bit -- we're fairly further along just because of the fact that was already a product that was out there in the market.

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

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So when you say a retailer resets in Q1, does that mean we ship and book revenues in Q4? Or it is in the very same quarter of the reset?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [37]

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It means that the reset, they will choose new products and put those new products in the store effective Q1. So their decisions, as Gary has explained before, are well ahead of that. So these meetings we're having now, they are actively making decisions in these major retailers right now and they will be notifying us hey, you're in or you're out, or you're expanded or you're contracted, and so that will then point us to -- the product shipments occur immediately when the store is ready in that, say, first quarter.

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

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And so when you -- so when you have that much advance notice and they say you're either in or we're not going to add you, is that kind of a binding thing for which you would deem it to be an announceable event once you're greenlighted for a retail channel or the retailer doesn't want you to be announcing anything until it's actually on the shelves and available in Q1?

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

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Well, as a company, we wouldn't announce it until we have it on the shelf of a store. And that even then, we probably won't go down to the detail level of saying it's available at this retailer. In terms of a press release. People find it online where to buy, it will tell them which retailer...

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [40]

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We have a feature on our website that lets people access the stores that it is available into the retail level. They're obviously not our stores, but there's no reason we couldn't revisit that. If we got into a chain that we -- a retail or brick-and-mortar chain, there was absolutely something we've never done before and very exciting, with the permission of that retailer, I'm sure they would be happy to ride along with our explanation of those partnerships. It's just something that normally isn't -- it is not done day in, day out, but there's no reason we couldn't look at it.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [41]

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Right. I mean, you wouldn't want to upset other retailers -- competitive retailers because you'd rather place all your product in every sporting goods store rather than a single one. But to the extent when you balance that against the promotion you may be giving to the new one, they may like that promotion. You guys have to figure out, I guess, what you're going to do.

I have additional questions. I'll back out into the queue, but please come back to me. I definitely want to talk about and understand these noncash write-off stuff.

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Operator [42]

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A question came up. A follow-up question from Mr. Thurman Willis.

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Thurman Willis, [43]

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Going back to the Annual Meeting just briefly. I want to applaud your efforts. I had set my 10-point strategy. I'm 70 years old and I've used this with dozens of companies and taking management to New York, Chicago, Boston, Miami, et cetera, and it's a 10-point strategy to enhance shareholder value and I've heard you talk about 4 of them today. And I want to thank you that you're going to be getting out more press releases. I want to thank you that some directors and insiders have bought stock and my question is do we think we'll see other insiders buy stock? Because I think all Board members ought to own stock in a Board of which they serve. So can you comment briefly on that please? But again, 4 of the 10 items you have addressed today.

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

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Yes. So I think we will see. We have indications from several insiders that following the opening of our next window period for transactions that they will be supporting the company. I think also, as you know, both management as well as Board have a significant portion of their compensation that is offered in the form of equity. So both parties are -- the Board is heavily paid in equity and management is as well. So both parties are on the same plane as the shareholders are and investors.

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Thurman Willis, [45]

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Do we think we might see them buy in the open market though?

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

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I believe that we might. We don't have any control over that, but we have heard some indications that people are inquiring how to go about that and would not be a surprise to me if they did that and...

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Thurman Willis, [47]

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And one quick, the window opens 2 days today or 3 days from today?

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Gary Medved, Mace Security International, Inc. - President & CEO [48]

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Our policy is 2 days after -- 2 days after the earnings release. So it will be Monday.

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Thurman Willis, [49]

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But again, thank you for paying attention to the 10-point strategy and adopting some of those measures.

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Gary Medved, Mace Security International, Inc. - President & CEO [50]

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Operator, are there other? We have about 5 minutes to go here.

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Operator [51]

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We have another follow-up question from Mr. Andrew Shapiro.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [52]

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Five minutes, I don't know if you can extend it, but otherwise I would need to schedule an offline call try to pile through a bunch of these things.

Last quarter, I asked about a spike in receivables that you mentioned. The prime cause was a onetime issue expected to successfully resolve eventually. Was this receivable the one that got reserved against here in the second quarter? And is that part -- is that amount the party's full receivable amount?

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Gary Medved, Mace Security International, Inc. - President & CEO [53]

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Yes. The growth that has worked its way through our aging was a onetime transaction from 2018. That is in a channel that we're no longer participating in. The receivable, unfortunately, as of last quarter, was not even -- first quarter I'm referring to was not even due. When it came due in the second quarter, we became aware that the party was involved in their own litigation and would not be paying us in a timely basis. So we investigated it and felt like a reserve was appropriate in the second quarter, which is when receivable became past due and we've gained information that they were not intending to pay us currently.

That -- this one matter, the matter that we referred to in the - as part of the increase in the reserve has been -- is in litigation right now. And we're very comfortable that there is not a heck of a lot of reasons why this shouldn't be a straightforward breach of contract situation. So we're pretty comfortable that we'll prevail in it and then the question is can we collect anything? So -- but it's -- I will say it's been filed. We're in the early processes of seeing whether they're going to contest this or, if they do, what timeline that will lead us down towards?

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [54]

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Okay. And where in the income statement again does this AR reserve write-off impact?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [55]

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So it sets in SG&A and mechanically just-- we keep it -- the way we do it, Andrew, we keep the reserve. We keep the receivable on the books gross and put a reserve against it. So you'll see that receivable balance hasn't gone down by the amount, it's just the reserve has gone up.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [56]

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And the net receivable has gone down.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [57]

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Exactly. And what -- you just keep it that way until this is settled one way or the other.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [58]

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You mentioned 2 receivables are in litigation, this is one. Can you quantify the amounts of these 2? This amount we kind of know of. What's the other amount that's in litigation?

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Gary Medved, Mace Security International, Inc. - President & CEO [59]

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The other amount is a little bit larger amount. It's less than $500,000, but not a lot less than that. And it is from a sale of a company. It's really from the sale of our surveillance business, several years ago that has been -- the payment ceased and the reserve occurred in the first quarter, but the litigation commenced in the second quarter. We are further along in that process. In fact, we have already received a judgment in Texas in our favor, which is where the company is located and we are in the process of asset discovery with them.

I'm not as optimistic, frankly, on the recovery of the full principal amount on this, but our hope would certainly be that we can get what we can get and we can certainly get our name off of this business that has gone very south on us. We don't want our brand damaged any further by this. So at a minimum, we will accomplish that, we believe.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [60]

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And with respect to Q4's note receivables written down, I think that this was one of them, the Texas one, but what is the status and efforts of the company to recover the other owed moneys, which I think are more recoverable from the call alarm buyer?

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Gary Medved, Mace Security International, Inc. - President & CEO [61]

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Correct. That one, we -- again, we had the appropriate basis to write it off for accounting purposes. We're a little more optimistic in that ultimate recovery because of that business is overall a much healthier than these other 2 that we sold and we had received (inaudible). We feel like that is a second half of 2019 event where we will have a lot better feel for whether this gets resolved. I mean we were -- this is a significant -- this was a significant payment we were receiving monthly that we haven't received since almost a year now. So it's growing to be a very large number that we have been patient up to now because we're second lien note holders, but the second half of this year is where that has to be resolved one way or the other.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [62]

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Now the manufacturing overhead variance as you discussed fairly quickly in your script, can you summarize that again slowly and what has been and what will be done to return back to optimized margin or are we already in the Q3 here now running back at optimized margins?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [63]

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So we're -- I'll let Gary jump in on this as well. We are -- there's a couple of the unusual items that -- I think we talked about, so we don't need to get back to those, I guess, unless somebody wants to. But they don't get us all the way back to the period over period, 44% was what we were looking at last year at this time and, obviously, even with the adjustments, we were probably in the neighborhood of 7 or 8 percentage points shy of that. So what -- there's a couple of factors. One factor is that when your volume tends not to be increasing as much that you don't absorb as much of your overhead and your labor and that catches you in the form of a variance, which has happened a bit to us this quarter.

The other thing is that if you think of the overall journey that we're on with the company in terms of resetting things, we feel like the top line has gotten a lot of attention. We think that the SG&A costs, while they are not where we want them to be, are under control in a sense that they are running about the same year-over-year when you strip out some of these crazy items. So the base there is coming along. It's this third piece that really resources are being identified and added to on the manufacturing floor. That really is the last of our homework I think that we have to do to get those numbers back. Gary may want to elaborate on some of this stuff.

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Gary Medved, Mace Security International, Inc. - President & CEO [64]

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Andrew you saw some of this stuff when you will here for Investor Day. Moving to cellular manufacturing out on the floor and automated packing machines and so forth. So the hierarchy here is like lean manufacturing, continuous improvement, and I was just meeting with Carl this morning going over a number of initiatives that are taking place out on the floor. And where we got hit with our private label business and order size, there's a lot of small orders that just happened to flush through during the second quarter and those don't bode well from an efficiency standpoint because for the way we make product, we'd rather just set up and run 50,000 of the same thing not small -- much smaller micro lot sizes. And then labor markets are getting tighter and tighter, as everybody can attest to. So we're not immune to this, the labor shortage out there, and so with the labor shortage comes with -- well, let's get this order done and then we got to jump over to that order, so it doesn't leave you the cushion to build up inventory in a more efficient manner. So I think those 2 items contributed heavily in the second quarter and we're taking a look at the smaller lot sizes now to do more with those on a manufacturing [cell] base and the labor -- at least right now we've got it under control to where we're starting to build inventory levels back up. So should see improvement in the third quarter.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [65]

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Okay. And would you guys discuss on what has changed and what has not changed with respect to your offering into the tactical and law enforcement market? And elaborate on your rationale supporting your shift in resource allocations and perhaps break down just the bigger items that comprise those exit costs. Is it like a lease? Or what are the costs of getting out of the less lethal munitions business line?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [66]

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Yes. That's a good question. I'll handle the cost side of that and Gary may talk more about the strategy. But on the cost side, we booked about $140,000 and we have a little bit more to accrue in the third quarter (inaudible) but most of it's in the $140,000. The largest portion of that, about $110,000, was the cost of inventory that we had in Florida that we were not able to -- basically it's difficult inventory to dispose of because it's regulated into munition. So we entered into an arrangement with a supplier that was able to take that inventory and remove it from our warehouse, and also at the same time cancel our 3-year fixed lease that we had in Florida, which we ended up paying another $10,000 on that. So most of the $140,000 was in the cost of the inventory that we were relieved of and the lease termination payment, which was very, very -- that's cost together were less than the cost that the lease would have been. So it really was done at a pretty reasonable amount. I think the rest of that $140,000 were some deposits and some samples and things of that nature that weren't material.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [67]

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And when you say a little bit more this quarter, what's a little bit? Below $50,000? Below $10,000?

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [68]

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Yes. Well below $50,000, yes.

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Gary Medved, Mace Security International, Inc. - President & CEO [69]

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Well below $50,000, yes.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [70]

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Okay. And then the -- just elaborating on your strategy and rationale supporting the shift, I know you explained it to me a little bit at the Annual Meeting, but for the benefit of our listeners?

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Gary Medved, Mace Security International, Inc. - President & CEO [71]

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Yes. Well, we have 2 product lines that we've been selling for a number of years and that is the Take Down line of gel, stream, fog or foam as well as another product line, which is a PG guard product line for prisons and jail cells and things like that. So those 2 product lines have been here for a while and then the company entered into the munitions business in 2018, I guess, was our full go at it and getting the bunker and everything, the supplier lined up and bringing on a training company that could go down and do training on these munitions. And when we speak of munitions, we're strictly talking about stuff that goes boom for the most part; flash bangs and ear-piercing grenades, and the like. So there's blast strips that blow the doorknobs off of buildings when they want to enter a building, the type of stuff you see in Hollywood movies. That's the munitions line and heavily regulated by the ATF.

There's a lot of cost that comes with that. You can't outsource that. You have to have a company employee at that bunker with that product. They control it. So that's the fun that's on our side of it, and then when you go out and try to sell this stuff, and this is why when I came in earlier this year, I wanted to give it a 90- to 180-day review and see if the needle could start moving if we got behind it. And so we put all these resources in place, reps, training, catalogs, the whole 9 yards and quite honestly I think what everybody underestimated was the amount of time or how long the selling cycle is. It's extremely long. And in my opening comments, I mentioned about $20,000 a month in savings and I can tell you, Andrew, a lot of the months I've been here was much higher than $20,000 per month. And so I was left with a decision of just keep pumping that type of money in every month after month after month with a selling cycle that might be as long as a year or 2. And then -- even then when it does hit, what's going to be the dollar volume. And the other part of it that made the decision a little bit easier was the fact that we did not -- unlike the Take Down line of products, which we manufacture right here in Cleveland, we do not manufacture those munitions. So there was an extra step in the cost side of it and what happens is when you're competing with companies that are actually manufacturing their own munitions and you have to purchase yours from an outside source, your margins get pinched really, really quickly.

So I started laying out a best case scenario in terms of sales and the cost over the next year or 2 that we would incur getting to that level of sales. And with the margins that I was going to expect at that point of time, knowing that there was a price increase coming in a couple of months this year and I looked at the whole equation and it just didn't spell mother lode, it just had a big hole and I figured one way to cut bait and run at this point -- we are going to close it down and redeploy the assets on more powerful projects that will have a shorter timeline and much quicker payback. So that was the detail in a nutshell of the thinking.

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Mark Elliott Barrus, Mace Security International, Inc. - Senior VP, CFO & Secretary [72]

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And, operator, I think we've gone a bit over. So if you could, I think we would like to wrap the call up at this point.

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Operator [73]

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This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.