Mace Security International CEO Discusses F2Q2010 Results - Earnings Call Transcript (Prepared Remarks)

Sep.19.10 | About: Mace Security (MACE)

Mace Security International Inc. (OTCPK:MACE) F2Q2010 Earnings Call Transcript August 17, 2010 1:00 PM ET


Sarah Din - MarCom Manager

Dennis Raefield - Chief Executive Officer and President

Greg Krzemien - Chief Financial Officer


Hello, and welcome to today’s teleconference. My name is (Keisha), and I’ll be your conference operator today. All lines have been placed on mute, and this event will be recorded for future playback.

There will be a Q&A session at the end of today’s presentation. At that time, I’ll instruct to you on how to ask a live audio question.

Welcome to the Mace 2010 Second Quarter Result Investor Conference Call.

At this time, I’ like to turn the call over to Sarah Din.

Sarah Din

Thank you (Keisha). Welcome to Mace Security International Second Quarter Investor Conference Call. My name is Sarah Din, and I’m the MarCom Manager for Mace.

Also with us today for this call is Mace’s Chief Executive Officer and President, Dennis Raefield, and Mace's Chief Financial Officer, Greg Krzemien. Today, Greg Krzemien will be discussing the financial results for the quarter, while Dennis Raefield will discuss the market trends, business conditions, and the Company’s plans.

Now, before I turn the call over to Greg, there are some general housekeeping matters that we want to address.

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

Such statements are subjected to certain risks, known and unknown, and uncertainties including but not limited to economic conditions, limit of capital resources and the ability of management to effectively manage the business and integrate required 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. Additional discussions for factors that could cause actual results to differ materially from management’s projected forecasts, estimates and expectations are contained under the heading “Risk Factors” in Mace’s SEC filings, which includes its registration statements and its periodic reports on Form 10-Q and 10-K.

All statements made during the conference call should also be considered in conjunction with the financial statements and notes contained in Mace’s annual reports on Form 10-K and quarterly reports on Form 10-Q.

You can access these reports on through the Investor Relations section on the Web site. With that, I would like to turn the call over to Greg Krzemien.

Greg Krzemien

Thank you, Sarah. Good afternoon. Good morning to those on the West Coast. And thanks again for joining us for our Second Quarter 2010 Investor Call.

I'm going to be discussing the results for the second quarter of 2010. I’ll be comparing that to the results for same period last year, talk a little bit about the six months 2010 results and also refer to some sequential changes in financial information over the last couple of quarters.

Just a little bit in the way of background for those who may be new to the call. Mace currently operates in two active business segments, our security segment which is our main business segment, and within the security segment, we really have four operations. We have our electronic surveillance operations, which we sell to both professional line of equipment, mostly to dealers in our home and small business operations. Our second division, if you will, is industrial vision and video conferencing division.

We have our personal defense, which is our famous Mace Pepper Spray and some other personal defense-type products. And the fourth division, which we added last April is Mace CS, which is our wholesale monitoring station out in Anaheim, California.

Our second segment is our digital media marketing segment, which consists of Linkstar, our e-commerce division selling multi home or beauty-type aid products and health-related products; and PromoPath, which is our media marketing division of that digital media marketing segment.

As far as the financial statements and the numbers I am going to be discussing, I’ll be mostly highlighting information from our continuing operations, which are those two active business segments. The car wash operations, which we continue to sell off and I’ll be addressing those in one brief set of comments shortly. But the numbers I’m going to discuss do not include those operations.

Those in the financial statements are disclosed as discontinued operations, in the income statement and the assets and liabilities of those car washes are pulled out and segregated on two lines on the balance sheet; assets held for sale and liabilities related to assets held for sale.

Again, I’m going to cover the financial highlights and then Dennis will be following up with some operation color commentary, shall we say, to my financial comments. On the income statement, I’m going to discuss some key points on revenues, gross profits, our operating losses, our trends there, SG&A cost and EBITDA and then I’ll make some additional comments on our cost reduction efforts.

I’ll review a few key items on our balance sheet. And I’ll make some comments on a few other key areas within our financial statements and disclosures.

Again, everything I’m going to be mentioning now is on continuing operation basis without the carwash. So, the first thing I want to make some comments on is our revenues. And based on the 10-Q, we just recently released, if we look at the revenues for the second quarter of 2010 versus the second quarter of 2009, there is about a $1.1 million decline or about 15 percent and the majority of that decline is in the digital media marketing segment which declined about 972,000 and the security segment being off by about 100,000.

If I look at the sequential quarters, the second quarter ending June versus the first quarter ending March of this year, overall, we’re down about $858,000 in revenues or about 12 percent. The good news is our security segments which is our main segment that is up about two percent, quarter-to-quarter with our digital media marketing segment being down $945,000 or about a 35 percent dip from the first quarter.

Also, I want to mention that if we look at six months versus six months, we are down about 9 percent with the security segment basically being flat on a six-month basis between 2010 and 2009.

A couple of comments on revenues, and again Dennis is going to add some more color to it. On a professional defense – or personal defense rather, our pepper spray operation – if you look at our second quarter of ‘010 versus 2009, pretty much flat down slightly in the second quarter of ‘010 versus the first quarter. I want to note a couple of things. First of all, that operation does have somewhat of a bell curve to it. We typically do lighten up a little bit in the second quarter and we usually have a pretty strong third quarter and fourth quarter.

We anticipate the same this year. As far as a couple of other things to point out, we do have a backlog right now on our TG guard systems that we’ve put in prisons and embassies. We had some backup on a key component to that due to a supplier issue. That supplier is back online, and we started shipping this month. And we’ll catch up on those orders, which is over $100,000 backlog, which will add to some strength in the third quarter here.

We also are a little bit light on the – our OEM products that we sell usually to other companies who manufacture personal defense things for the law enforcement industry.

Law enforcement is a part of our business that had been down for the last – couple of quarters. So, we (are still) a little bit on our aerosol side than on our OEM products.

But as I mentioned, you know, we are still looking for a very strong second half. Doing very well with the sale of our new Pink Mace that came out last year, selling a lot of wireless systems through our personal defense segment and some other products such as our Jogger Mace and even our Bear spray have been doing real well for us in the last quarter.

So I just want to mention too that our margins are staying very strong in the segment in the 43 to 45 percent range depending on mix. So, you know, no real concerns though with the personal defense.

On the electronic surveillance side of the business, as I mentioned, we are still seeing some slowness due to contractor – construction being still slow. But we are seeing improvements there and again, Dennis will speak a little bit more on that.

We definitely had a good uptick in our industrial vision operations in the past quarter and, you know, we continue to work on some new products and markets and customers, which again, I’ll let to – Dennis to provide some more color on that.

As far as Mace CS goes, our monitoring station, we have seen some slight growth in the second quarter. We spent, I guess, this first year that we owned it, the first six months of our ownership, been really doing a lot of rehabbing of that operation, putting in the latest monitoring computer systems and billing systems. And in the second six months of our ownership, we spent a lot of time on truing up our customer base.

We overhauled some of the customers that we acquired that weren’t good-paying customers. We’re replacing them with new customers. We have a customer base of about 38,000 end-users right now to about 300-plus dealers that are our customers. And you know, we saw some good growth. Just looking at April, May, and June; each month we put in over 700 new end-users or about almost 2,300 end-users just in that one quarter. So, we’re excited about that and the additional revenues that that will provide as we go forward here.

Again, Dennis will provide a little bit more color on that segment.

A couple of comments in the digital media marketing, continues to definitely be a challenge for us. You know, we are surviving it. We’re working through issues that continually hit us. This quarter, we were challenged with a couple of key things that we’re working through.

One of the first things is credit card processors took a dislike to one of our main product stream, our Extreme Brite White teeth whitening is that across the board – across the financial institution issue in the United States here, so we basically lost our processing halfway through the quarter. And we are actually resorting to some European processing, which as we speak is currently getting put up in place, and we’re going back and catching up on some billing going to be able to continue to bill the Extreme Brite White going forward here.

Another major thing that happened this past quarter that really impacts us was regulations in the ability to pass on customer information and credit card information regarding customers, which was the way we generated a significant amount of cross-sell revenue in the past.

Our cross-sell revenue is another way to maximize the revenue on the TPA or the customer acquisition cost for new member into the Linkstar system. And we basically had to halt processing across our revenue for a few months until we came up with a methodology with our partner that was above board and completely legal to go after cross-sell revenue without passing credit card information.

So, we relaunched that here recently in August here. So, again, a couple of key things that hit us this past quarter that we’re working our way through, you know, and we’ll continue to try and run Linkstar as profitably as possible as we continue to, you know, look for potential buyers for that as we’ve disclosed in our 10-Q. Again, I’ll let Dennis talk a little bit more about that division in his comments.

The next thing I want to spend a few minutes on is gross profit. Just to highlight a couple of key statistics, our gross profit second quarter this year versus the second quarter of last year is down to a couple of percentage points from about 29.8 to about 26.9 percent. That’s all on the digital media marketing side.

Our gross profit margins on the security side are staying in that 29 percent range. But again, on the digital media marketing with the difficulties we have had, we’ve dropped from about a 31 percent margin to about a 21 percent margin. Mainly, the impact of heavy CPA costs trying to generate new members into the system and having billing issues, and cross-sell revenue issues not being able to maximize the revenue against those new members.

I mentioned last time we presented and I’ll just kind of highlight here in our cost to consult for digital media, about 75 percent of our costs are the cost of acquiring members about 13 percent, give or take is product cost. Freight cost is about seven percent and the remainder five percent is just general warehouse packing, supplies, utilities, other warehousing type costs. So, very heavily geared towards that new member acquisition cost.

On the margin side for security, as I mention, the second quarter this year versus last quarter is very steady at about 29 percent. We did see it go up a little bit in the third and fourth quarter of last year to around 31 percent to back down about 29 percent in the first quarter and hover around 29 percent in the second quarter.

You know, I would like to mention that obviously we have the four operations in there; the profession and small business electronics, the industrial vision or personal defense and our monitoring station. So, as the mix of those revenues change by month and by quarter a little bit, you know, those margins do vary by a percent or two.

So, I just want to kind of mention that, you know, we’re comfortable with that range of profit margins, but it does bound to around a point here or there as again mixed changes and as we introduce some new products, and look at cost structures.

Next thing I’m going to spend a couple of minutes on is operating loss. I just want to highlight some good news here that our operating loss continues to come down as we work hard on cost side and on increasing revenues even despite the issues that we’ve had in our digital media marketing segment.

And I’m going to quote some numbers here which are our operating loss after taking out the big line items on our income statement for the impairment charges and the arbitration award, which again was 4.5 million reported in the first quarter and 3.6 million of impairment charges recorded here in the second quarter

Also, last year in the second quarter, we had about $1.3 million of impairment charges. But if I strip out those impairment charges on that award, our operating loss is at about $1.4 million for the second quarter of this year compared to about 2 – almost $2.1 million for the second quarter of last year.

So, you know, that’s a real nice reduction, it’s about 30 percent. And we’re going to continue to work to drive that down. If you look at the sequential quarters, again stripping out the Paolino award and the impairment charges that we went from about $2 million in the first quarter, about $1.4 million in the second quarter, we drove that down to about 578,000 – about 29 percent.

So, again, we’re – you know, continue to work on that and Dennis will speak a little bit more about some of our efforts there.

SG&A costs, just a couple of points – and again, these SG&A costs are without the carwash, it's because that’s a discontinued operation. But we drove those down also. If I look at the second quarter of last year, SG&A was about 4 million. This year in the second quarter, it’s about 2.9 million. So it’s down about 1.1 million or 28 percent. And from the first quarter of this year to the second, we’re down about 645,000 or about 18 percent from 3.5 to about 2.9 million.

I could also look at that after what I’d consider are our notable items.

And the big things that are notable items are the costs relating to the Paolino legal cost or severance cost and our acquisition reversal that I disclosed in the 10-Q. And I’ll mention those with just a little bit more detail here.

But for the current quarter, our reported SG&A was about 2.9 million. After these unusual items, it was about 2.7. So, it’s not a huge change because we got items coming from both directions. But, even a lower SG&A number without the unusual item. And again, in this quarter, we had $208,000 worth of legal expenses relating to the Paolino matter, naturally two pieces at 73,000 for the costs that we’ve incurred and another 135,000 for an additional award granted by the arbitrators to Mr. Paolino as we disclosed in our 10-Q.

We have about $160,000 worth of severances in this second quarter related to about five individuals who have severance arrangements that we terminated this quarter. A couple of those were heavy managers, vice president, in fact three of them were vice presidents, so the severance number is fairly large related to those.

And going the other way as I mentioned was about 276,000 of acquisition reversal cost. And that basically was in first accounting we accrued from the contingency that we might have had to pay additional consideration based on reoccurring monthly revenues that were retained after the first year of operations of our monitoring station. And as I mentioned, yes, there were a lot of customers that were required to be weeded out, who are not paying their bills, and basically that one’s one of the main drivers in our reoccurring monthly revenue contingency payment not having to be made.

So, that 276,000 was actually a reduction in purchase price and under current accounting, is actually a reduction of our operating expenses.

Next thing I’ll spend a few moments on is headcount reduction. I mentioned last quarter around the middle of 2008 when Mr. Raefield took over, not including car washes, we had about 215 people – and really I should say 215 people includes me putting in as if CSSS was on board at that time. And currently right now with CSSS on board, we had 130 people. So, that’s about a 40 percent reduction in headcount.

So, we basically have 60 percent of the workforce, you know, we had in towards the middle end of 2008. So, you know, we did a lot there. Within that headcount reduction was an additional headcount reduction of about 17 people in the first half of this year and the average annual salary of those reductions were about $95,000.

So, you know, we really had a significant amount of higher level people that we – that we terminated in this first half of 2010. Again the total that we reduced since 2008 was about 85 people. The next thing I want to spend a few moments on is talking about a couple of key items within our balance sheet.

And a couple of things that I want to notice on the inventory level, we did do a real good job in the last couple of quarters reducing inventory. However, this last quarter of June, those reductions aren’t as great. The three months ending March, we reduced about $567,000 of inventory.

I don’t remember the exact number for last year, but I know the inventory came down. I think it was over $1 million last year, again, just working to keep as tight as possible selling off some of the older electronic inventory and managing the Linkstar inventory.

This year, for this quarter ending June, we are still down slightly from the March balance sheet to the June balance sheet. And it is really kind of offsetting – we're up about $100,000 in our Linkstar operation. We did introduce two new products – or rather introduced one new product and reintroduced a new product very recently, our pet vitamins which we kicked off earlier in the year. We have some vendor supply issues there which we cured and started receiving those in at the end of the June quarter. And our (pro-lash) is a product is the new product that we’ve introduced recently here.

And just some of the billing issues we’ve have had in Linkstar in the second quarter, inventory grew there about 100,000. And our inventory actually in the security segment went down by just a little bit less than 100,000.

So, we are showing a little bit slower turnovers because of that. But nothing that’s really alarming us. Assets held for sale are down about $1.3 million on the beginning of the year are large because we did sell off two Lubbock sites in the six months ending June. Our goodwill is down from 7.9 million to 4.8 million. And that was directly related to a write-off we took this quarter of about 3.1 million on our Linkstar, Goodwill.

Our intangible – other intangible assets are down about 763,000.

Again, this quarter, we wrote down some other intangibles related to our Linkstar operation by about $275,000 and the remainder or about $487,000 relates to intangible writes down in the MSP and some of our other operations. And accounts payable and accrued expenses, that liability is up to about 3.1 million from the beginning of the year and the largest part of that is the accrual of the 4.5 million of Paolino award.

So, again, I just want to kind of highlight some of those bigger changes on the balance sheet.

Two comments on our car washes, we basically continue to work to sell off the car washes. We are down to about five car washes as we speak. We have one carwash left in Lubbock, Texas and we have four car washes left in Arlington, Texas.

Our revenues are, you know, dwindling down there. We’re now generating for the three months ending June only about $1.5 million of revenues. What’s good to see is that our total decrease in volumes for three months versus last year ay six months versus last year six months is exactly equal to the amount of cars at the sites we sold were generating. So, we are retaining the business that we have from the existing car washes.

As I mentioned, we have five car washes left. Of those five car washes, two are under agreement right now. One of the carwash under agreement is our large site in Arlington will be referred to as Colonial Number One. That is under agreement dated June 1, sale price of about $2.1 million, net book value of about $2 million. Right now, that deal has gone through with the initial 45-day inspection period, which would have ended the middle of July.

At that point, the buyer put a hard $30,000 in escrow – should pay the escrow in hard for $30,000. They recently just put off the first of three $10,000 escrow payments for the 30-day extension period. So, we now have $40,000 up hard on that side in escrow deposits.

The agreement gave them the right to ask us to pull the tanks as they furthered the work with their bankers and following up on their new diligence. We did start that process about a week ago and that’ll be wrapped up in a couple of weeks.

They saw the opportunity to put up two more $10,000 deposits for a two 30-day extension period on top of the extensions they've asked for. So, if you’re looking at all those extension periods and inspection periods and closing periods, the latest that that car wash technically can close would be the beginning of December, around December 1 or November 30th. So, you know, continue to work with the buyer, things are progressing well, so we continue to be, you know, optimistic on that site closing.

The other site under agreement is our large site in Lubbock, Texas known as Crystal Falls that's under agreement dated May 24th for $1.7 million. That site we have (write) down in the past $1.7 million. Again, that site has gone through its 45-day feasibility of process, the buyer did put up the initial $25,000 escrow deposit that is hard and not refundable.

They recently put up another $10,000 part escrow deposit so now we're at $35,000 and they're continuing to work through their due diligence and they hedged up two more 30-day feasibility or I should say extension period. They can ask for a $10,000 of hard escrow money each.

So, depending on the way that site rolls out, that site would require to be closed in November or if you go into early January should they decide to also want the tanks pulled which they would have to pull – would do at their own cost but that provides them a little bit more time under the agreement. And again, that deal is moving along well.

Other than those two deals, again there's three. There will be three sites left all in the Arlington/Fort Worth area with a current book value of about $1.2 million left on those and about $100,000 of debt. So, in addition to these two sites which after debt would clear about a million three on Colonial One and about $900,000 on the Lubbock site. There's again three other sites that should clear up the debt about $1 million if we can get a net book value for those sites.

So that's (inaudible) update on the car washes. Another asset that I mentioned in our 10-Q that we’ve put up for sale is our Texas building. Dennis and I had done an analysis. We recently have not been using all that space as we've said on other calls. We moved most of the office people to Florida and we really have – we're using probably about five percent to 10 percent of the office space there. We've started looking for a possible tenant and then looking at this space we're using also in the warehouse for product, we just decided that we are inefficiently using that using, lease rates are very attractive right now and we decided to put that building up for sale and we do have it listed. You know, we would hope to clear it somewhere in the million and one or a million two range of cash after we would pay off a mortgage that we have on that building.

But as far as our debt structure goes, we're down to about $2.7 million in debt as of June, about $1.9 million related to the car washes, additionally there is the mortgage on the Texas building which is about a 580,000 and we have about $140,000 of (capwise) leases, most of which we inherited on our monitoring station company.

As far as our treasury stock goes, we have not purchased any treasury stock in the last quarter. We did purchase about $350,000 last year and about another $178,000 in this first quarter. And when you combine that with the purchase we did in 2007, 2008, we've spent about $775,000 to date on our stock repurchasing plan.

Last thing I want to make a comment on is our net operating losses. In disclosing our 10-K with about $35.6 million of annual carry forwards not expiring until a different period, but the ultimate was 2029. I think the only amount expiring in $35 million in the next year is about 900,000 and with the losses that are tax deductible in the first six months about $9.4 million additional and it (won’t) carry forward would accrued our NOL situation so we would have just a little over $45 million of NOLs as of June 30th, again expiring towards 2030 ultimately.

With that, I'm going to stop talking and I'm going to turn the call over to Dennis. Dennis?

Dennis Raefield

Thank you, Greg.

Welcome everyone to our Q2 call. I appreciate you joining us today and I would just like to get into some overall comments about where we're going. While the absolute numbers in the 10-Q with all those impairment charges are painful, I think it's a little less obvious that in the result that there's some excellent news here and I'd like to focus on that so we'll make sure that we understand it.

Number one, our security segment which has been the focus of the company since we changed management to move towards security and away from diverting energies that we had, that the security segment revenue continues to grow, the security segment is getting healthier every month and I am not pleased with it yet, but it is an improvement. We are going in the right direction.

I would like to note, as Greg I think mentioned it, our EBITDA loss for Mace in this quarter is the lowest level since 2006. So, we have not been at this level since 2006 before so it's a very, very low number and even that includes with the huge loss that we took in this last quarter from Linkstar. We took about a $260,000 hit in Linkstar. In this last quarter, we're still at our lowest level. Our SG&A cost, so it’s the lowest level also since 2006 even though we acquired Linkstar and Central Station, we're still lowest number we've ever been since 2006.

Our security segment, which when I went back and looked at the numbers since 2007, really lost an average of $300,000 per quarter to $1 million a quarter in the security segment. In Q2, we lost $177,000 EBITDA in Q2 and that includes some huge severance costs. And if we take out those severance costs, the security segment lost only $49,000 on a pro forma basis. So, we are very, very close to breakeven for those of you that are wondering when it's going to happen. The security segment is very close and I'm pleased that we've done so many things here to get the cost level down. It is close as I said.

In spite of the positive news, I was not happy with our growth in Q2 because we should be recovering in my mind at a faster rate. I shook up the security segment management. I eliminated the president and two vice president positions, VP of operation and VP of marketing, and I am now the acting president for that division. We needed to change the direction we were growing but it's such a slow rate, I felt we should grow more.

So, I took over the presidency and I'm pleased to announce that I hired Mr. Erik Vorbeck. He’s originally from Northern Video and (Tri-Ad) and he's our new national sales manager. So, he started in – at the middle of June and our numbers continue to improve for July over June and June over May so we are growing again.

And in addition, I promoted George Martinez. He was our head of – vice president of product development. He’s now vice president and general manager and he handles all the back office functions as well as continuing to handle production development. So, it took significant cost out of the division and hopefully put in the right team to increase sales. At the same time, we finished our video products upgrade so we now have first-class video products. And better than that, we have very, very competitive prices and a very strong sales team. So I believe now that that division has no excuses except to begin to perform as we've intended it to do.

Mace Personal Defense, as Greg mentioned, our famous Mace Pepper Spray did struggle in Q2 with supply chain issues and it held down the top line. It's also as he said, a bell curve, so it tends to be the weakest quarter, but we expect Q3 to be strong and we expect our August numbers to be very strong as he's broken – our president, John Goodrich, has broken through the supply chain issues.

Our Mace Central Station is steadily profitable and it's growing slowly. Central stations do not grow rapidly but it is growing and it's growing at a time when most central stations are still shrinking from the recession. We are taking market share. It's because we have a good management team, we are highly automated now and we have cleaned out the accounts that weren’t paying so we have all well-performing and good accounts receivable.

The remaining car washes that we have, even though they’re in discontinued operations, were profitable in Q2. I intend to keep them profitable and continue to size them. They've been loss generators as we wound down, but now we've got them sized correctly so they did generate profit in Q2. It's the first time in three quarters that they've been profitable. So, we are making sure that those stay profitable or the remaining ones will closed down that aren’t under contract.

Our major challenge remains to be Linkstar and we took a 35 percent drop as Greg mentioned in Q2 over Q1. We had been recovering and these credit card issues, the change in the finance laws enacted by Congress in February have had some devastating tolls on the way we process. It has nothing to do with the desire for our product, it has to do with the consumer's ability to pay for the product originally and now it's the ability of credit card processors who do not want to handle this kind of business.

They have gotten very conservative, these processors, and in the middle of Q2, they completely, as Greg said, cut off one product line, just one of our product lines, but it happened to be the one that was growing the most which was the tooth whitener. They didn’t do it because of anything that Mace did, they did it because they did not like tooth whitening space. There were too many people with fraud and over-promising claims and Mace because our Linkstar division because we run it very conservatively, had an excellent product and had no problems and we have tremendous demand for it but we cannot get a credit card processor to process the payment for an entire month.

We then offshore to European banks who tried it for a month and then also shut down and we are now – have re-opened and signed up a new processor but at the price of paying 10 percent of the top line for credit card processing. Luckily this business has a high gross profit margins. We can absorb that 10 percent. but this tells you that this business model is changing significantly and it needs to fit into a company that has regular and traditional products and that this business is up for sale and we will sell it if we get enough money to make a good business decision for Mace overall.

The business has recovered. We have got the processors in place. We have got the supply chain issues re-opened and so I'm cautiously positive but I was – we were required to write down $3.4 million, 3.1 of goodwill on this – mostly goodwill – to get it in line with the future expectations because we're running it as a business to make a profit and at a smaller level of revenue until things improve.

So, as I look into the future, I would tell you that Linkstar remains a formidable issue. We seem to see new things that pop up on a regular basis in this credit card space. I think any of you that have credit card statements and have looked at it, you see down at the bottom of your statement and now it says if you make a minimum payment, you will not pay off your credit card for 40 years and people have started to react to that and we have seen that struggle of people to make what I would call optional purchases which many of the things we sell are optional and they have slowed down significantly.

We do see some improvement. Ron Gdovic, our president of that division has been very aggressive in finding new sources or new ways of doing revenue and we do have some hot new products, both the pet vitamins and we just released last week and have seen tremendous demand for (Pro-Lash), a natural lash lengthener that competes with Latisse that doesn’t require a doctor's prescription to get it and it's quite effective. So, that's – enough on Linkstar. It is an issue we're watching tightly. It is a dangerous area but I think we've got it under control.

The security segment continues to grow and I expect now with new sales management and the new products that are released to raise the top line more than the two to five percent per month we've been experiencing, we need to get this thing across that finish line and into profitability, we're very close. We should have strong growth in MSP and the Mace Personal Defense in the balance of the year. The Central Station will be steady and continue to be profitable.

So, I have – I'm the most optimistic about the future that I have been in the last year and we continue to look for merger partners because our biggest cost now is the cost of being a public company and it is well over $1 million a year of our SG&A. It is the cost of being on NASDAQ. And so we need to combine with another company that wants to be on NASDAQ. We have looked at merger partners. It doesn’t do us any good to buy somebody who's in trouble or to merge with somebody who's in trouble.

So, we continue to look and there are several underway and we will report them as we get near them. We are conserving our cash and we'd be required to pay out on the Paolino settlement. There's no new updates on that. We don't expect it to be very quickly but we – there's a potential for us to have to pay it out and we're conserving our cash to be able to pay that settlement and continue to operate should we not prevail.

As I said, I'm the most – in closing, I'm the most optimistic about the future that I have been for a year and we do have most of these issues behind us and the focus on security segment is working. So, with that, I'd like to open up to questions and see if I can answer any of them for you or if Greg can.

Question-and-Answer Session

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