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| MACE > SEC Filings for MACE > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto included in this report on Form 10-Q.
Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements other than statements of historical fact included in this report are Forward-Looking Statements. Although we believe that the expectations reflected in such Forward-Looking Statements are reasonable, we can give no assurance that such expectations will prove to be correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, number of acquisitions, and projected or anticipated benefits from acquisitions made by or to be made by us, or projections involving anticipated revenues, earnings, and levels of capital expenditures or other aspects of operating results. All phases of our operations are subject to a number of uncertainties, risks, and other influences, many of which are outside our control and any one of which, or a combination of which, could materially affect the results of our operations and whether Forward-Looking Statements made by us ultimately prove to be accurate. Such important factors that could cause actual results to differ materially from our expectations are disclosed in Part II, Item 1A. Risk Factors of this report. All subsequent written and oral Forward-Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the important factors described below that could cause actual results to differ from our expectations. The Forward-Looking Statements made herein are only made as of the date of this filing, and we undertake no obligation to publicly update such Forward-Looking Statements to reflect subsequent events or circumstances.
Summary of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company's financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are described below.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 104, Revenue Recognition in Financial Statements. Under SAB No. 104,
the Company recognizes revenue when the following criteria have been met:
persuasive evidence of an arrangement exists, the fees are fixed and
determinable, no significant obligations remain and collection of the related
receivable is reasonably assured. Allowances for sales returns, discounts and
allowances, are estimated and recorded concurrent with the recognition of the
sale and are primarily based on historical return rates.
Revenues from the Company's Security Segment are recognized when shipments are made and title has passed, and are recorded net of sales and discounts.
Revenues from the Company's Digital Media Marketing Segment are recognized in accordance with SAB No. 104, Revenue Recognition in Financial Statements. The e-commerce division recognizes revenue and the related product costs for trial product shipments after the expiration of the trial period. Marketing costs incurred by the e-commerce division are recognized as incurred. The online marketing division recognizes revenue and cost of sales consistent with the provisions of the Emerging Issues Task Force ("EITF") Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company records revenue based on the gross amount received from advertisers and the amount paid to the publishers placing the advertisements as cost of sales.
Revenues from the Company's Car Wash Segment are recognized, net of customer coupon discounts, when services are rendered or fuel or merchandise is sold. The Company records a liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care locations but not yet redeemed. The Company estimates these unredeemed amounts based on gift certificate and ticket book sales and redemptions throughout the year, as well as utilizing historical sales and tracking of redemption rates per the car washes' point-of-sale systems. Seasonal and annual passes are amortized on a straight-line basis over the time during which the passes are valid.
Shipping and handling costs related to the Company's Security and Digital Media Marketing Segments of $810,000 and $277,000 in the three months ending September 30, 2008 and 2007, respectively and $2.0 million and $725,000 in the nine months ending September 30, 2008 and 2007, respectively are included in selling, general and administrative (SG&A) expense.
Accounts Receivable
The Company's accounts receivable are due from trade customers. Credit is extended based on evaluation of customers' financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. Accounts that are outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Risk of losses from international sales within the Security Segment are reduced by requiring substantially all international customers to provide irrevocable confirmed letters of credit and/or cash advances.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) method for security, e-commerce and car care products. Inventories at the Company's car wash locations consist of various chemicals and cleaning supplies used in operations and merchandise and fuel for resale to consumers. Inventories within the Company's Security Segment consist of defense sprays, home protection products, child safety and personal protection products, electronic security monitors, cameras and digital recorders, and various other consumer security and safety products and their component parts. Inventories within the e-commerce division of the Digital Media Marketing segment consist of several health and beauty products. The Company continually reviews the book value of slow moving inventory items, as well as discontinued product lines to determine if inventory items are properly valued. The Company identifies slow moving or discontinued product lines and assesses the ability to dispose of them at a price greater than costs. If it is determined that cost is less than market value, then cost is used for inventory valuation. If market value is less than cost, then an adjustment is made to the Company's obsolescence reserve to adjust the inventory to market value.
Advertising and Marketing Costs
The Company expenses advertising costs in its Security and Car Wash Segments, including advertising production cost, as the costs are incurred or the first time the advertisement appears. Marketing costs in the Company's Digital Media Marketing Segment, which consist of the costs to acquire new members for its e-commerce business, are expensed as incurred rather than deferred and amortized over the expected life of a customer, based on the Company's application of Statement of Position ("SOP") 93-7. Under SOP 93-7, a company can capitalize and amortize direct-response advertising costs in a stable, established market where a company can demonstrate a history of profitability in the related product or advertising campaign. The Company's determination is that neither the history nor stable market criteria are currently met.
Impairment of Long-Lived Assets
In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, when events and circumstances warrant such a review. If significant events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. Cash flow projections are sometimes based on a group of assets, rather than a single asset. If cash flows cannot be separately and independently identified for a single asset, we determine whether an impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, an impairment in the amount of the difference is recorded.
Goodwill
In accordance with SFAS 142, Goodwill and Other Intangible Assets, the Company completes its annual impairment tests as of November 30 for its Security Segment and as of June 30 for its Digital Media Marketing Segment. In addition, an impairment test is conducted whenever there is an impairment indicator. The Company's annual impairment testing corresponds with the Company's determination of its annual operating budgets for the upcoming year. The Company's valuation of goodwill is based on a discounted cash flow model applying an appropriate discount rate to future expected cash flows and management's annual review of historical data and future assessment of certain critical operating factors, including security product and e-commerce sales and related costs, car wash volumes, average car wash and detailing revenue rates per car, wash and detailing labor cost percentages, weather trends and recent and expected operating cost levels. Estimating cash flows requires significant judgment including factors beyond our control and our projections may vary from cash flows eventually realized. Adverse business conditions could affect recoverability of goodwill in the future and, accordingly, the Company may record additional impairments in subsequent years.
Other intangible assets consist primarily of deferred financing costs, non-compete agreements, customer lists, software costs, product lists and trademarks. In accordance with SFAS 142, Goodwill and Other Intangible Assets, our trademarks are considered to have indefinite lives, and as such, are not subject to amortization. These assets are tested for impairment using discounted cash flow methodology annually and whenever there is an impairment indicator. Estimating future cash flows requires significant judgment and projections may vary from cash flows eventually realized. Several impairment indicators are beyond our control, and determining whether or not they will occur cannot be predicted with any certainty. Deferred financing costs are amortized on a straight-line basis over the terms of the respective debt instruments. Customer lists, product lists, software costs, patents and non-compete agreements are amortized on a straight-line or accelerated basis over their respective assigned estimated useful lives.
Income Taxes
Deferred income taxes are determined based on the difference between the financial accounting and tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change during the period in the deferred income tax assets and deferred income tax liabilities. In establishing the provision for income taxes and deferred income tax assets and liabilities, and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted laws, published tax guidance and estimates of future earnings. Deferred income tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Stock-Based Compensation
The Company has two stock-based employee compensation plans. The Company follows SFAS 123(R), Share-Based Payment, which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is recognized as compensation expense on a straight-line basis over the vesting period of the instruments, based upon the grant date fair value of the equity or liability instruments issued. Total stock compensation expense is approximately $255,000 and $548,000 for the three and nine month periods ended September 30, 2008, respectively ($255,000 in SG&A expense, and nothing recorded to discontinued operations during the three month period ending September 30, 2008 and $545,400 in SG&A expense and $2,600 in discontinued operations in the nine month period) and $772,000 and $1.1 million for the three and nine month periods ended September 30, 2007, respectively, ($769,600 in SG&A expense and $2,400 in discontinued operations in the three month period and $1.1 million in SG&A expense and $7,700 in discontinued operations in the nine month period).
The Company expects the application of SFAS 123(R) to result in stock compensation expense and therefore a reduction of income before income taxes in 2008 of approximately $590,000 to $600,000. The Company's actual stock compensation expense in 2008 could differ materially from this estimate depending on the timing, magnitude and vesting of new awards, the number of new awards and changes in the market price or the volatility of the Company's common stock.
Supplementary Cash Flow Information
Interest paid on all indebtedness was approximately $118,000 and $294,000 for the three months ended September 30, 2008 and 2007, respectively and $425,000 and $1.2 million for the nine months ended September 30, 2008 and 2007, respectively. Income taxes paid were $447,000 and $81,000 for the nine months ended September 30, 2008 and 2007, respectively. Noncash investing and financing activity of the Company include the recording of the sale of property and equipment and the simultaneous pay down of related mortgages of $4.2 million for the nine months ended September 30, 2008.
Revenues
Security
Our Security Segment designs, manufactures, markets and sells a wide range of products. The Company's primary focus in the Security Segment is the sourcing and selection of electronic surveillance products and components that it produces and sells, primarily to installing dealers, system integrators, retailers and end users. Other products in our Security Segment include, but are not limited to, less-than-lethal Mace® defense sprays, other personal defense products, high-end digital and machine vision cameras and imaging components, as well as video conferencing equipment and monitors. The main marketing channels for our products are industry shows and publications, outside sales representatives, catalogs, internet and sales through a call center. Revenues generated for the nine months ended September 30, 2008 for the Security Segment were comprised of approximately 35% from our professional electronic surveillance operation in Florida, 44% from our consumer direct electronic surveillance and machine vision camera and video conferencing equipment operation in Texas, and 21% from our personal defense operation in Vermont.
Digital Media Marketing
Prior to June 2008, our Digital Media Marketing Segment consisted of an online marketing and e-commerce business which had two business divisions: (1) online marketing and (2) e-commerce. After June 2008 we discontinued the online marketing services to outside customers and our Digital Media Marketing Segment is now essentially an online e-commerce business.
PromoPath, our online affiliate marketing company, drove customer acquisitions or leads for advertising clients principally using promotional internet sites offering free gifts. Promopath was paid by its clients based on the cost-per-acquisition ("CPA") model. PromoPath's advertising clients were typically established direct-response advertisers with well recognized brands and broad consumer appeal such as NetFlix®, Discover® credit cards and Bertelsmann Group. PromoPath generated CPA revenue, both brokered and through co-partnered sites, as well as list management and lead generation revenues. CPA revenue in the digital media marketplace refers to paying a fee for the acquisition of a new customer, prospect or lead. List management revenue is based on a relationship between a data owner and a list management company. The data owner compiles, collects, owns and maintains a proprietary computerized database composed of consumer information. The data owner grants a list manager a non-exclusive, non-transferable, revocable worldwide license to manage, use and have access to the data pursuant to defined terms and conditions for which the data owner is paid revenue. Lead generation is referred to as cost per lead ("CPL") in the digital media marketplace. Advertisers purchasing media on a CPL basis are interested in collecting data from consumers expressing interest in a product or service. CPL varies from CPA in that no credit card information needs to be provided to the advertiser for the publishing source to be paid for the lead.
In June of 2008, the Company discontinued marketing PromoPath's online marketing services to external customers. PromoPath's primary mission is now focused on increasing the distribution of the products of the e-commerce division, Linkstar.
Our e-commerce division is a direct-response product business that develops,
markets and sells products directly to consumers through the internet. We reach
our customers predominately through online advertising on third party
promotional web sites. Before discontinuing PromoPath, Linkstar also marketed
products on promotional web sites operated by PromoPath. Our products include:
Vioderm, an anti-wrinkle skin care product (www.vioderm.com); Purity by Mineral
Science, a mineral cosmetic (www.mineralscience.com); TrimDay™, a weight-loss
supplement (www.trimday.com); Eternal Minerals, a dead sea spa product line
(www.eternalminerals.com); and Extreme Brite White, a teeth whitening product
(www.extremebritewhite.com) as well as Mace's pepper sprays and surveillance
products. We continuously develop and test product offerings to determine
customer acquisition costs and revenue potential, as well as to identify the
most efficient marketing programs.
Car Wash Services
At September 30, 2008, we owned full service and self-service car wash locations in Texas. We earn revenues from washing and detailing automobiles; performing oil and lubrication services, minor auto repairs, and state inspections; selling fuel; and selling merchandise through convenience stores within the car wash facilities. Revenues generated in the nine months ended September 30, 2008 for the Car Wash Segment were comprised of approximately 64% from car washing and detailing, 20% from lube and other automotive services, and 16% from fuel and merchandise. Additionally, our Arizona, Florida, Lubbock, Texas, San Antonio, Texas and Northeast region car washes and our truck washes are being reported as discontinued operations (see Note 4 and 5 of the Notes to Consolidated Financial Statements), and accordingly, have been segregated from the following revenue and expense discussion. Revenues from discontinued operations were $2.9 and $12.3 million for the nine months ending September 30, 2008 and 2007, respectively. Operating (loss) income from discontinued operations was $(1.5) million, and $259,000 for the nine months ended September 30, 2008 and 2007, respectively.
The Company executed a lease-to-sell agreement on December 31, 2005 with Eagle to lease Mace's five truck washes beginning January 1, 2006 for up to two years. Pursuant to the terms of the agreement, Eagle paid Mace $9,000 per month to lease the Company's truck washes and was responsible for all underlying property expenses. On December 31, 2007 Eagle completed the purchase of the truck washes for $1.2 million consideration, consisting of $280,000 cash and a $920,000 note payable to Mace secured by mortgages on the truck washes. The $920,000 note, which has a balance of $899,000 at September 30, 2008, has a five-year term, with principal and interest paid on a 15-year amortization schedule. As a result, we did not recognize revenue or operating expenses during the term of the lease other than rental income and interest expense.
The majority of revenues from our Car Wash Segment are collected in the form of cash or credit card receipts, thus minimizing customer accounts receivable.
Cost of Revenues
Security
Cost of revenues within the Security Segment consists primarily of costs to purchase or manufacture the security products including direct labor and related taxes and fringe benefits, and raw material costs. Product warranty costs related to the Security Segment are mitigated in that a significant portion of customer product warranty claims are reimbursed by the supplier.
Digital Media Marketing
Cost of revenues within the Digital Media Marketing Segment consist primarily of amounts we pay to website publishers that are directly related to revenue-generating events, including the cost to enroll new members, fulfillment and warehousing costs, including direct labor and related taxes and fringe benefits and e-commerce product costs.
Car Wash Services
Cost of revenues within the Car Wash Segment consists primarily of direct labor and related taxes and fringe benefits, certain insurance costs, chemicals, wash and detailing supplies, rent, real estate taxes, utilities, car damages, maintenance and repairs of equipment and facilities, as well as the cost of the fuel and merchandise sold.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of management, clerical and administrative salaries, professional services, insurance premiums, sales commissions, and other costs relating to marketing and sales.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings and equipment, and amortization of leasehold improvements and certain intangible assets. Buildings and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or the lease term with renewal options. Intangible assets, other than goodwill or intangible assets with indefinite useful lives, are amortized over their useful lives ranging from three to fifteen years, using the straight-line method.
Other Income
Other income consists primarily of rental income received on renting out excess space at our car wash facilities and gains and losses on short-term investments.
Income Taxes
Income tax expense is derived from tax provisions for interim periods that are based on the Company's estimated annual effective rate. Currently, the effective rate differs from the federal statutory rate primarily due to state and local income taxes, non-deductible costs related to acquired intangibles, and changes to the valuation allowance.
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents and short-term investments were approximately $12.8 million at September 30, 2008. The ratio of our total debt to total capitalization, which consists of total debt plus stockholders' equity, was 13.3% at September 30, 2008, and 20.2% at December 31, 2007.
One of our short-term investments is in a hedge fund. We requested redemption of the hedge fund investment on June 18, 2008. Under the Limited Partnership Agreement with the hedge fund, the redemption request was timely for a return of the investment account balance as of September 30, 2008, payable ten business days after the end of the September 30, 2008 quarter. The hedge fund acknowledged that the redemption amount owed was $3,206,748; however, on October 15, 2008 the hedge fund asserted the right to withhold the redemption amount due to extraordinary market circumstances. After negotiations, the hedge fund agreed to pay the redemption amount in two installments, $1,000,000 on November 3, 2008 and $2,206,748 on January 15, 2009. The Company received the first installment of $1,000,000 on November 5, 2008. The original amount invested in the hedge fund was $2,000,000.
Our business requires a substantial amount of capital, most notably to fund operating losses, make capital improvements to the car wash properties we still own and to pursue our expansion strategies. Our expansion strategy is to grow revenue by making accretive acquisitions in the Security and Digital Media Marketing business sectors. We plan to meet these capital needs from various financing sources, including borrowings, internally generated funds, and the issuance of common stock, if the market price of the Company's stock is at an acceptable level.
As of September 30, 2008, we had working capital of approximately $21.9 million. At December 31, 2007, working capital was approximately $17.8 million. Our working capital increased by approximately $4.1 million from December 31, 2007 to September 30, 2008 principally due to the sale of our six Florida car washes in the first quarter of 2008 and the repayment of their related mortgage debt, which was recorded as current at December 31, 2007. Additionally, we reclassed approximately $1.7 million of mortgage loans related to several Texas car washes and our security operation warehouse facility in Farmers Branch, Texas from non-current to current as a result of this debt being up for renewal from June 2009 to September 2009. Although we expect that we will be successful in renewing this debt, or paying off the car wash related mortgage debt with proceeds from the sale of the car wash facilities, there can be no assurances that this will occur.
During the nine month periods ended September 30, 2008 and 2007, we made capital expenditures within our Car Wash Segment of $196,000 and $320,000, respectively, including $25,000 and $218,000, respectively, of capital expenditures related to . . .
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