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<table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="vertical-align: top;"><td style="width: 0.25in;"><b>1.</b></td><td><b>Description of Business and Basis of Presentation</b></td></tr></table><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The accompanying consolidated financial statements include accounts of Mace Security International, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Mace”). All significant intercompany transactions have been eliminated in consolidation.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company currently operates in one business segment, the Security Segment, which consists of three operating or reporting units: Mace Personal Defense, Inc., which sells consumer safety and personal defense products; Mace Security Products, Inc., which sells electronic surveillance equipment and products; and Mace CSSS, Inc. (“Mace CS”), which provides wholesale security monitoring services. The Company entered the wholesale security monitoring business with its acquisition of Central Station Security Systems, Inc. (“CSSS”) on April 30, 2009. See <i>Note 4. Business Acquisitions and Divestitures</i>.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company had a Car Wash Segment which provided complete car care services (including car wash, detailing, lube, and minor repairs). As of March 31, 2012, there were two remaining car washes, both of which were located in Texas. The assets and liabilities of our remaining car wash operations are classified as assets held for sale and liabilities related to assets held for sale in the balance sheet and the results of operations for the car washes are reflected as discontinued operations in the statements of operations and the statements of cash flows.</p>
<table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="text-align: left; width: 0.25in;"><b>2</b>.</td><td style="text-align: justify;"><b>New Accounting Standards</b></td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b> </b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">In June 2011, the FASB issued ASU 2011-05, <i>Presentation of Comprehensive Income</i>. ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220, <i>Comprehensive Income</i>, and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. In December 2011, the FASB issued ASU 2011-12 which defers the requirement in ASU 2011-05 that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company has adopted ASU 2011-05, as amended by ASU 2011-12, beginning with the quarter ended March 31, 2012. The Company presents the new requirement in two separate but consecutive statements. The new requirement had no material impact on the Consolidated Financial Statements.</p>
<table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="text-align: left; width: 0.25in;"><b>3.</b></td><td style="text-align: justify;"><b>Other Intangible Assets</b></td></tr></table><p style="text-align: justify; text-indent: 1in; margin: 0pt 0px 0pt 0.6pt; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px 0pt 0.6pt; font: 10pt times new roman, times, serif;">The following table reflects the components of intangible assets, excluding goodwill and other intangibles classified as assets held for sale (in thousands):</p><p style="margin: 0pt 0px 0pt 0.6pt; font: 10pt times new roman, times, serif;"> </p><table style="width: 93%; border-collapse: collapse; font: 10pt times new roman, times, serif; margin-left: 0.25in;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td style="text-align: left; font-size: 1pt;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="6" nowrap="nowrap">March 31, 2012</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="6" nowrap="nowrap">December 31, 2011</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td style="text-align: left; font-size: 1pt;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">Gross <br />Carrying <br />Amount</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap"><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"><b>Accumulated</b></p><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>Amortization</b></p></td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">Gross <br />Carrying <br />Amount</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap"><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"><b>Accumulated</b></p><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>Amortization</b></p></td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td style="text-align: left; font-size: 1pt;"> </td><td style="padding-bottom: 1pt; font-weight: bold;"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="14">(in thousands)</td><td style="padding-bottom: 1pt; font-weight: bold;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left;">Amortized intangible assets:</td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="width: 48%;">Non-compete agreements</td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">169</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">131</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">169</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">128</td><td style="text-align: left; width: 1%;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left;">Customer and product lists</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">2,226</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">1,110</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">2,226</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">1,087</td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left;">Patent costs and trademarks</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">130</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">77</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">130</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">69</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc;
vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt;">Deferred financing costs</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">123</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">123</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">123</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">123</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left;">Total amortized intangible assets</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">2,648</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">1,441</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">2,648</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">1,407</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left;">Non-amortized intangible assets:</td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td><td style="text-align: right; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt;">Trademarks - Security Segment</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">653</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">646</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt;">Total other intangible assets</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">3,301</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">1,441</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">3,294</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">1,407</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr></table><p style="text-align: justify; margin: 0pt 0px 0pt 0.6pt; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px 0pt 0.6pt; font: 10pt times new roman, times, serif;">The following sets forth the estimated amortization expense on intangible assets for the fiscal years ending December 31 (in thousands):</p><table align="center" style="width: 25%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: justify; width: 49%;">2012</td><td style="width: 2%;"> </td><td style="text-align: left; width: 2%;">$</td><td style="text-align: right; width: 45%;">120</td><td style="text-align: left; width: 2%;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: justify;">2013</td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">112</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: justify;">2014</td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">98</td><td
style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: justify;">2015</td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">92</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: justify;">2016</td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">89</td><td style="text-align: left;"> </td></tr></table><p style="text-align: justify; text-indent: -45pt; margin: 0pt 0px 0pt 270.6pt; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Amortization expense of other intangible assets, net of discontinued operations, was approximately $34,000 and $37,000 for the three months ended March 31, 2012 and 2011, respectively. The weighted average useful life of amortizing intangible assets was 10.85 years as of March 31, 2012.</p>
<table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="text-align: left; width: 0.25in;"><b>4.</b></td><td style="text-align: justify;"><b>Business Acquisitions and Divestitures</b></td></tr></table><p style="text-align: justify; margin: 0pt 0px 0pt 0.6pt; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"><b><i>Acquisitions</i></b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On March 31, 2011, the Company completed the purchase of all of the outstanding common stock of The Command Center, Inc. (“TCCI”). Total consideration was approximately $1.36 million, consisting of approximately $1.23 million in cash and the assumption of approximately $135,000 of liabilities. TCCI’s operations have been combined with the operations of Mace CS in Anaheim, California. TCCI was formerly located in Corona, California. TCCI had approximately 70 security dealer clients and approximately 22,500 end-user accounts. Mace CS, combined with TCCI, currently monitors over 70,500 end-user accounts through 490 security dealer clients. TCCI’s primary assets are accounts receivable, equipment and customer contracts. The fair value of the identifiable assets acquired and liabilities assumed as of the TCCI acquisition date include: (i) $60,000 for accounts receivable; (ii) $3,000 for prepaid expenses and other assets; (iii) $42,000 for fixed assets and capital leased assets; (iv) the assumption of $127,000 of liabilities; and (v) the remainder, or approximately $1.26 million, allocated to goodwill and other intangible assets. Within the $1.26 million of acquired intangible assets, $823,000 was assigned to goodwill, which is not subject to amortization expense. The amount assigned to goodwill was deemed appropriate based on several factors, including: (i) multiples paid by market participants for businesses in the security monitoring business; (ii) levels of TCCI’s current and future projected cash flows; and (iii) the Company’s strategic business plan, which includes cross-marketing the Company’s surveillance equipment products to TCCI’s and Mace CS’s dealer base as well as offering monitoring services to the Company’s current customers, thus potentially increasing the value of its existing business segment. The remaining intangible assets were assigned to customer contracts and relationships for $385,000, tradename for $28,500, and a non-compete agreement for $20,500. Customer relationships, tradename, and the non-compete agreement were assigned a life of fifteen, five and three years, respectively.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">On May 5, 2011 and July 8, 2011, the Company amended the Stock Purchase Agreement dated April 7, 2009 for the purchase of all the common stock of CSSS, Inc., which the Company had entered into with the former stockholders of CSSS, Inc. Under the May 5, 2011 amendment: (i) the date for the payment to the former stockholders of a $500,000 general holdback of the purchase price was extended from May 1, 2011 to July 1, 2011; (ii) a purchase price holdback relating to a service contract for telephone lines was reduced from $300,000 to $250,000 and the holdback, as reduced, is to be paid to the former stockholders by July 10, 2015, if no legal proceeding has been initiated to collect any amounts owed on the service contract by July 6, 2015; (iii) a purchase price holdback relating to a contract for long distance telephone lines was reduced from $200,000 to $150,000 and the holdback, as reduced, is to be paid to the former stockholders by January 15, 2013, if no legal proceeding has been initiated to collect any amounts owed on the contract for long distance telephone lines by January 12, 2013; and (iv) the $100,000 of reduced holdbacks to be paid to the former stockholders, with $50,000, paid on May 13, 2011 and $50,000 paid on July 15, 2011. The amendment also provided for payment of interest at the rate of 2% per annum on the holdback amounts.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">Under the July 8, 2011 amendment: (i) the date for the payment to the former stockholders of a $500,000 general holdback of the purchase price was extended further from July 1, 2011 to August 15, 2011; and (ii) $50,000 of reduced contingent liability holdbacks were paid to the former stockholders, $25,000 on July 18, 2011 and $25,000 on August 5, 2011. The $500,000 general holdback payment was made on August 15, 2011 as required under the July 8, 2011 amendment.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"><b><i>Divestitures</i></b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On March 8, 2011, the Company completed the sale of the remaining car wash it owned in Lubbock, Texas for a sale price of $1.7 million. The net book value of this car wash was approximately $1.7 million. The cash proceeds of the sale were approximately $300,000, net of payment of the related mortgage for $670,000, a payment of $675,000 towards the $1.35 million promissory note with Merlin Partners, LP (“Merlin”), and closing costs. See <i>Note 12. Related Party Transactions, </i>for additional information and terms regarding the debt instrument with Merlin. The sale resulted in a net loss of approximately $54,000 after customary closing costs and broker commissions.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">On October 21, 2011, the Company completed the sale of certain assets and liabilities related to its Industrial Vision Source (“IVS”) division, which sold high-end digital and machine vision cameras and professional imaging components, for approximately $517,000 in cash paid at closing and a potential further payment of $100,000 if certain revenue levels were achieved in
the first 90 days following the sale. The required revenue levels were achieved and the Company earned the additional $100,000. The Company recognized a gain of $56,000 on the sale in the fourth quarter of 2011 and an additional gain of $100,000 in the first quarter of 2012 related to the additional consideration earned.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On December 16, 2011, the Company completed the sale of its Farmers Branch, Texas warehouse (the “Texas warehouse”) for $1.8 million. The cash proceeds of the sale were $1.17 million, net of paying off existing debt of $494,574 and closing costs. Costs at closing were $120,000, including $109,800 of broker commissions. The sale of the Texas warehouse resulted in a gain of $9,300. Of the $1.17 million of cash proceeds, $439,000 was deposited into a restricted cash account as security against our JPMorgan Chase Bank, N.A. (“Chase”) revolving credit facility and certain letters of credit provided by Chase as collateral relating to workers’ compensation insurance policies.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On February 29, 2012, the Company completed the sale of an Arlington, Texas car wash for a sale price of $2.1 million. The cash proceeds of the sale were $1.57 million, net of paying off existing debt of $512,000 and certain closing costs. The book value of this car wash was approximately $2.0 million at February 29, 2012. The sale resulted in a net gain of approximately $20,000 after customary closing costs.</p>
<table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="text-align: left; width: 0.25in;"><b>5.</b></td><td style="text-align: justify;"><b>Discontinued Operations</b><b>and</b><b>Assets Held for Sale</b></td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company reviews the carrying value of its long-lived assets held and used, and its assets to be disposed of, for possible impairment when events and circumstances warrant such a review. We also follow the applicable guidance in determining when to reclass assets to be disposed of to assets and related liabilities held for sale as well as when an operation disposed of or to be disposed of is classified as a discontinued operation in the statements of operations and the statements of cash flows.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">As of March 31, 2012, the assets of the Company’s former Car Wash Segment being held for sale consisted of two car washes.</p><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The results for the car wash operations have been classified as discontinued operations in the accompanying statements of operations and the statements of cash flows. The classifications of the remaining car washes as discontinued operations is based on these operations being marketed and ready for sale or under an agreement of sale. The Company’s Board of Directors is committed to a plan to dispose of the remaining car washes, within the next twelve months. The statement of operations and the statement of cash flows for the prior year have been restated to reflect the discontinued operations in accordance with GAAP.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Revenues from discontinued operations were $596,000 and $856,000 for the three months ended March 31, 2012 and 2011, respectively. Operating loss from discontinued operations was $47,000 and $74,000 for the three months ended March 31, 2012 and 2011, respectively.</p><p style="text-align: justify; text-indent: 11pt; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Assets and liabilities held for sale were comprised of the following (in thousands):</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><table style="width: 55%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td style="text-align: justify; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">As of March 31, 2012</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td style="font-weight: bold;" nowrap="nowrap">Assets held for sale:</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">Car Washes</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td> </td><td> </td><td style="text-align: center;" colspan="2"> </td><td> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="padding-left: 9pt; width: 85%;">Inventory</td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 12%;">86</td><td style="text-align: left; width: 1%;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt; padding-left: 9pt;">Property, plant and equipment, net</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">302</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in;">Total assets</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">388</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><table style="width: 85%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom; text-decoration: none;"><td style="font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold; text-decoration: none;" colspan="14" nowrap="nowrap">As of December 31, 2011</td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom; text-decoration: none;"><td></td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold; text-decoration: none;" colspan="2" nowrap="nowrap"><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif; text-decoration: none;"><b> </b></p><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif; text-decoration: none;"><b>Car Washes</b></p></td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold; text-decoration: none;" colspan="2" nowrap="nowrap">Digital Media <br />Marketing</td><td
style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold; text-decoration: none;" colspan="2" nowrap="nowrap">Security <br />Segment</td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold; text-decoration: none;" colspan="2" nowrap="nowrap"><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif; text-decoration: none;"><b> </b></p><p style="text-align: center; margin: 0pt 0px; font: 10pt times new roman, times, serif; text-decoration: none;"><b>Total</b></p></td><td style="padding-bottom: 1pt; font-weight: bold; text-decoration: none;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td> </td><td> </td><td style="text-align: center;" colspan="2"> </td><td> </td><td> </td><td style="text-align: center;" colspan="2"> </td><td> </td><td> </td><td style="text-align: center;" colspan="2"> </td><td> </td><td> </td><td style="text-align: center;" colspan="2"> </td><td> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="padding-left: 0.12in; width: 48%;">Inventory</td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">98</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">-</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">-</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 10%;">98</td><td style="text-align: left; width: 1%;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-left: 0.12in;">Other current assets</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">-</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">28</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">-</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">28</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-left: 0.12in;">Property, plant and equipment, net</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">2,313</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">3</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">22</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">2,338</td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt; padding-left: 0.12in;">Intangible assets</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">5</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">5</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt; padding-left: 0.24in;">Total assets</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">2,416</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">31</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">22</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">2,469</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; font-weight: bold;">Liabilities related to assets held for sale:</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align:
left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-left: 0.24in;">Other current liabilities</td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">-</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">24</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">-</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;">$</td><td style="text-align: right;">24</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-left: 0.24in;">Current portion of long-term debt</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">463</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">-</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">-</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">463</td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt; padding-left: 0.24in;">Long-term debt, net of current portion</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">79</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">79</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt; padding-left: 0.36in;">Total liabilities</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">542</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">24</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">-</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">566</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>6. Stock-Based Compensation</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">The Company has two stock-based employee compensation plans. The Company recognizes compensation expense for all share-based awards on a straight-line basis over the life of the instruments, based upon the grant date fair value of the equity or liability instruments issued. Total stock compensation expense was approximately $7,600 and $20,200 for the three months ended March 31, 2012 and 2011, respectively.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><table style="width: 65%; border-collapse: collapse; font: 10pt times new roman, times, serif; margin-left: 1in;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td nowrap="nowrap"> </td><td style="padding-bottom: 1pt;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center;" colspan="6" nowrap="nowrap">Three Months Ended March 31,</td><td style="padding-bottom: 1pt;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td nowrap="nowrap"> </td><td style="padding-bottom: 1pt;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">2012</td><td style="padding-bottom: 1pt;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">2011</td><td style="padding-bottom: 1pt;" nowrap="nowrap"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; width: 70%;">Expected term (years)</td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;"> </td><td style="text-align: right; width: 12%;">5</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;"> </td><td style="text-align: right; width: 12%;">N/A</td><td style="text-align: left; width: 1%;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left;">Risk-free interest rate</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">0.83</td><td style="text-align: left;">%</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">N/A</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td>Volatility</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">50.6</td><td style="text-align: left;">%</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">N/A</td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left;">Dividend yield</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">0</td><td style="text-align: left;">%</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">N/A</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left;">Forfeiture Rate</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">0</td><td style="text-align: left;">%</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">N/A</td><td style="text-align: left;"> </td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Expected term: The Company’s expected life is based on the period the options are expected to remain outstanding. The Company estimated this amount based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements and expectations of future behavior.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Volatility: The Company calculates the volatility of the stock price based on historical value and corresponding volatility of the Company’s stock price over the prior five years.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company granted 400,000 stock options during the three months ended March 31, 2012. There were no stock option grants during the three months ended March 31, 2011. The weighted-average of the fair value of stock option grants are $0.08 per share for the three months ended March 31, 2012. As of March 31, 2012, total unrecognized stock-based compensation expense is $45,500, which has a weighted average period to be recognized of approximately 1.7 years.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.</p>
<table style="margin-top: 0px; font: 10pt times new roman, times, serif; margin-bottom: 0px;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="width: 0in;"></td><td style="text-align: left; width: 0.25in;"><b>7.</b></td><td style="text-align: justify;"><b>Commitments and Contingencies</b></td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On November 16, 2010, the United States Attorney for the District of Vermont (the “U.S. Attorney”) filed a one count indictment charging Mace Security International, Inc. and Jon Goodrich with a felony of storing hazardous waste without a permit under 42 U.S.C. § 6928(d)(2)(A) at the Company’s Bennington, Vermont location. Mr. Goodrich was the President of Mace Personal Defense, Inc., the Company's defense spray division located in Bennington, Vermont. Mr. Goodrich’s employment with the Company ended on September 30, 2011. Mr. Goodrich is also the owner of Benmont Mill Properties, Inc., the owner of the Bennington, Vermont facility and the owner of Vermont Mills Properties, Inc. (“Vermont Mills”), the entity that rents the Bennington, Vermont facility to the Company. The Company resolved the indictment against the Company through a Plea Agreement entered into between the Company's subsidiary, Mace Personal Defense, Inc., and the U.S. Attorney. The Plea Agreement was accepted by the Federal District Court for Vermont on May 26, 2011. Mace Personal Defense, Inc. pled guilty to one count of violating 42 U.S.C. § 6928(d)(2)(A) (Storage of Hazardous Waste Without a Permit) and was fined $100,000 (the "Fine"). The Fine was fully paid during 2011. In addition, the Company incurred legal expenses of $3,100 and $21,400 in the three months ended March 31, 2012 and 2011, respectively, relating to this matter.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The indictment charging Jon Goodrich was resolved with a guilty plea accepted by the Federal District Court in January, 2012. Mr. Goodrich pled guilty to a felony for storing hazardous waste without a permit under 42 U.S.C. § 6928(d)(2)(A) at the Company’s Bennington, Vermont location and agreed to a fine of $100,000. Mr. Goodrich is scheduled to be sentenced on May 16, 2012. The Company has advanced Mr. Goodrich the cost of his defense under the provisions of Article 6 of the Company's Bylaws. The advancements through March 31, 2012 were $85,766. The Company and Mr. Goodrich have entered into an Agreement ("Indemnity Agreement") on January 12, 2012 providing that the Company would not pay any portion of a fine imposed on Mr. Goodrich. The Indemnity Agreement also set a maximum limit to future advancements and indemnity claims of $25,000 with regard to any costs incurred by Mr. Goodrich after November 9, 2011. In exchange for Mr. Goodrich limiting future indemnity claims and agreeing to a five year non-compete agreement with the Company, the Company agreed not to seek recovery of any advancements it paid.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company is a party to various other legal proceedings related to its ordinary business activities. In the opinion of the Company’s management, none of these proceedings are material in relation to the Company’s results of operations, liquidity, cash flows, or financial condition.</p>
<table style="margin-top: 0px; font: 10pt times new roman, times, serif; margin-bottom: 0px;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="width: 0in;"></td><td style="text-align: left; width: 0.25in;"><b>8.</b></td><td style="text-align: justify;"><b>Use of Estimates</b></td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of its consolidated financial statements. The Company bases its estimates on historical experience, actuarial valuations and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. The Company must make these estimates and assumptions because certain information is dependent on future events and cannot be calculated with a high degree of precision from the data currently available. Such estimates include the Company's estimates of reserves, such as the allowance for doubtful accounts, sales returns, warranty allowances, inventory valuation allowances, insurance losses and loss reserves, valuation of long-lived assets, estimates of realization of income tax net operating loss carryforwards, computation of stock-based compensation, as well as valuation calculations such as the Company’s goodwill impairment calculations and derivative liability calculations.</p>
<table style="margin-top: 0px; font: 10pt times new roman, times, serif; margin-bottom: 0px;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="width: 0in;"></td><td style="text-align: left; width: 0.25in;"><b>9.</b></td><td style="text-align: justify;"><b>Income Taxes</b></td></tr></table><p style="text-align: justify; text-indent: 11pt; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b> </b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company recorded income tax expense of $5,000 and $10,000 from continuing operations in the three months ended March 31, 2012 and 2011, respectively. Income tax expense reflects the recording of state income taxes. The effective tax rates are approximately 1.0% and 0.8% for the three months ended March 31, 2012 and 2011, respectively. The effective rate differs from the federal statutory rate for each year, primarily due to state and local income taxes, non-deductible costs related to intangibles, fixed asset adjustments and changes to the valuation allowance. It is management’s belief that it is unlikely that the net deferred tax asset will be realized and, as a result, it has been fully reserved. Additionally, the Company recorded no income tax expense related to discontinued operations for either of the three months ended March 31, 2012 and 2011.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company follows the appropriate accounting guidance which prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on recognition, classification, interest and penalties, disclosure and transition. At March 31, 2012, the Company did not have any significant unrecognized tax benefits. The total amount of interest and penalties recognized in the statements of operations for the three months ended March 31, 2012 and 2011 is insignificant and when incurred is reported as interest expense.</p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>10.   Asset Impairment Charges</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b> </b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">Management periodically reviews the carrying value of our long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. Assets classified as held for sale are measured at the lower of carrying value or fair value, net of costs to sell.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i> </i></b></p><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"><b><i>Continuing Operations</i></b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Due to continuing challenges in our Mace Security Products, Inc. reporting unit, we perform certain impairment testing of our remaining intangible assets, specifically, the value assigned to customer lists, product lists, and trademarks principally related to our consumer direct electronic surveillance operations and our high-end digital and machine vision cameras and professional imaging component operation. As a result of these review procedures, we recorded an impairment charge of $15,000 to trademarks as of September 30, 2011. Additionally, on August 31, 2011, the Company entered into a Commercial Contract, which was subsequently amended on October 19, 2011 and November 7, 2011, to sell its Texas warehouse for $1,830,000. The net book value of the Texas warehouse at September 30, 2011 was approximately $1,725,000 with closing costs and broker commissions estimated at $125,000. Accordingly, we recorded an impairment charge of $20,000 relating to this facility as of September 30, 2011. The sale of the Texas warehouse was completed on December 16, 2011. The cash proceeds from the sale were $1.12 million, net of paying off existing debt of $494,574 and closing costs. Costs at closing were $120,000, including $109,800 of broker commissions. The sale of the warehouse resulted in a gain of $9,300.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Discontinued Operations</i></b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">In September 2011, we evaluated the market value of our remaining car wash site in Arlington, Texas and a site in Fort Worth, Texas with a business broker. Based on our evaluation, we determined that the estimated future proceeds from these sites were below their net book values by $200,000 and $61,000, respectively. Accordingly, we recorded impairment charges of $261,000 related to these two sites at September 30, 2011. With the continued difficulty in selling the remaining Arlington, Texas car wash facility, we re-evaluated our strategy to dispose of this property and accordingly recorded an additional impairment charge of $250,000 at December 31, 2011.</p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>11.  Goodwill</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">In assessing goodwill for impairment, we first compare the fair value of our final reporting unit containing goodwill, our wholesale monitoring business, with its net book value. We estimate the fair value of the reporting unit using discounted expected future cash flows, supported by the results of various market approach valuation models. If the fair value of the reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the net book value of this reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the implied fair value of goodwill in the same manner as if our reporting unit was being acquired in a business combination. Specifically, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">We performed extensive valuation analyses, utilizing both income and market approaches, in our goodwill assessment process. The following describes the valuation methodologies used to derive the fair value of the reporting units:</p><p style="text-align: justify; margin: 0pt 0px 0pt 0.75in; font: 10pt times new roman, times, serif;"> </p><table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="vertical-align: top;"><td style="width: 0.5in;"></td><td style="width: 0.25in;"><font style="font-family: symbol;">·</font></td><td style="text-align: justify;"><i>Income Approach:</i> To determine fair value, we discounted the expected cash flows of the reporting unit. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our reporting units and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we used a terminal value approach. Under this approach, we used estimated operating income before interest, taxes, depreciation and amortization in the final year of our model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption and discounted by a perpetuity discount factor to determine the terminal value. We incorporated the present value of the resulting terminal value into our estimate of fair value.</td></tr></table><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"><tr style="vertical-align: top;"><td style="width: 0.5in;"></td><td style="width: 0.25in;"><font style="font-family: symbol;">·</font></td><td style="text-align: justify;"><i>Market-Based Approach: </i>To corroborate the results of the income approach described above, we estimated the fair value of our reporting unit using several market-based approaches, including the value that we derive based on our consolidated stock price as described above. We also used the guideline company method, which focuses on comparing our risk profile and growth prospects to select reasonably similar guidelines of publicly traded companies.</td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The determination of the fair value of the reporting unit requires us to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. In addition, changes in underlying assumptions would have a significant impact on either the fair value of the reporting unit or the goodwill impairment charge.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also requires us to make significant estimates and assumptions. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, customer relationships, non-competition agreements and current replacement costs for certain property, plant and equipment.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">We conduct our annual assessment of goodwill for impairment for our wholesale security monitoring business reporting unit as of April 30 of each year. This is our remaining business reporting unit with recorded goodwill. With respect to our assessment of goodwill impairment as of April 30, 2011, we determined that there was no impairment in that the fair value for this reporting unit exceeded its net book value by approximately $1.0 million or 22%. Our wholesale security monitoring business had recorded goodwill of $2.8 million at April 30, 2011. The determination of the fair value of this reporting unit requires us to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, expected future revenues and expense levels, the discount rate, terminal growth rates, operating income before depreciation and amortization and capital expenditures forecasts. We periodically update our forecasted cash flows of the wholesale security monitoring reporting unit considering current economic conditions and trends, estimated future operating results, our views of growth rates, anticipated future economic and
relevant regulatory conditions. The key or most significant assumption is our estimate of future recurring revenues. If monthly recurring revenue from security monitoring services within this reporting unit were to be adversely affected by the ongoing economic climate or by other events and we were unable to adjust operating costs to compensate for such revenue loss, this reporting unit would be adversely affected, which would negatively impact the fair value of this business. Based on the Company’s April 30, 2011 assessment, a hypothetical reduction in the annual recurring revenue growth rate from a range of 4% to 5% to an annual recurring revenue growth rate of 1% to 2%, without a corresponding decrease in operating expenses, would result in the fair value for this reporting unit exceeding its net book value at April 30, 2011 by approximately $50,000. Additional events or circumstances that could have a negative effect on estimated fair value of this reporting unit include, but are not limited to, a loss of customers due to competition, pressure from our customers to reduce pricing, the purchase of our dealer customers by third parties who choose to obtain monitoring services elsewhere, the current adverse financial and economic conditions on revenues and costs, inability to continue to employ a competent workforce at current rates of pay, changes in government regulations, accelerating costs beyond management’s control, and management’s inability to control and manage payroll and other operating costs.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The changes in the carrying amount of goodwill for the year ended December 31, 2011 and the three months ended March 31, 2012 are as follows (in thousands):</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><table style="width: 65%; border-collapse: collapse; font: 10pt times new roman, times, serif; margin-left: 0.25in;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td style="text-align: center; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">Security <br />Monitoring <br />Services <br />Reporting <br />Unit</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="width: 82%;">Balance at December 31, 2010</td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 15%;">1,982</td><td style="text-align: left; width: 1%;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="padding-bottom: 1pt;">Acquisition of TCCI</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">823</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="padding-bottom: 2.5pt;">Balance at December 31, 2011 and  March 31, 2012</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">2,805</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b> </b></p>
<table style="margin-top: 0px; font: 10pt times new roman, times, serif; margin-bottom: 0px;" cellspacing="0" cellpadding="0"><tr style="text-align: justify; vertical-align: top;"><td style="width: 0in;"></td><td style="text-align: left; width: 0.25in;"><b>12.</b></td><td style="text-align: justify;"><b>Related Party Transactions</b></td></tr></table><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">The Company’s Security Segment leases manufacturing and office space in Bennington, Vermont under a lease between Vermont Mill and the Company. The lease expired on May 14, 2012 and is being extended on a month-to-month basis while a new one year lease is being finalized with Vermont Mill. Vermont Mill is controlled by Jon E. Goodrich, a former director and employee of the Company. Mr. Goodrich’s employment with the Company ended on September 30, 2011. Rent expense under this lease was $33,945 for each of the three months ended March 31, 2012 and 2011.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company borrowed $1.35 million from Merlin Partners, LP (“Merlin”) on December 28, 2010. Merlin is a fund managed by Ancora Advisors, LLC, an entity within the Ancora Group. Richard A. Barone, Chairman of the Company's Board of Directors, is the Chairman and controlling person of the Ancora Group. Denis J. Amato, a Company Director, is the Chief Investment Officer of Ancora Advisors, LLC. The loan, which had an original maturity date of March 28, 2011, was extended to August 15, 2011. The loan was payable in two installments of $675,000, with each installment payable upon the closing of each of two car washes that were under agreements of sale at December 31, 2010. The Company made payments of $675,000 to Merlin on March 8, 2011, upon the sale of the Lubbock, Texas car wash, and on August 8, 2011, upon completion of the Company’s Rights Offering. The loan's interest rate was 12% per annum and was secured by a second lien on a Dallas, Texas area car wash, a Lubbock, Texas car wash and a security interest in the tradename “Mace.” As part of the consideration for the financing, Merlin was granted a Common Stock Purchase Warrant to purchase up to 314,715 shares of the Company’s common stock at an exercise price of $0.20 per share, expiring December 28, 2015. The warrant contains anti-dilution provisions providing that Merlin will receive additional warrants exercisable into 2% of any common stock of the Company issued by the Company through December 28, 2011. On August 2, 2011, after the conclusion of the Company’s Rights Offering, a warrant for 847,452 shares was issued to Merlin under the anti-dilution provision. The exercise price of the original warrant and the newly issued warrant were subject to being adjusted lower, if necessary, to equal the stock issuance price of any stock issued through December 28, 2011 at a price below $0.20. The initial warrants were accounted for at a Black-Scholes fair value of the warrant of $63,274 and recorded as a discount to the $1.35 million Merlin loan and as additional paid-in capital. The discount was charged to interest expense over the original three month maturity period of the loan with an offsetting credit to the loan balance.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Ancora Securities, Inc. ("Ancora") was the Placement Agent and Dealer Manager of the Rights Offering pursuant to the Placement Agent and Dealer Manager Agreement dated March 25, 2011 executed between Ancora and the Company. Ancora was not paid a fee for acting as Placement Agent and Dealer Manger. Ancora also provides investment advisory and brokerage services to the Company, assisting in the purchasing and trading of its short-term investments. Ancora is not paid a fee or commission for these services. Richard A. Barone, Chairman of the Company’s Board of Directors, is a controlling owner of Ancora. Denis J. Amato, a director of the Company, is the Chief Investment Officer of Ancora and a large shareholder.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On March 30, 2011, the Company borrowed $1.4 million with an interest rate of 6% per annum from Merlin to fund the acquisition of TCCI, a wholesale security monitoring company. The loan is secured by a security interest in the “Mace” tradename, a pledge of the stock of the Mace CSSS, Inc., the Company’s wholesale monitoring subsidiary, and a security interest in the assets of Mace CSSS, Inc. The loan was originally due March 30, 2013. The terms of the loan provided that the loan maturity date would be extended to March 30, 2016, if Merlin elected not to call the loan after the completion of the Company's Rights Offering. Merlin did not exercise its right to call the loan by March 27, 2012 (the date required), and accordingly, the maturity date of the loan was extended to March 30, 2016. Merlin has the right to convert the loan into common stock through March 30, 2016. The conversion right is at a per share price of $0.21 (calculated based on the ten day average closing sales price of the common stock, starting with September 14, 2011, the trading day which is 30 trading days after the completion of the Company's Rights Offering, plus forty trading days). In accordance with ASC 815, “Derivatives and Hedging,” the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The conversion option is marked-to-market each reporting period, with future changes in fair value reported in earnings. The fair value of the embedded conversion was estimated at $590,000 at the date of issuance of the debenture and each subsequent quarter using the Monte Carlo model with the following assumptions: risk free interest rate: 0.16%; expected life of the option to convert of 4.7 years; and volatility: 48%. The fair value of the conversion option was estimated at $516,000 at September 30, 2011 using the Black-Scholes valuation model. Accordingly, for the three and nine months ended September 30, 2011, the Company recorded a gain on valuation of derivative of $74,000 to reflect the reduction in the market value of the derivative. Additionally, when the debenture conversion price and
number of conversion shares to be issued upon a conversion became known, the initial bifurcated derivative no longer met the criteria to be recorded as a derivative liability. Accordingly, the $516,000 conversion option at September 30, 2011, was reclassified from a liability to stockholder’s equity as additional paid-in-capital and as a discount to the $1.4 million Merlin loan. The conversion option is being accreted as a charge to interest expense over a 60 month period with an offsetting credit to the loan balance.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">As compensation for the $1.4 million loan, Merlin received a five year warrant exercisable into 157,357 shares of common stock at an exercise price of $0.20 per share. The warrant contains an anti-dilution provision that provides that the Company will issue Merlin a warrant equal to 1% percent of any shares issued by the Company for one year after the date the warrant was issued. Any new warrant issued will be exercisable at $0.20 cents per share. On August 2, 2011, after the completion of the Company’s Rights Offering, a warrant for 423,726 shares was issued to Merlin under the anti-dilution provision. The conversion features of the loan and the warrant may result in additional dilution to stockholders. The initial warrants were accounted for at a Black-Scholes fair value of the warrant of $47,420 recorded as a discount to the $1.4 million Merlin loan and as additional paid-in capital. The discount is being accreted as a charge to interest expense over the initial 24 month maturity period of the loan with an offsetting credit to the loan balance.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">The Rights Offering was completed on August 1, 2011. A total of 22,372,616 shares of common stock were purchased in the Rights Offering. Of the 22,372,616 shares of common stock purchased, 16,305,144 were purchased under the basic subscription right and 6,067,472 were purchased through the oversubscription privilege. Net proceeds from the Rights Offering were approximately $4.3 million after expenses of approximately $167,000. The Rights Offering was made pursuant to a Registration Statement filed with the Securities and Exchange Commission (the “SEC”), as declared effective June 29, 2011 (the “Registration Statement”), and under a Prospectus dated June 30, 2011 (the “Prospectus”). The Rights Offering granted the Company's stockholders the right to purchase three shares of common stock for each share of common stock owned on the record date of June 27, 2011 at an exercise price of $0.20 per share. The 22,372,616 shares issued under the Rights Offering were registered under the Securities Act. Additionally, shares registered in the Registration Statement but not sold in the Rights Offering (“Available Stock”) were offered for sale by the Company during the period commencing on August 2, 2011, and concluding on August 15, 2011. The Company sold 838,100 shares of the offered Available Stock generating additional proceeds of $167,620.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Additionally, on August 2, 2011, Merlin and two assignees, Mr. Fedeli and Mr. Spitalieri (the “Purchasers”), purchased 20 million shares of the Company's common stock at a price of $0.20 per share (the "Additional Stock"). The sale of Additional Stock resulted in net proceeds to the Company of $3.75 million. The Purchasers of the Additional Stock were paid a fee of $250,000 in connection with the purchase under the Securities Purchase Agreement. The Additional Stock was registered for resale by the Purchasers of the Additional Stock under the Securities Act. The Additional Stock was purchased under the terms of a Securities Purchase Agreement dated March 25, 2011 (the "Securities Purchase Agreement") with Merlin.</p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>13.   Long-Term Debt, Notes Payable and Capital Lease Obligations</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b> </b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">At March 31, 2012, the Company had borrowings, including capital lease obligations, of approximately $992,000, and net of unamortized discounts for warrants and a conversion option classified in stockholders’ equity totaling $518,000 at March 31, 2012.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">We had two letters of credit outstanding at March 31, 2012 totaling $149,392 as collateral relating to workers’ compensation insurance policies. We maintain a $250,000 revolving credit facility with Chase to provide financing for additional electronic surveillance product inventory purchases and for commercial letters of credit. There were no commercial letters of credit outstanding for inventory purchases under the revolving credit facility at March 31, 2012.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Our most significant borrowing at March 31, 2012 is the $1.4 million debenture note with Merlin, which is classified as a non-current liability and recorded at $882,000 at March 31, 2012, excluding the unamortized value of a conversion option and the value of warrants related to the debenture totaling $518,000, which are both classified in stockholders’ equity. The debenture note is secured by a security interest in the “Mace” tradename, a pledge of the stock of Mace CSSS, Inc. and a security interest in the assets of Mace CSSS, Inc. See <i>Note 12. Related Party Transactions </i>for additional information and terms regarding the debt instruments with Merlin.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Additionally, upon sale of the Company’s Farmers Branch, Texas warehouse in December 2011 which was used as collateral against the Company’s Chase revolving credit facility, $439,000 of the Company’s cash was deposited into a restricted cash account at Chase as security against the Company’s revolving credit facility and certain letters of credit provided by Chase as collateral relating to workers’ compensation insurance policies.</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Chase agreements require the Company to provide Chase with annual audited financial statements within 120 days of the Company’s fiscal year end and quarterly financial statements within 60 days after the end of each fiscal quarter. The Chase agreement also contained covenants that required the maintenance of a minimum total unencumbered cash and marketable securities balance of $1.5 million and covenants relating to the maintenance of certain levels of debt to tangible net worth and limitations on capital spending. These financial covenants were eliminated through credit agreement amendments effective December 31, 2011 and March 31, 2012. We were in compliance with ongoing covenants as of March 31, 2012.</p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>14. Accrued Expenses and Other Current Liabilities</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Accrued expenses and other current liabilities consist of the following (in thousands):</p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><table align="center" style="width: 75%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td style="text-align: left; font-size: 1pt;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">March 31, <br />2012</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">December 31, <br />2011</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td style="text-align: left; font-size: 1pt;"> </td><td style="padding-bottom: 1pt; font-size: 1pt;"> </td><td style="text-align: left; font-size: 1pt;" colspan="2"> </td><td style="padding-bottom: 1pt; font-size: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="text-align: center;" colspan="2"> </td><td style="padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; width: 70%;">Accrued compensation</td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 12%;">309</td><td style="text-align: left; width: 1%;"> </td><td style="width: 1%;"> </td><td style="text-align: left; width: 1%;">$</td><td style="text-align: right; width: 12%;">513</td><td style="text-align: left; width: 1%;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="padding-bottom: 1pt;">Other</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">1,132</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">1,228</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt; font-size: 1pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">1,441</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">1,741</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr></table><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b> </b></p>
<p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>15. Earnings Per Share</b></p><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">The following table sets forth the computation of basic and diluted loss per share (in thousands, except share and per share data):</p><table align="center" style="width: 75%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="6" nowrap="nowrap">Three Months Ended <br />March 31,</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="vertical-align: bottom;"><td nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">2012</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-weight: bold;" colspan="2" nowrap="nowrap">2011</td><td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td>Numerator:</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt; width: 70%;">Net loss</td><td style="padding-bottom: 2.5pt; width: 1%;"> </td><td style="border-bottom: black 2.5pt double; text-align: left; width: 1%;">$</td><td style="border-bottom: black 2.5pt double; text-align: right; width: 12%;">(533</td><td style="text-align: left; padding-bottom: 2.5pt; width: 1%;">)</td><td style="padding-bottom: 2.5pt; width: 1%;"> </td><td style="border-bottom: black 2.5pt double; text-align: left; width: 1%;">$</td><td style="border-bottom: black 2.5pt double; text-align: right; width: 12%;">(1,259</td><td style="text-align: left; padding-bottom: 2.5pt; width: 1%;">)</td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td>Denominator:</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td>Denominator for basic loss per share-weighted average shares</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">58,946,441</td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;">15,735,725</td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt;">Dilutive effect of options and warrants</td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td><td style="padding-bottom: 1pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left;"> </td><td style="border-bottom: black 1pt solid; text-align: right;">-</td><td style="text-align: left; padding-bottom: 1pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="padding-bottom: 2.5pt;">Denominator for diluted earnings per share- weighted average shares</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;"> </td><td style="border-bottom: black 2.5pt double; text-align: right;">58,946,441</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;"> </td><td style="border-bottom: black 2.5pt double; text-align: right;">15,735,725</td><td style="text-align: left; padding-bottom: 2.5pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left;">Basic and diluted loss per share:</td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td><td> </td><td style="text-align: left;"> </td><td style="text-align: right;"> </td><td style="text-align: left;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 2.5pt;">Net loss</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">(0.01</td><td style="text-align: left; padding-bottom: 2.5pt;">)</td><td style="padding-bottom: 2.5pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left;">$</td><td style="border-bottom: black 2.5pt double; text-align: right;">(0.08</td><td style="text-align: left; padding-bottom: 2.5pt;">)</td></tr></table><p style="margin: 0pt 0px; font: 10pt
times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The effect of options and warrants for the periods in which we incurred a net loss has been excluded as it would be anti-dilutive. The options and warrants excluded totaled 84,209 and 48,608 for the three months ended March 31, 2012 and 2011, respectively. Additionally, the potential dilutive effect of the conversion option related to the convertible debenture note with Merlin of 6,666,667 shares has been excluded from the above earnings per share calculations as they would be anti-dilutive.</p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>16. Equity</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On August 13, 2007, the Company’s Board of Directors approved a share repurchase program to allow the Company to repurchase up to $2.0 million of its shares of common stock. Purchases will be made in the open market, if and when management determines to effect purchases. Management may elect not to make purchases or to make purchases totaling less than $2.0 million in value. Through March 31, 2012, the Company had purchased 747,860 shares of common stock on the open market, at a total cost of approximately $774,000, with 18,332 shares included in treasury stock at March 31, 2012.</p>
<p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;"><b>17. Subsequent Events</b></p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif; border: white 1pt solid;">On May 9, 2012, the Company entered into an agreement of sale for an Arlington, Texas car wash for a sale price of $420,000. The net book value of this car wash is approximately $300,000 with no outstanding mortgage debt. The transaction is subject to customary closing conditions, including a thirty day due diligence period with closing required within seventy five days from the execution date of the sale agreement. No assurance can be given that this transaction will be consummated.</p>