Digital Ally Inc (DGLY) 2008 Q4 法說會逐字稿

Hello and welcome to the Digital Ally, Incorporated fourth quarter year-end 2008 conference call.

(Operator Instructions)

The company would like to state the following. Earlier today, Digital Ally Incorporated issued a press release that included certain cautionary language with respect to forward-looking statements. The company would ask you to review the language in the press release regarding forward-looking statements, as they are equally applicable to any forward-looking statements made during this conference call. If you should need assistance during the conference call, please signal an operator by pressing star then zero on your touch tone phone. Please note this conference is being recorded.

Now I would like to turn the conference over to Stan Ross. Mr. Ross, you may begin.

Thanks, Chad and thanks, everybody for joining us today. We came off with a -- definitely what we would call a somewhat very exciting year, very strong growth in both our sales and pretax income. And I think we're looking to have a very, very exciting 2009 with the -- a lot of money that's out there in the stimulus plan, and other programs that are coming available. I've got with me today Tom Heckman, our CFO, which we'll do a recap of the numbers and will try to give you a little better color in regards to some of the costs and revenue side of it. And also invited Ken McCoy to join us, our Vice President of marketing so that he could give you some color in regards to the market, and what it is looking like for us right now. So then after we complete our little recap here, we'll jump -- open up the lines for Q&A. Tom?

Thank you, Stan. First of all, I want to just mention that we did file our Form 10-K this morning with the SEC. It's got a full MD&A discussion of our results of operations, liquidity and so forth. So I would encourage everyone to look at that filing and for further details on what's going on with the company, and what happened in 2008 for us. I guess with that I would tell you that we had a tremendous year in 2008, with strong growth and revenues and income, but a rather disappointing end to it in the fourth quarter. Primarily there were three or four items that I want to get into in more detail as we go through this. And I will do that, but number one, there was a short fall in sales, obviously, in the fourth quarter. We'll discuss that.

There was a small erosion in the gross margin during the fourth quarter as compared to previous quarters and for the year. I'll get into that further. We had a tremendous increase in R&D expense, which I think a lot of people are aware of, but we want to discuss that a little further as we go through. And then also there was some increases in legal and professional fees in the latter half of the year that there were some -- some reasons for that that I'll go through as well. But anyway, looking at the P&L, there was a 68% growth in revenues year-over-year. We're happy with that. We're proud of that.

However, the fourth quarter, there was a 5% decline from the prior year. Now, what I will tell you in the fourth quarter of 2007, we had our largest single international order, any order, in our history of $5.1 million, that was received and shipped in the fourth quarter of 2007. That same customer ordered 530,000 in the fourth quarter 2008, so there's significant reduction in the order volume from that customer. Now, that customer, the $5.1 million was their initial order in 2007, so we didn't really think that was going to repeat. So that's part of the reason for the short fall in the revenues in the fourth quarter.

Several other items, the DVM-750, we had anticipated shipping that in December of 2008. That project was delayed somewhat, so we were not able to ship those orders. We had back log of $1.5 million -- in excess of $1.5 million at the end of the year on the DVM-750. And, of course, we were not able to recognize those until 2009 when we shipped those. So that was -- that also contributed to our short fall in sales. Also, there were two significant international orders that we expected in the fourth quarter that have been delayed, due to funding reasons with the -- the foreign government. We fully expect those to occur, yet they just were slid out of the fourth quarter and into 2009. So that also contributed to the short fall in revenues.

In addition, the DVM-750, there were several contracts that we were seeking in the fourth quarter that really required the specifications that are coming out in the DVM-750 to comply with the specs of the contract. Therefore, since we didn't have the DVM-750 ready by the end of the quarter, we obviously did not get those orders and that contributed to the short fall in revenues. As far as the average order size, let me give you some data on that. Average order size for Q4 was $10,500, that was a $2,000 decline from Q3. The interesting thing though, with that is that we had eight individual orders over $100,000 in the fourth quarter, which was the highest number of larger orders than in any other quarter during 2008. The fact is we just didn't have a huge order as we did in previous years and previous quarters in 2008.

Also, from an international perspective and primarily for the reason that we've previously discussed, the $5.1 million order in 2007, in the fourth quarter, our international sales declined as a percent of total sales in 2008 to 26%. In 2007 it was 30%. And that was primarily that one individual order. In the fourth quarter it declined from 76% in 2007, down to 10% in 2008. Now, that's a combination of that single order and the slide of the international orders that we expect in the fourth quarter. On the cost of revenues side -- I'm sorry, let's go to gross margin. Margin for the year was pretty stable, 60% in 2008, versus 61% in 2007. It's a good gross margin, our bogey has always been roughly 60% in gross margins, and we're happy with that.

But if you look at the quarter, our quarter gross margin dropped to 54%, 55% as compared to the yearly average of 60%. A couple of things happened to us there. We had the 500Plus, it upgrades our existing 500 model that we converted our production line over to in the fourth quarter. We stopped producing the 500 E model, and went to the 500 plus. So there was some disruption in the production line, production costs going to the 500Plus model. Also, there was a number of expedite fees and increased costs, temporarily increased costs in our production components and such, because we were getting those components in late in the year. So that contributed to the decline or the erosion in the margin.

So anyway, that was hopefully a nonrecurring event, but it did affect us in the fourth quarter of 2008. If you look at the operating expenses, on a year-to-year basis, they remain steady at 46% of revenue. But if you look at the quarter, there was a tremendous increase in the percent. It was 70% in the fourth quarter 2008, versus 37% in the fourth quarter 2007. Let me give you some flavor on that. The primary driver in the operating expenses has been and continues to be research and develop expenses.

As required by GAAP, we expense all R&D costs incurred and, therefore, we expense those. We view those more as an investment in the business and we have, you know, six, seven, eight active research projects going on right now, so it is a tremendous investment that the company's making. On a year-to-year basis, our R&D expense is $3.2 million in 2008. versus $1.5 million in 2007. It doubled in the gross dollars spent on R&D. In the quarter, we had an increase of $800,000 in the fourth quarter. Now, there was a push to get the DVM-750 done in the fourth quarter. And therefore, there was some increased costs associated with that that we believe are going to be nonrecurring in nature. But we did incur those in the fourth quarter in an attempt to get the 750 out in December.

If -- past that, sales commissions as a percent of revenues increased to 8.5% in 2008, versus 6.8% in 2007. That's primarily because of that $5 million international contract in 2007. We -- that went through an international distributor, therefore, no commissions were paid. If commissions would have been paid on that, then our sales commissions as a percent of revenues would have been virtually the same. So that's the reason for the increase there. Stock-based compensation declined $100,000 year-over-year. We continue to expect that to decline over time. And it's because of the vesting schedule on options, and just a reduction in the total number of options granted during the year.

Professional fees increased $500,000 for the year. Let me give you some detail on legal and professional. We did have a couple of litigation matters that came up in the third and fourth quarter. L-3, the patent litigation suit that was settled, with no payments, we still had litigation costs with that and legal fees of roughly $155,000, $160,000 during 2008. That was not -- was not in the 2007 numbers. Also, there was another matter, the Huff matter that we spent almost $100,000 in litigation fees in 2008, that was not there in 2007. We had roughly a $250,000 increase in our regulatory costs probably because of our market cap, requiring us to step up to Sarbanes-Oxley 404(b) standards and increased our professional fees accordingly.

Also, we had a few more filings during the year, S-8's and so on and so forth. So year-over-year, we had roughly a half a million dollar increase in professional fees and expenses because of those matters. The other SG&A costs primarily head-count driven. Let me give you some head count numbers here. At December 31, 2008 we had total employees of 117. That breaks down, production at 60, engineering 29, sales and tech support 14, and admin and accounting 14. So that compares to 9-30 numbers which we talked about at our last conference.

We were at a total head count of 102, with the primary increase being in our production and engineering folks. So we had a -- an increase of roughly 15 head count between third and fourth quarter, that contributed to the increase in SG&A expense. From an operating income line, we increased our operating margin as a percent of revenues to 16% in 2008, versus 15% in 2007. We're happy with that at the current time. Of course in the quarter with the operating loss we incurred, it's not very comparable from that perspective. From a financial income area, we only had interest income this year of $79,000. We were not borrowing funds at any time during the year, so no interest expense. The $78,000, the rates earned on our invested cash funds were pretty meager during the year. So it's not reflective of the amount we had invested.

At the operating income line -- I'm sorry, pretax income line, we had an increase year over year of $2.3 million. And then from an income tax provision percent -- income tax provision perspective, last year there was a nonrecurring tax benefit, where we recognized the value of all our NOL carryforwards during the third quarter 2007. So the income tax provision is non-reflective and actually nonrecurring. In 2008 we had an income tax -- effective income tax rate of 35%, which is pretty close to the statutory rate, and as a result our net income was $3.3 million in 2008. If you look at non-GAAP adjusted net income line, we had $7.2 million in adjusted net income during 2008 compared to 4.7 million in 2007, an increase of $2.5 million, roughly 50% increase, very happy with that.

The fourth quarter obviously for the reasons we previously discussed, there was a small loss of $380,000, per share on that. We'll go to the balance sheet. We'll walk down that. The cash and cash equivalent balances have gone down roughly $3 million. That's primarily because we've put a lot of money into our inventory and our receivables are quite high at year-end, which we'll discuss next. So our inventory -- our cash balances are about $1.2 million at 2008. Accounts receivable trade, we -- is at $6.2 million at 12-31. Current -- at the current time, we're down to $5 million, so we've collected $1.2 million net since 12-31 on accounts receivables.

Skewing that number is a receivable we had from one of our international distributors of roughly $2 million. It is past due and we are quite aware of that. And we have been assured that payment is forthcoming here in the next -- well, in the near, near future, we'll put it that way. From an inventory perspective, we had quite a build up, and let me give you some details on that. In the finished goods line, we had $2.8 million versus $200,000 at the end of 2007, a $2.5 million increase. Now, at the end of 2007, we had shipped virtually every unit that was completed to fulfill that large international order, so our finished goods was abnormally low at the end of 2007.

At the end of 2008, we have roughly 1800 DVM-500s in stock, that represents that number. Raw materials and component parts have risen roughly $3 million to $6 million at the end of 2008. That's primarily advanced parts bought for the DVM-750. We had to get those in because we were expecting deliveries in December of 2008. We also had changed over to the 500 plus models, so there was increased inventory from that standpoint and also inventory from the radio, the voice vault radio that we announced earlier.

From a -- an inventory obsolescence standpoint, excess standpoint, we've increased our reserve to roughly $530,000, which represents 9% of raw material and component parts, versus 7% at the end of 2007. We increased that because of the switchover to the new products. We don't foresee major issues there, but we will continue to monitor that. Just as an aside, our test evaluation units are out in the field, increased to 313,000 at 12-31-2008, versus 147,000 at 2007. Also an increase from 9-30 where it was 136,000. I guess from an overall standpoint, we're -- we're trying to reach internally inventory turns of 8 to 10 times. If we reach that, we're talking about $2.5 million to $3 million in inventory. So obviously our inventory levels are higher than we would like. We're actively working on that and we should see some improvement in that in the future.

Okay. From there, we got deferred taxes totaled between long-term and short-term $2.3 million. Those are the assets related to our NOL carry forwards, roughly a million dollars there. We have R&D tax credits of $400,000 that we're carrying forward. And the main driver in that is $1.2 million of deferred tax assets related to our stock compensation plans. After that, we've got intangible assets, total $365,000. What's happening there is, we are entering into sub license agreements and license agreements with some engineering groups in -- to give us some exclusive rights to some software that runs new chips that we're going to use.

So this is -- this is kind of a change in our philosophy. We're paying money to get sub licenses on that. And that's -- that's the reason for the intangible assets. We also have some patent costs for pending patents. We defer those until they're issued, and that's also included in intangible assets. On an overall basis, we have $14 million in working capital in 2008 versus $7.2 million in 2007, so we've doubled our working capital. And that's primarily from a buildup in inventory and accounts receivable, and we're going to try and convert those to cash.

On the liability side, our accounts payables has increased roughly $1.7 million, that's in support of our increased inventory level and our operating level. Accrued expenses has increased $500,000. We changed our payroll cycle from semi monthly to biweekly, therefore, we have payroll accruals at the end of each quarter. That happened in 2008. So that's the main driver to the increase in accrued expenses. Also included in accrued expenses is warranty accrual of $271,000 versus $213,000 in the prior year, a slight increase. We continue to see very good warranty results of roughly 1% or so of the units outstanding, so we're not seeing any uptick in that area.

One thing I'll point out as well, we had no borrowings during the year. We did have a line of credit of $1.5 million during the year. We just renewed that with the same bank and increased it to $2.5 million. So we increased our available line of credit to $2.5 million. The interest on that is variable. It's prime minus a half a percent. So it's still a very competitive rate from that standpoint. From the stock holders equity perspective, our equity increased $8 million, almost doubled. That's primarily from $3.3 million in net earnings during the year, and then $4.7 million in options, exercises and stock compensation expense that's put into stockholders' equity. So with that, I'll turn it back over to Stan.

Thanks a lot, Tom. I'm hoping that everyone takes away from this conference call, that realizes, really all the things that we did achieve in 2008. But -- and doesn't try to penalize us too much for just having the one quarter by being off. Because if you realistically look at the timing of the 750. If we were able to have had that product as planned in the fourth quarter, there was multiple million dollar orders that were out there that the specs called upon, that particular style of system to be available that we felt like we had a real inside track on getting.

If we would have had the ability just to ship our back orders, we would have had a very nice quarter. And on top of that, if you looked at the international order that was to be coming in that also was looking for some of the 750 units, we would have had a rather phenomenal fourth quarter. Now, we did not hit the mark and a lot of that is our own doing. The 750, we could send it out today, but when we found a few little areas that we weren't comfortable as far as the performance. We just did not feel it was worth, sending those units out there and trying to tarnish the reputation that we have. We've gained a considerable amount of the market share. I mean a considerable amount.

I personally think that this particular industry hat gotten down to -- has gotten down to a two, maybe three-horse race and we're definitely one of those horses. We have a lot of things that are getting ready to be announced. A lot of things that are going to be very exciting and news worthy events that are going to occur in 2009. And it should show and reflect in regards to the numbers and definitely, hopefully, shareholder value as well. So I don't want to elaborate on it a whole lot, but again, I want to stress that, if the 750's timing would have been just a little better. you would be looking at a very, very strong finish to 2008 and a great kickoff to 2009. Ken, you want to say a couple of words before we open it up for Q&A?

Sure. Thanks, Stan. Yes, I just want to kind of parallel a little bit of what Stan said. I was very, very happy with the year we had in 2008, 68% increase with basically the same products. Nothing new in '08 is a real contribution to our sales staff that we have out there, and the customer base that we have. And that we still run about a 50/50% ratio on reorders from present customers and new orders, which continues to build our customer base, but also proves the fact that our customers are buying back from us after the initial purchases. And we're seeing that in larger numbers on the reorders. So we -- we are very happy with the progress that we made in '08. And we think '09, my personal opinion in '09, is we're going -- it's going to be much better as we introduce these new products.

We did have a little delay there, but there's still tremendous amounts of business out there that we'll be able to compete against in a better form with the 750. And that's really where the specifications that we need for the 750 are really -- and our larger orders, our larger customers want those type of specifications. And so once we start shipping that product and been able to demonstrate it better, we feel very comfortable that we're going to see some of the major orders coming our way as well. So, again -- and our other new products we're introducing, we've gotten great excitement about those as well. We've actually got orders on some of the other products from some of our international people, so they can be first in line on the first few and whatnot, so they're very excited about that.

The other exciting thing is the stimulus plan that's been signed and going to come down. We see a tremendous opportunity with probably more money coming to the law enforcement market over the next -- over '09 and '10 than ever -- I've ever seen before. So we are actively pursuing how we can help our customer base, and our new customers share into that money. And we think that that's really going to be a boost for us in '09. So again, we had a little -- a little down spurt there in the fourth quarter from some orders I was hoping we could get, didn't happen, but we're looking forward to a great '09.

Chad, if you don't mind, we'd like to open up the call for a Q&A session.

(Operator Instructions)

Our first question comes from John Putnam with Next Wave Research. Please go ahead.

Thanks and good morning.

Good morning.

I was wondering if you might elaborate a little bit on the issues with the 750. It kind of sounds like you're not ready to ship it yet, which suggests it's either a second quarter or even later event, Stan. Can you kind of elaborate a little bit on that?

Yes, I can. One of the things we've done is we've implemented a new radio in the 750. And the bottom line is that while we're out there introducing it and a few other features to the product, there has been some small interference problems within the system. Now, those are very easy to resolve. The time delay, so that you can understand, is, for instance, you may have to lay out your printed circuit board a little differently. And to turn a printed circuit board takes approximately two weeks. In some cases maybe a few days longer than that. So while you're doing some of these final adjustments, you're -- you know, the clock is running while you happen to have -- wait on a new board to come in.

So the problems that we're dealing with are not major problems. They're just -- they're not. And you can talk about -- anyone that has a technical background, these are just little problems that take a little bit of additional design work to overcome. We feel like we are really in the final stretch, maybe the final board or two, that and we'll have those issues resolved, and the product will be going out the door. So I'm not -- I hate to put a time line on it because we honestly thought we were there in December, but you along with the rest -- all of us will be disappointed, if we don't see this thing getting out here very, very shortly.

Okay, great. My second question is this large account receivable from overseas, what gives you confidence that it's collectible?

We basically -- sorry, Tom, but we basically know that the order that they were waiting on and the funding that they were waiting on, just the order is always standing, but the funding that they're waiting on has already -- the process for those funds to come down has already started. And they're getting funded and they'll be -- we'll be getting a wire directly into our account.

Okay. Great. Thanks.

Thank you, John.

Our next question comes from Jim Stone with PSK advisers. Please go ahead.

What can you tell us about the current climate, and what you see going forward? I think in your earlier release you had commented that there was weakness, difficulty getting funding, et cetera and wish you could give us some more flavor in that area.

Yes, I mean it's hard to really -- I guess understand what we're going to be looking at in 2009, in regards to the actual tax revenue that will be coming into these municipalities. But what we can tell you, depending on the timing, and again, we think it could be as early as second quarter, that some of the funds from the stimulus package will be entering into the market. Now, if those funds do get in, say second quarter or even early third quarter, the second half of the year is going to be explosive. I mean it's the most money that we've seen available to equip our customer base since we've been in business. And Ken's been in this business several years longer than Digital Ally. But, I mean, it's just an enormous amount of money, at least five times what we've seen in any of the years we've had in the past. So it's timing. If that stimulus plan is -- get out -- it does get out there quickly to these municipalities and state agencies and stuff, it's going to be an exciting 2009. And I don't know if you want to add anything to that.

Well, I could just add again, even though we all read in the paper where departments are laying off police officers and whatnot. Again, in '08, we did not see that having any effect upon us in that we have continued to increase our market share. And also, it seems like even though departments may have to lay off personnel, they're still having to buy equipment. And that crime doesn't stop, and even though they may have less police officers, it actually can turn into a favor, in that they've got to have better and more sophisticated equipment to do the job better with less people. So I -- again, I feel real good about it. Even though, again, we see the head lines of cities and counties having less funding. But again, as we --

Well, coming off of a -- coming off of a year over year of 68% growth, it's hard to sit there and have a negative outlook on what we think '09 is going to be able to deliver for us.

Okay. And trying to figure out what's happening in the first quarter, it sounds like that the delayed 750s may not get delivered in the first quarter. But what can you tell us about the first two months which have already occurred, and how this is comparing to last quarter and the last year?

Yes, I mean I can tell you in regards to the marketplace itself, I think that we're seeing equal, if not better business out there. Now, granted, some of that business we're not going to be able to go after because -- if the 750 isn't available. Okay. Those are the specs. They need the simultaneous recording or the higher resolution, to be able to even get up to the plate and have a chance to swing the bat. So, the business itself is -- looks great. If we've done anything wrong, we've stubbed our toe on timing of getting this product introduced. And other than that, once this product is available, I think we're going to see the same type of dramatic -- I want to say combination in the market like we did two years ago, well approaching three years ago, when we introduced the 500. I mean we came out of nowhere -- and next thing I mean, like I said, we have -- we've gotten a tremendous amount of market share. we've even seen a couple of companies that have went by the wayside, because of our being able to step in there and having the strong balance sheet like we have. So the business is there. We've got to get the 750 out the door. And we really think we're in the final stretch of having that. And we'll have some good -- we'll definitely have a strong 2009.

Okay. Thank you. I'll get back in line.

Thank you, Jim.

Our next question comes from a private shareholder, Joe Robinson. Go ahead, sir.

There's a new international sales director. How about giving us some background on this guy? Can he immediately bring potential customers to the plate?

Yes. This is Ken. And, yes, our new international sales manager, Jeff, worked for -- well, he's been working for us as an outside sales agent for -- since the very beginning. He was one of our first sales agents that came on board with us, working the Illinois, Indiana-type territory. He also -- he came from Decatur Electronics, a 50-year-old radar and in-car video company in Decatur, Illinois. And he left -- he was international sales manager for them. And when he came on board with us, some of his contacts he helped me with for the last couple of years that he had known there, but was doing both territorial sales and really just passing things on to me.

And so some much our international business has been a result of Jeff being with us anyway. But now that he's on full-time, he is concentrating 100% on our international people. He's already established several new international sales agents throughout the world. And is somebody that can go and go train them and work with them where I just didn't have -- actually have the time to do it in the past. So I think we're going to see a real good increase in our international sales business with Jeff on board.

Yes, Joe, we've probably -- I think we're at -- right at 20 representatives throughout the world now, covering over 50 countries. So it's definitely -- the international side of our business is starting to grow. And I think you're going to see us being able to somewhat maintain, if not maybe even a little bit of increase in international, in regards to the percentage of our market.

Okay. That's all I have.

Thank you. Our next question comes from Joey Feste with KM capital Management. Please go ahead.

Hey, guys.

How are you doing, Joey?

I'm doing okay. A couple of things, one, the Saudi deal. Our distributor was ICOP and they have a hundred unit test. Help me reconcile that? Who's riding the white horse?

Well, we can't speak about ICOP, but we can speak about ourselves. We have -- working with a new distributor we set up over there. Although they did get that one order, Saudi is a huge country with a lot of different government agencies that buy product, and so we feel very comfortable. We are and have been working with another Saudi company on another order over there. And we feel like that we've got a good chance of getting orders from various organizations, law enforcement organizations in Saudi, as well as other countries in the Middle East. So they got the round one order, but we're in there for the long term, and think that -- are very encouraged by what we've got working over there.

Okay. And in regards to revenue growth coming out into '09. I know that you discontinued guidance, is that something you will update upon completion of the 750 and getting those things out the door? is it something then you can put a pencil to and say now we know? Is it the sole purpose of the 750 not coming out the reason, you had to take away guidance?

What we'll do, Joey, we definitely will peak of make a press release once we start shipping the 750.

Okay.

That way we can alert our shareholders that we are in full blown production. Don't think that we're not still shipping a lot of the 500 and 500PLUS's. Those are still going out the door as well. But we'll do a press release in regards to the 750 getting out there. And then when we've got a little bit of understanding of the stimulus plan and timing and those funds coming down, we may revisit that guidance. But we need to see how things are going to develop here for a few months.

Okay. I appreciate it. I encourage you guys to visit the --- center and find out where the manipulation of the stock is coming. Without the (inaudible) rule, we're out there, just at the mercy of these guys, its like a little wild west out there. So if you can engage our SEC attorney to really take a strong stance with these guys, your shareholders really would appreciate it.

I'm sure he's listening, Joey.

If he's on the line, just tell him to say hello, so I know he's listening.

Well, he's probably on -- he's probably just listening in.

So -- give him my cell phone, Stan, and let me talk to him. You all have a good day.

See you, Joey.

Thanks, bye.

Our next question comes from Austin Hopper with AWH Capital.

Good morning, thanks for taking my questions. In your press release, you talk about the 750 -- I guess, sort of working through -- resolving these issues in the next few months. I was just curious, do you have any sort of more specific guidance as to when you're shooting for the 750 to be available?

Yes. I mean we -- the bottom line is it's late. I mean we were shooting for a date in the fourth quarter, and it did not occur. So I mean we have -- we have thrown a lot of resources at that product to get it out in a timely fashion. And the key is, though, it's got to -- when it goes out, it's got to go out correctly. I mean it's a situation where you don't want to make a bad first impression. And, again, as Tom had said, you know, we're running at right around a 1% failure rate as far as our products out there. And when we talk about failure rates, we're talking about sometimes just a dissatisfied customer. So we don't want to -- we don't want that to occur and so, they are really in the home stretch on having this thing completed and it is -- it's just not a big -- some of the big issues that they're working on. It is a situation, though, in some of the products, mainly the printed circuit board, takes about two weeks to turn that. And -- turn it and so until you have really got 20, 30, 40 units that you feel are coming out and you're hitting on all cylinders, you're not going to go order 500 of these boards. So it really, truly, Austin, could be any day.

Okay. But the next few months, do you have a specific target or date in mind? I just didn't know what few meant, the next three months, is that what that means?

Well, we're -- we were just -- we're trying to get it out there absolutely as soon as we can.

Okay.

We'll shoot you out a press release when we start shipping.

Okay. And in January you put out a press release, and you talked about how officers and directors have agreed to defer their, I guess, what, 25% of their 2009 monetized compensation until year-to-date sales reach $50 million. I was just curious if that's still the case given the fact that you've suspended your revenue guidance for '09?

Absolutely. That's still the case.

Okay. Great. Thank you.

Thank you.

Our next question comes from Corey Tobin with William Blair and company. Mr. Tobin, go ahead. Mr. Tobin. We'll go with our next question. Our next question comes from a private shareholder, Jeff Bawkelar. Please go ahead.

Good morning, guys.

Good morning. I have a couple of questions on inventory. First question, Tom mentioned you have 1800 units of the DVM-500 in finished goods. That equates to more sales than you had in the fourth quarter. And my concern there is potential obsolescence with the 750 coming out. Do you feel confident you'll be able to move those? And secondly on the 750, once you do get those, how quickly can you convert your raw materials to finished goods? What kind of run rate can you get to meet your orders? Just curious, do you have that projected out? And will you be able to do that quickly enough so you'll be able to avoid losing orders? Those are my two questions.

Jeff, this is Ken. As far as the 500 goes, a good amount of that inventory has already been sold and delivered during this quarter, and so we're depleting that right along. I don't see it as a problem. We continue to sell 500s. We've got a price differential between the 500 to 500PLUS, and the 750 naturally and so -- and we've got all of our customer base out there using the 500s. So we're seeing that go down steadily, and should be depleted in the near future. I'll let somebody else --

And again, I guess where we're at, in regards to the 750, Jeff, we've been able to get the 500 up to where easily they were able to do north of 1200 to 1500 units a month on the 500. The 750, while the design itself may be a little more sophisticated, the assembly side of it is probably considerably easier. And so to ramp up and -- the majority, as you can see on our inventory, there's an unbelievable amount of inventory as far as raw parts there, and so it's just a matter of giving production the green light. I think they can -- they'll get up to a real reasonable number north of a thousand a month rather rapidly.

Okay. Well, thank you. I just had a couple of questions on that inventory, and I hope you avoid loss of orders and can kick butt in '09.

Thank you.

Thanks, Jeff.

Our next question comes again from Jim Stone with PFK advisers.

In your earlier statement you were talking about some of the potentials, you couldn't really talk to, because you couldn't deliver the 750. I'm not sure I fully understand that, and especially as you say you're working like mad to get the 750 out, and you're obviously in a public call are not going to make a commitment to it, but I would think you could make that commitment when talking to customers. So if you could explain the dichotomy of that issue.

Yes, Jim, I mean, here's the case. I mean there has been several companies that have had some real difficult times. One we know has basically went under, another one has some real financial problems. And you're starting to see some states and municipalities require performance bonds to be put up. And so if they're going to spend their time, money and energy or at least have it allocated for you, you better be able to deliver. And again, it's very important to us not to lose the credibility with our customers, and there's a few situations where we just could not assure them that we were going to be able to deliver on time. So we had to decline on bidding on those orders.

Well, I guess the part of it that I don't understand, if we have the greatest thing since sliced bread, so to speak, why they might not be willing to delay for a month or so?

Yes, Ken, you --

And that has happened in many cases. And, the $1.5 million worth of back order we have, are people who are willing to wait on us. And we continue to get orders on a daily basis for the 750, and so there are a good number of customers are willing to wait. On the other side of that coin is some of them have money that they've got constraints on that they've got to spend that money by a certain date or they lose it. Or they just, for internal reasons, feel like that they've got to get their -- the in-car video system in their vehicles, quicker than we could have delivered it to them. So it goes both ways with it.

On something like this, will we lose an order to a competitive situation? Don't the departments want compatibility in all of their units, so that would mean we'd be locked out for future orders?

Well, that does happen in some cases. However, we have also saw that in cases, that sometimes is there made purchases, and after they've had experience with that product or whatever, they haven't been totally satisfied. And so it does open the door for us to come back in. So -- and again, this has not been a great number of departments that we were talking about anyway. And, again, you know, there's 20,000 of them out there, and so we are disappointed that we lost any. We don't want to lose anything. But, again, it's -- we're not talking about hundreds of departments that we've lost. It was just a very few large ones that we thought we was going to be able to get there in the fourth quarter that we just -- for the timing wasn't able to do it.

Can you talk a bit -- you implied it in your earlier statements, on the competitive climate and which of the folks you worry about the most?

Well, I think we probably -- I don't want to give up too much press, but there's really -- there's two of them out there. I mean one of them is a very large company that has a tremendous amount of products that are sold into that sector. And then another one is more like Digital Ally in regards to, has a much narrower focus in regards to just the video side of things. But again, these are products that still are going to hard drives or DVD type of burners and stuff like that. So there's really two of them out there that we find to be the -- our biggest competition. And we really think that the 750, because of the new features that it brings, there are situations that some of the -- those competitors, our top competitors just are not going to be able to meet the specs that we can deliver.

And when do you think they can deliver them?

I don't know. I don't know in their sake -- their case.

Okay. Thank you.

Thank you, Jim.

Our next question comes from [Liam Timmons] with Fine Art Investments.

Hi, guys, thanks for taking my call. I just had a question, if you see if you could maybe elaborate a little further on just the status of your accounts receivables, in terms of what percent you consider to be presently at-risk, as well as maybe speak a little bit more about what type of writeoffs you're seeing?

Yes, this is Tom. Outside of the one international distributor that we have the $2 million receivable on, our collection days are 36, which is quite good and we have not seen a deterioration in that. In fact, it's improved a day or two over the last two quarters. So we're not seeing any degradation in the quality of the AR balances. Now having said that, we have increased our reserve for bad debts to $90,000. I think it was roughly $28,000 or so at the end of last year. So we have increased that accordingly. We do have several small accounts out there in the 120-day categories. We have situations with that we're dealing with, but nothing of any magnitude. We're quite happy with the collection days on our receivables.

Tom, do you have a rough idea on what is the -- in regards to uncollected since we've been roughly in business?

We've written off, I think, one $12,000 receivable that I'm aware of. We've only had one receivable true writeoff to date. The rest are -- we do have some needs for reserves, but we have not given up the case at this point.

Okay. Okay. Great. And just one other question. Just wondering if you could speak a little bit about the strategic alternatives that you're currently looking at with Banc of America.

Yes, we just had an opportunity to visit with them. They came back and gave a presentation to the board. I guess the short story is -- and again, I don't know how many are aware of some of the internal things that have been occurring at Banc of America. But during our process, they literally laid off our whole team and so we had to contact them, and say what in the world is going on here? And so the long of it is the -- there was an individual that we had a lot of confidence in, and still do, was the reason I would say that we went that direction with Banc of America. They went back to him, and negotiated an ability for him to continue to work with us. So there was a few weeks that were lost. Now, in his presentation to us, he had contacted all the parties that were interested. We have had face to face. They've had the opportunity to look rather hard at us, but at the end of the day, there is still -- in this sort of economic climate that we're in. Some of them while they have great intentions, we're not sure that they can step up to the plate. There is one in particular that there may even be anti-trust issues involved that would create a problem and then -- and some of them, just because of the recent environment, they have seen their stock fall dramatically and they would happen to utilize or needing to utilize their stock to do a deal. So where this is at, is basically, he has asked for a little bit more time to continue to see what is -- what is transpiring and is to get back to us. So I do think that it's probably going to go into the -- throughout this quarter, before we're really going to hear something and definitely into the second quarter, before I'm going to be able to respond on what's finally transpired there.

Okay.

I apologize. He's just asking for a little bit more time and that's about where we're at.

Okay. So I mean is there any type of thought about maybe, finding a different company to do this type of analysis, since Banc of America just has so many problems internally?

I don't know that we've really talked about that. I mean I could tell you, they did a great job of identifying the players or at least the individual that we're working with. Absolutely I don't know that we would have came up with another name that made strategic sense that he didn't have identified, or had not contacted him. So I don't know that we have had any thoughts in that regards.

Okay. All right. Great. Thank you.

Thank you.

Thank you. Our next question comes from [Peter Mann] with [Dockerty]. Go ahead, sir.

Hey, guys. Kind of expanding on that last question. With the Banc of America market maybe being a little drier than you guys would like, have you thought at all about maybe going to the equity or debt market, seeing that the cash is getting pretty low, at one point $2 million? Any thoughts on that?

Yes, I mean we still think that our cash flow, our cash reserves, we're feeling pretty comfortable with that. I don't know if you can elaborate?

Yes, we're -- now we have $2.5 million unused line of credit available to us, and we've got $14 million in working capital, primarily sitting in accounts receivable inventory. We are actively working inventory and looking to reduce those balances, so that will generate cash, when those are converted as well as the accounts receivable. We really believe in the near future this one sizable past due account is going to come current. So I think -- I think we have substantial cash availability, and together with the line of credit we have $2.5 million, we don't see a need for liquidity sources.

Okay. Appreciate it. Thanks a lot, guys. Good luck.

Thanks, Peter.

Next question comes from [Emerson Whitley] with Harvest Capital Strategy. Please go ahead.

All of my questions have been answered. Thank you.

Okay. Our next question comes from Randall Wright with R. J. Wright.

I'm sorry, I thought I'd already gotten off the line. My question has been answered. The only other thing I would say is I've been with you guys since you were (inaudible) I'm still very comfortable with you and I just need to know the date of the annual meeting. I'm sorry, I didn't quite understand you. I'm sorry.

I apologize. I got a little Parkinson's. My question has been answered. We're in good shape. Thanks.

Okay. Thank you very much.

Yes.

Our next question comes from Martin Yokosawa with Tory Asset Management.

Morning, guys. Can you go through the -- kind of the sales cycle time line? I'm concentrating on the importance of the fourth quarter. Did a lot of people -- municipalities have to get money spent by the end of the fourth quarter, and that means that we kind of lost an opportunity till '09's fourth quarter?

No. Actually, yes to part of your question. You know, some of these municipalities did have to have those funds allocated, spent by the end of the year and so they're gone. If you just recently -- the capital that was allocated for 2008 was issued, and so there are a lot of these municipalities are getting funded currently. And then with the stimulus package, they will get a piece of that action as well. There is probably at least two more times that that -- those particular ones that we were looking at in the fourth quarter, will probably be reordering this year.

And again, some of them that we were hoping to close up and they, for our sake, got delayed and have been able to go ahead with their funding. It's coming through in '09. So it's not like we lost all of that much, everything working on. That's still out there, some of it has closed up in the first quarter even and we're expecting as the quarter goes forward.

We'll probably have well over 50% of the funding that is out there to buy this type of equipment comes from, the federal agencies, so they are getting a whole lot more this year.

So you're -- I mean one municipality, they're struggling, when they get the stimulus bill, that you strongly believe that it's going to be allocated to digital monitoring versus to continue running their garbage trucks or whatever they're doing? Is that -- is there something specific that you get that feeling?

The dollars we're talking about from the stimulus plan is directly for law enforcement. They're getting other moneys for like their garbage trucks and building parks and that kind of thing. So the $2 billion to $3 billion, to $5 billion that is allocated strictly for law enforcement, not all of that is naturally not going to go to in-car video systems. And since we're out there fighting against other law enforcement manufacturers for parts of that funding, some of it is for personnel. But in new personnel, they've got to have equipment and cars and this type of thing, so it all ties together. Again, the numbers we gave you are strictly law enforcement in this plan.

Good. And any progress on the new products, the DVM-250 PRo and so on, new markets?

Yeah, they're all still in the (audio difficulty) hopper and still really haven't slid a whole lot on the time. But we have a lot of resources in the 750 because it's going to be sort of a dominant product for us out there, but don't anticipate any real great delays or we'd be giving you a heads up on that right now. We still think that we're going to have the time line that we laid out earlier.

Okay. Thank you.

Thank you.

Our next question comes from Taylor Thomkins with Anderson Strudwick.

Thanks for taking my call. I guess this is for Tom. I may have missed it, but on the OpEx, it was a little bit higher than what I was expecting, it was up like 22% sequentially. Where do you see that for '09? Do you see it moderating, or can you give me a little bit more color on that?

I'm sorry, Taylor, you were cutting out a little bit, but I think --

OpEx, it was like $4.6 million, up 22% sequentially, where do you see that for the balance of the year?

Well, our operating expenses for the quarter are obviously higher because of the lower sales revenues than had been anticipated in the fourth quarter. For 2009, we have been constricting hiring, and so on, it will improve our -- (audio difficulty) expenses as a percent of revenue. The key driver of that is R&D expense, it's the majority of the expense there. There was a lot of resources, and a lot of what we hope are nonrecurring type costs in the fourth quarter, related to expedite fees and rush fees in order to get some boards turned and some component parts being available, in anticipation of shipping in the fourth quarter. So that we think are nonrecurring. Hopefully that will control the expense in 2009.

Okay. Thanks.

We show no further questions at this time. I would like to turn the conference back over to Stan Ross and Tom Heckman for any closing remarks.

Listen, we just want to thank everybody for their time today and again just emphasize, I think that you've got a great company here that has a lot of potential. We apologize stalling a little bit in regards to the deadline or time line, in getting our 750 product out, but I assure you that this is something that is right around the corner. And we'll do our very best to sit there and not only catch up, but get back ahead. Thank you all for the time. If you do have any further questions and we can answer them, feel free to give us a call here at corporate offices. Thank you.

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