Digital Ally Inc (DGLY) 2009 Q4 法說會逐字稿

Good morning, and welcome to the Digital Ally Inc. fourth quarter 2009 conference call.

(Operator Instructions).

Please note this event is being recorded. Earlier today, Digital Ally Inc. 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. I would now like to turn the conference over to Stanton Ross. Please go ahead.

Thanks, Amy. And thanks everybody for joining us for our 2009 operating results year-end call. With me today, I have Tom Heckman, the Company's CFO, and also Ken McCoy, our Vice President of Marketing. What we are going to do today. is Tom will go over the highlights in regards to the numbers, and a little bit of a recap. And then we'll go into more of a Q&A session, allowing all of you to ask any one of the three of us any questions. I would like to first of all, thank all of our employees for their hard work this year. We had a few things that we achieved, including some very is big improvements in regards to the engineering feats that we've -- were able to accomplish with the big announcement of our Turkish order, and allowing the Turkish language to be put in there, along with Arabic and the Spanish and other languages that we are working on. I am very excited about what our 2010 international business is going to look like. While we are maybe a little disappointed in our current margins, how they showed up for us the last quarter and for the year-end, I am very optimistic that we know what are the proper steps to take to improve on those margins, as we have had and shown in the past. So that should hopefully be a short-term issue, and we should be back to the margins that we've seen, and been able to produce in the past. And it looks like the revenue, the top line is looking very strong for 2010. But Tom go ahead and give us a little recap of the 2009 numbers.

Thank you, Stan, and thanks to everyone for joining us today to talk about the fourth quarter results and to date 2009 results. First of all, I'd like to refer you to the Form 10-K that was filed this morning with the Securities and Exchange Commission. Please look at that filing for a comprehensive analysis and review of our operations and financial position. What I'm going to do here is hit some of the highlights and some of the discussion items, but please refer to the 10-K for a more comprehensive analysis. First of all, let's address probably the biggest question on everybody's mind. The fourth quarter revenue was a record $9.2 million in revenue, but that did not translate into record profits or even normal profits for us, from a gross margin line or an operating margin line. The gross margins for the quarter were 51.1%, well below the 60% threshold that we consider acceptable. And also we had a 4% net operating margin as well, which is lower than our expectations and our forecast.

There's two factors generally contributing both to those conditions. First of all, it's a nonrecurrent event related to the Turkey contract that was completed and shipped in the fourth quarter. I'll go into specifics about that, but we believe those are non-recurring events. There is however, longer term margin pressure both from a gross margin perspective and a net margin perspective, that is getting management's attention and focus, and we intend to fix in the longer term. First of all, let's talk about Turkey. Turkey was $3.4 million of revenue in the fourth quarter, a significant portion of our revenue obviously. We aggressively priced that contract to secure a significant customer, the Turkish National Police. We believe based on the product we delivered and their genuine or their happiness with the product that we have a customer for quite sometime to go. So we aggressively priced that contract to begin with, and that resulted in lower margins.

The second point I'd like to make on that contract is, it was integrated with radar. That was kind of new to us, in that we basically served as a prime contractor and integrated a third party's radar system into our in-car video. With that said, we were not able to pass through the costs of, I'm sorry. We were only able to pass through the cost of the radar systems, and not necessarily achieve any gross margins or any substantial gross margin. So that served to reduce our margins on that contract.

In addition, there were some accessories developed for specifically the specifications of the Turkey contract. First was an external monitor, a monitor in addition to the monitor that currently resides in the rear-view mirror was added, as well as a remote control so the in-car video system can be controlled in the back seat perhaps, or in the passenger seat as opposed to the driver itself. There was also a third component on that, the secure card. One of the specifications was that if a CF car were lost or stolen, they didn't want anybody to be able to open that card and read the content and see the contents. So we developed a secure card accessory. All these things have ongoing value to us, from the standpoint that we can now offer to other customers. But in the short-term in the Turkey contract we were not able to push through prices, acceptable price levels for that. And we also had obviously had software costs, engineering costs to integrate those accessories into that contract.

Third thing, we -- the Turkey contract represented the first contract for the DVM-750 that included language other than English. With that said, we -- our engineers did a modular approach to the language pack on this thing. And they developed an architecture that you can pull in and pull out different languages more easily and readily than if you hard-coded the language. So we spent a significant amount of time and effort and cost making that system more modular in the approach from a language perspective. With that in mind, since we delivered the Turkey contract, we've also added Arabic and Spanish languages to our DVM-750, which we believe will help us with some future and also outstanding opportunities that are out there today. Those are non-recurring in nature specific to the Turkey contract. If we were to specifically look at the margins on the Turkey contract, they would be quite low, in the 35% to 40% range perhaps. So that had a very negative impact on our overall gross margin for that quarter.

In addition, at the eleventh hour, the Turkish National Police requested that we become the prime contractor on the thing, instead of doing a typical international distributor type sale, in that we sold the unit to our distributor, the distributor did a retail markup and then passed it through the ultimate customer. In this instance, they required us to be the prime contractor, therefore we in turn had to pay a commission on that contract to our distributor in Turkey. That amounted to $0.5 million, a little over $0.5 million in additional expense that showed up in the SG&A line that wouldn't typically not be there for an international sale. So that depressed our net margin, our operating margin as well. So those are the specific items that we hope and believe are non-recurring from the Turkey contract.

Longer term, though, we do have some margin pressure both gross margin and net margin. First of all, the sales mix, we are completing production, and phasing out the DVM-500. That was amateur product and it's rotating to the newer products of DVM-750, the Ultra FirstVu, those sorts of things. And because of the inefficiencies of the new product, we are just not quite where we want to be in terms of margins on those products yet. Longer term we are going to be there. Shorter term, it is a sales mix issue. Thirdly we've got a -- our engineers have been tasked with all the specific items from the Turkey contract, and a couple of other ones that we are dealing with right now. They have not been able to undertake much in terms of value or cost engineering look at the DVM-750.

We are embarking upon that kind of program now. And by value cost engineering we are looking at ways to take cost out of the product, both from our supply chain and internally from a labor and overhead perspective. We are now applying those efforts to the DVM-750, and we believe we'll see results in the near term. On a net margin basis, we talked about the commission expense on the Turkey sale. That amounted to $0.5 million of additional SG&A expense during the quarter. Also our R&D costs are trending because of the new products, as well as some of the work we did on the Turkey contract. The new products we have are obviously the FirstVu the DVM250, and we are beginning to spend some money on the license plate recognition project. There are some others that we have not disclosed publicly yet, that we are doing development projects on.

From a headcount perspective, we ended the year at 103 headcount. That is down 14 from the prior year, but up six from the third quarter. And primarily, we added three contract engineers and hires in the engineering group. The rest, one in sales and two in production. So our headcount is up from the third quarter, but way down from the fourth quarter 2008. Let's look at the overall results for the year. Sales were down $6.2 million for the year, 75% of that decline or $4.6 million was in our international sales efforts. From that standpoint, we are focusing on international sales. We hired a new salesman to cover the Europe and Middle East territories. Our bid activity is up internationally, and I think Ken may talk about that later. Having the Arabic and Spanish translation as well as the Turkis translations available will also help our international sales efforts. From a domestic standpoint our stimulus funds are not hitting us hard, but we are seeing some activity from a stimulus fund for domestic sales.

Let's look at the operating income -- actually a nice trend during 2009, and I'll go quarter by quarter. First quarter, we got in a big hole from a net operating, operating loss side. We lost $2 million in the first quarter. We improved $1.7 million in Q2 to a $300,000 operating loss. Q3 we had a small profit of $25,000, and Q4, $341,000. So improvement every quarter during 2009. So -- but the problem is we started out in the hole pretty deeply in Q1, and therefore ended up with a $1.8 million operating loss for the year. On a positive side we did have positive EBITDA both for the quarter and the year, a little over $900,000. So we are generating cash, and that results in the fact that we do not have any long term or short-term debt on the balance sheet, and have not had any since May of 2007.

We still have some work to do on the balance sheet. Our AR is high at $8.4 million, but I will tell you that $3.4 million of that or almost half is related to the Turkish contract. We do have a irrevocable letter of credit issued by a bank supporting that receivable, so we are assure to collection ask we believe that will be becoming shortly, shortly meaning in the next 30 to 45 days. So our cash position at the end of the year was $183,000 but soon we will get $3.4 million of cash flow in, which will look very nice on our balance sheet. Inventory is trending down, not quickly enough, but it is trending down. We're -- we -- our inventory balance declined $700,000 from Q3, and a $1 million less than prior year. The problem with our inventories, our sales are somewhat erratic from quarter to quarter, and it makes it a little difficult to set production schedules, and bring in supplies and our supply chain and dealing with them. So from quarter to quarter, you may see that jump around but long term the trend will be down. We are focusing on that.

One thing I will point out, actually a bright spot, in our inventory is the activity on our test evaluation units, which are units that are being tested by potential customers out in the field. As well demo units which are units held by our salespeople to demonstrate to potential customers. The balances are growing, which is a bright spot, at 12/31/09 we had $930,000 worth of T&E and demo inventory. At 9/30 it was $525,000. and at year-end 2008, it was $273,000. So you are seeing a definite trend upward. We hope that translates into ultimately into sales. Overall, it was a difficult is year for us, but the positives that we come out of the year is that our balance sheet is still very strong, we have no debt.

We have positive cash balances which is expected to grow significantly here, once we get the funds from the Turkey contract. We have $14.5 million of positive working capital, a lot of that sitting in AR and inventory, which we think we'll be able to convert to cash and increase our cash balances. We have a very productivity R&D group. We have got the FirstVu that came out in the fourth quarter. Ultra that came out in the third quarter. We have the DVM-250 that is coming out shortly. So our R&D efforts and our investment in R&D, although it is significant to our income statement, it is productive, and we believe it will give us a platform to grow revenues in the future.

The FirstVu, let's just talk a little bit about that. We are receiving great feedback from it. During the quarter, our contract manufacturer had some difficulty in sourcing some of the components. They are TI, Texas instrument proprietary components that go on to the PCB, the printed circuit board. That's because primarily they are using one of the newer TI chips, and available inventory out in the in the field is not an acceptable levels yet. We believe, and our contract manufacturers is telling us that they have that solved or will have it solved shortly, and commercial deliveries in quantity will begin in the second quarter 2010. Our international appeal is there. FirstVu seems to be taking the international market, taking to the international market quite well, and we believe that will translate into future revenues for us. Thank you, Stan.

Thanks, Tom. I have got to tell you. Some of the things that we have teed up for 2010 are really exciting. Internationally, we probably are currently bidding on as much as $20 million worth of contracts that are out there, while the Turkish order was nice coming in at, call it a little over $3 million, there are additional opportunities out there worldwide that we are now getting a lot of exposure. We are getting into countries that we can refer other countries to, and having a lot of success with our products that they are very pleased with it. So we are not only domestically having good referrals, but internationally are -- set ourselves up for great referrals.

The Arabic language is going to be quite an opportunity for us as well. There is a couple companies throughout the Middle East that are over there, and are able to deliver this capability and we are one of them. We have a good foot hold in that marketplace, and I think you'll be seeing some stuff generated out in 2010 as well. Again, the FirstVu, it has a lot of appeal, and again it's one of those things that we are able to get that product out in small quantities at this point, but probably setting on approximately 200 backorders at this point. And when we do get some sizable quantities in, we'll be able to get a lot more T&E's out there, which I'm sure will generate additional sales in that regard too. But anyways, a lot of the stuff -- since we have Ken McCoy here, I think we ought to do is open up the floor, Amy, for Q&A,a and let address Ken some of these, with some of the questions that may come up.

Thank you.

(Operator Instructions).

Our first question comes from Ned Borland with Hudson Securities.

Good morning, guys.

Good morning Ned.

A couple of questions, several questions surrounding the gross margin issues. First of all, Turkey you mentioned that you had to price aggressively to sort of get into the Turkish National Police Department. I'm just wondering what is your pricing strategy regarding Turkey going forward? And with all these component issues, are those essentially put to rest now? Are you able to price at least to a level where you can offset the price of the third party vendors, or is this a one-time deal?

Ned, this is Ken McCoy. I'll try to answer that for you. As far as the pricing of the single in Turkey, we knew we were up against several competitors over there that had sold to the Turkish government before, and actually one that was a Turkish company. And so when you have those kinds of situations, naturally the government likes to buy from a Turkish company if they can. And so we felt we had to be pretty aggressive to try to meet or be around the same price as that other company, and -- that they had bought from in the past. So we made a decision to either be aggressive and go after it, or not get the order and not have any future business, or not make any profit by not having any order in the first place. So that was kind of our strategy there. We tried to look at that on an individual basis, and also based upon what we think the future potential is.

In Turkey, we think that this is just the beginning. We have now got both the Turkish police and the Turkish Gendarmerie as customers of ours through our agent's hard work over there. We have done a great job in giving them what they want, and supporting them. And we feel like we'll see future business from both of those departments, as well as some additional departments that will start using this type of equipment in the country. As we develop new products such as the FirstVu, or if we get the license plate recognition this sets the stage for us to go back to the products to those same customers. So we take all that into consideration.

Yes, Ned, this is Stan. Again there's still quite a bit of room for improvement in regards to some of the engineering that we can do in the future, and some of the additional costs that we incurred in this first round of engineering that we should not see going forward. So I think you'll see the margins on our next order from them, be quite different than what is being reflective this go around.

Okay. Just to follow up on the Turkey stuff. Do you still have units that have not been shipped yet? I mean is the 3.4 the total order, or are there still units that are going to ship in the first quarter?

No, we already shipped everything. It had to be shipped as one package. They took not only our systems, but the radar at the same time. They've already completed the testing, and they are actually installing the units throughout the country right now. So they're basically, we are just waiting for a check to show up at this point. They are pleased with the product, and we don't have anything else in the mix to ship them right now.

Okay. And just shifting over to the longer term issues with mix, you have the new products that are out there, the ultra, it seems like that is a lower unit product right now. And FirstVu doesn't sound like it's going to hit until the second quarter. What are the unit levels you need to see in order to hit 60% on those? I mean what kind of a ramp should we be expecting on FirstVu and Ultra near term, and what do you have to see in order to get back your traditional 60% gross margin?

Yes, Ned, I am going to dance around this a little bit. I apologize. But here is one of the things that we are seeing on the forefront, and that is, is there's a tremendous amount of is interest in the FirstVu by virtually every department that we go talk to, and we've got over 3500 customers out there now. And if each one of our customers would just buy one unit which is, they probably out of those 3500, have somewhere around 10,000, no, 100,000 officers, but if they just bought one for the department, that would easily get us there. There's that kind of margins in the FirstVu that are very healthy. We have the capability of still even discounting pretty aggressively on some of the larger international orders, and we have people that have asked for bids as many as a thousand pieces. So, it's just one of those things that, if I said a thousand units but it's an internationally order so where we discount it a little bit, that may not be the right answer. But domestic if we shipped 3500 of them, that would be, I would say that would get us there. Would you agree Tom?

I would.

So it's sort of a moving target. But and I can tell you this that the DVM-250 has comparable margins as the FirstVu, and again, it's a late second quarter. We probably won't see any real revenue effect, until the third or fourth quarter. But it, too, will contribute probably on a one-to-one basis, as with the FirstVu.

Yes, Ned, this is Tom. I would add that the FirstVu is much less sophisticated product than the DVM-750, and much more of that manufacturing is done outside of our buildings. So our is costs are more fixed from that standpoint. And so we are not going to get the downward surprises, but nor would we get the upward surprises as well. But it's much more stable pricing, much more stable cost than the DVM-750 or any of the In-Car video systems.

Okay.

The next question comes from Jim Stone at PSK Advisors.

Good morning, gentlemen. Nice quarter.

Thank you, Jim.

I wonder if you can give us some more flavor on what is happening domestically? What I'm looking at is if I take the $9 million, and subtract the $3 million for Turkey, looking at the $6 million for the US, which seems relatively flat with previous quarters. And just if you can add to the flavor that would help me understand that I would appreciate it?

Jim, I agree with you. One of the things that we have been stating in the past, and have talked about quite about over the last couple of years, is that we had about $1.5 million in what we would call bread and butter or you go to the mailbox and the orders are there, occurring every month. We have seen, and whether it's because of the trickling of the stimulus money. Or just the fact that our products are becoming more accepted, that number has inched up to about that $2 million a month number that you are referring to. So I think that is something that we still look to be able to see come through the door on a consistent basis. And then it gets down to, okay these larger contracts, state contracts, international contracts, additional products coming into the mix, that would contribute to a bigger number. Ken, do you want to elaborate on that?

Yes, Stan, you hit it right on the nail head. We are seeing an increase in our day in and day out orders. The past few quarters, we haven't seen any large state orders of significance come through. However I do want to say that we have added a new state police to our customer list recently. And we have had reorders from our existing state customers. They just haven't been of any real large significance, and therefore we didn't make announcements on them. But that all builds towards the future. Again, it's telling us that our present customers are happy. We are acquiring new customers on a state level. And again as we had stated in the past, sometimes the initial orders from the state is smaller as a test site, so to speak. And then once they become acquainted with our products a little bit on a day to day basis, they come back with a much larger order. Or it's a funding issue, they've got just enough to buy a few this year and we'll go from there. So I think we'll see -- we'll see an increase as we go on in 2010 through the stimulus funds and reorders from our existing customers.

And Jim, one of the things, one of the barometers that we follow is new customers versus existing customers. And we like to have that mix meaning as long as we know we are getting new customers, then we know that our product is still cutting edge, and we are out there as a product of choice. We also like making sure that we have a good balance of our existing customers ordering, so that we are satisfying their needs and they continue to be coming back to us. Right now again, we are still batting about a 50/50 with new customers and existing customers. And probably hit a number in excess of 3500 customers now. And the international side of things is probably going to be the most dramatic thing that you will see from us this year, because just again, we are getting tremendous amount of exposure. And we've been out there for quite a while, but now is coming to the forefront on stuff that is sizable.

And I might, this is Ken again. I just add to what Stan said. We are making, to emphasize the fact that with this customer base, in the past we haven't had the new product to go back to them. With the FirstVu and the Ultra, that is exactly what we are doing. And so just from that in itself, we should see an increase from what we've seen in the past is being able to go back and sell our present customers these new products, and that's what we are really excited about.

Could you talk a little bit about the competitive marketplace? What I'm thinking particularly you've obviously said, it's increasing by decrease in margins, but what can you tell us about who the players are, who is the most significant, is that changing with time?

There's still several competitors out there. We don't see too much change. If you want some names, probably our biggest competitors are WatchGuard, Panasonic, help me guys?

L3.

L3, those are probably our three biggest competitors out there. We haven't seen any particular startling new features from any of them, or new engineering designs that we are nervous about whatsoever. We still have the same specifications as they do in most all cases, and we exceed them in many cases. We haven't seen much price degradation, a little bit from some of them, but they are still above our pricing. And so when you compare feature with feature. I haven't seen anything really different from our competitors out there.

Jim, there was a study done the other day concerning In-Car video systems, and this is a little dated but they have us in a very close race for third as far as the names that we've mentioned. Obviously L3 is the big one out there, but they had us in sort of a third place or fourth place, real close to third place type of position. And we think that due to the fact that we are seeing a lot of these companies are still out there trying to raise money, you can see how their balance sheet and the profitability looks, you may see a few of these get out of our way, and the market continues to open up for us. As long as we can continue to stay focus on what our objectives are going to be, the top line is something that Ken has got to keep in mind. And then Tom and the rest of us, have got to make sure we get back to the margins, the bogey that we were shooting as far as 60 or better, and that will reflect to our bottom line numbers as well.

What are the major objections that you see at this point in a sales cycle?

Is the question, what is the one reason someone is taking someone else's product versus ours?

Well not only that, but why they are just saying, (inaudible) they start down the path, and then they say forget it.

We really don't see much of that. It's really -- the challenge is who gets to the customer first, And once, if you can get there before somebody else has got there, one of our competitors and convince them that theirs is the best, and we feel like if we are in there first, the department has an open mind, we are going to get the biggest percentage of those orders. And that's what we try to do, continue to pound on doors and get to all the departments as quickly as we possibly can, and of course, that is what our competitors are trying to do as well. The other place you lose, is if we lost to somebody or wasn't involved in something a few years ago, then the department sometimes want to stay with the same. And so, they will reorder from that other supplier. But if -- the nice thing about that however if they are not happy with their present or earlier supplier, we are seeing them change over to our product.

Jim, it's one of those things -- I think the biggest challenge is budgets, and the grant money, stimulus money, and all those factors. Once they get the money, we have had a very good success in being able to show the customer why our system makes the most sense for them is. One of our competitors made comments about a very large percentage of their business was reorders. Well, that's because they are not able to get new customers. And we are able to get out there, and still get the new customers. You will find departments that went down a certain path with these customers. And we are sort of the new kid on the block too, of the names that we mentioned, they've already been out there and established a lot longer than what we have.

But you will have departments that say, look, I don't want to change up things. I want all my officers being able to operate the electronics that are in there and I don't want to confuse them with multiple companies in different cars. We will always have that challenge, but if we have a situation where they got a new fleet of vehicles in, and they are going out because maybe the other competitor's product won't fit in that new vehicle, or they are looking at trying to upgrade, we have a very good success rate in regards to, going in there and going head to head against anybody.

How much of the market would you say at this point is still, give me a device as distinct from, sell me a system?

I don't know if I understand your question, but I can tell you that probably still over 50% of the vehicles that are out there have some kind of video capability. But there's still a very small number that have digital capabilities, and even a smaller number that have solid state digital. And what I mean by how small, the solid state, I would say less than 15% of the vehicles out there have solid state capabilities.

Okay. But what I'm saying system, is not only that but it's really tying it together, transmitting the data, storing the data, maybe tying it with other pieces of equipment you found in Turkey where you had to tie it to radar.

I better understand what you are saying. Mainly that is just internationally, when they tie it to something else. Of course here in the domestic market, we can interface with any radar systems out there, but that is just a cable, and software we have already developed in there. Most of the time here in the domestic market ,we are selling as an In-Car video systems and that's what they want, they may want to have speed on it. Internationally, in such as the Turkey thing, it was more of a speed detection/video system tied together. But we don't see that really here in the US.

And lastly, seeing as we are fairly far into it, what can you tell us about the current quarter?

Jim, we knew that was coming. Here is what we are trying to stay away from. We don't want to get into this type of quarter to quarter type of talks, in regards to guidance and stuff. But we have talked openly, and that we do think with the FirstVu being able to get out there, and the 250 being around the corner, we believe that on our first quarter call which would be early part of May, we are looking to try to give some year guidance at that point in time. But the quarterly stuff is so tough, because you have a situation like the Turkey order that comes in. And again we know contracts that are out there right now, international contracts that we have been told that we have won, and will be awarded. But again it's a matter of paperwork, funding and issues along those lines. And the first time we sit there and anticipate another $3 million order to come in a quarter, and it gets slid a quarter, and we are going to have egg on our face again. So we are going to stay away from the quarterly stuff. But I do believe that it is the consensus that we may visit about some yearly guidance here, and we may do it as early as the next call.

Okay. But here we are in March. The probability that you'll get a $3 million order, and fill it in the remaining three or four days of the quarter is probably quite low.

It's one of those moving tarts.

What you could share with us about the current March quarter?

What I can tell you is I know there are contracts out there that we feel comfortable that we, that we have the ability if we receive the contract and funding to within a 48-hour period, we could ship. And I think you have got a pretty, again we don't every -- $30,000 or $40,000 order we don't make press releases on. So unless it was substantial, we would be making -- so you can sort of understand and figure out where we are at.

(Operator Instructions).

Our next question comes from Ned Borland from Hudson Securities.

A follow-up on that last one. You said that the walk in the door business was, was $1.5 million. Now it's gone up to $2 million. Would it be a fair assumption to assume, we are assuming that you probably didn't bag another huge international order in the first quarter, that basically we are looking at a ballpark of about $6 million for this quarter?

Those would be, that would be the way to look at it at this point. But I have to tell you Ned, there are international contracts out there that we have a lot of knowledge that we have won, that we have the product on the shelf ready to go, and anticipating and that is something that can hit, and we can have it turned around in 48 hours. Again, unless it's a significant state contract or something like that or well in excess of close to a $1 million dollars, we just don't do the press releases all the time. So your assumptions based upon what I said, would be pretty accurate. At the same time, don't be surprised.

Okay. And on the international picture, sounds like there's a lot of new international interest out there for your products. I'm just wondering what markets are you targeting some of these businesses -- contract opportunities that you've won. How much of those have been priced aggressively. How many of them are new customers?

The things that we are working on, most of them are new customers. There are some reorders that we are expecting in 2010. Again, we look at each one separately. I'm not sure how to answer, how aggressively we priced it, in that we have things that we certainly wouldn't want our competitors to know how we are pricing our products. So it's kind of difficult to answer that.

But Ned, I would say that we have got to have exposure now into 90 different countries now. And I mean with the language package that we put in there, not only the Spanish and Arabic and Turkish and stuff, but we can easily adapt to additional languages now. So we are in countries that we have yet to ever mention on a call, that we feel we have really good -- we're the first ones through the door. We are currently, we went to one -- I want to say in South America. We were the only In-Car video company there, period. I mean, some of these guys are not reaching out to what some of these markets are, and it is becoming a big market internationally.

I guess --

I'll just add to that that we are increasing our exposure international shows, we are in one right now in Europe. Excuse me, we have got others that we are going to and really several of our US competitors, as Stan said, they don't compete in the international market in that their equipment just won't fit into some of the international cars. So we have got a definite advantage there. Again back to the Turkey thing, we were up against the Turkish company, and also a past supplier. So we had to be aggressive there.

I guess I'm just -- just to sum it up here, I'm trying to understand. The Turkey orders had specific issues, I get that. You were going against in-country competition. But if you are trying to broaden your international reach, and you need to price somewhat aggressively in order to break into some of these markets, are we looking at some of this international flavor that is going to be hitting, we are probably not looking at 35% to 40% gross margins on that like you saw in Turkey because there were specific issues, but are we looking at like say 45% to 50%, assuming you don't have similar issues?

This is Ken. I probably haven't done a good job of answering your question earlier there. Because the Turkey thing called out for radar and the accessories we had to develop, that as Tom indicated hurt our margins as well. These other things that we are working on, are really off the shelf 750 or 500 plus units or Ultras or whatever. So our margins will be back up. We don't have the radar and these accessory items. That was a unique situation there in Turkey.

Okay. Thank you.

Thanks, Ned.

The next question comes from Liam Timmons, FinArc Investment Management.

Good morning. I just wanted to get your take on how comfortable you are with not needing to borrow to fund operations going forward, just given the dramatic draw down in your cash balance during the last quarter, going from about a $1 million down to $180,000. And it seems like from your comments that you are relying on receiving the cash from the accounts receivable, $3.4 million that you are waiting for Turkey. So if you can also maybe go into the remaining account receivable balances, in terms of how old they are, and what the likelihood of collection is for those I would appreciate it?

This is Tom. In terms of our forecasted cash needs, with the influx of that Turkey money, which is over $3 million, that we expect shortly, within days if not weeks, that will set us up very nicely for the rest of the year. We expect to grow cash during the year. We do not expect any need to borrow funds at this time. Now from accounts receivable standpoint, we do have the Turkey receivable, which is backed by an irrevocable letter of credit issued by a bank. So that collection is assured on that one. Outside of that, we have a few minor collection issues that we are dealing with, but those issues are well covered by our $110,000 allowance doubtful accounts. Our problem AR is $110,000 or less. So that's all I'll say there. Our collection days are actually improving, outside of the Turkey issue or the Turkey letter of credit. So I -- we just don't forecast any collection issues on the receivables of any significance.

One of the things out of the. roughly the four years that we've been shipping product, we've had sales cumulative of roughly around $70 million, and we may have written off a $100,000,.

Not even that. Less than $40,000 we have written off.

The customers in our case are generally police agencies and municipalities and state governments, so those are not typically collection concerns. Where we do run into issues sometimes is where we sell to installers, or we sell into integrators that sell complete cars to police agencies. That's the ones we watch very closely. That's the ones we maintain reserves for, and we try to limit our exposure there.

Okay. Great. Thanks a lot.

Thank you.

Our next question comes from Gary Fisher, private investor.

Gentlemen.

How are you doing Gary?

I am doing great. I appreciate your taking my call. I have one question really, and it's regarding foreign sales. I wonder if there are any issues with the United States government on technology transfer issues, that sort of thing?

On foreign sales? Not on our products, no. We naturally look into those kinds of things, but we have no problem on any of the current products that we sell or distribute. That being said, there's maybe a handful of countries that you can't ship anything or sell anything to, and we certainly abide by those laws.

You will have some, Gary, that you will -- outside of just did regulatory side of things, that will tax you so heavily, we are not going to be able to get competitive and get into. But right now it's not like we are having to deal with some of the thermal imaging type of products that would have a little tougher time getting into certain countries.

Okay. Thank you.

Thank you.

Our next question comes from Jim Stone at PSK Advisors.

Trying to look at the model for the quarter, and wonder what you can tell us about the operating expenses. They were up considerably third quarter to fourth quarter. I assume there was a $0.5 million in the fourth quarter relative to Turkey sales commission. But beyond that, then how would we look for first quarter relative to the fourth quarter?

Yes. This is Tom. From an SG&A perspective, I see R&D expense trending upward slightly, primarily because of the amount of and the number of development projects we have going currently. The selling expense and commissions that was abnormally high in the fourth quarter, because of the commission paid on the Turkey sale. That was roughly $500,000. Other than that, selling and commission expense would have been in line. Now, I would suspect that promotional activity and advertising will increase a little bit, because we did have a sales and marketing meeting with all of our distributors and salesmen here in the first quarter, as well as some promotional material for the is DVM-250 and the FirstVu that is being put out there. But other than that, I think it's trending slightly higher but not alarmingly so. We are continuing with cost containment effort internally, and so we are trying to keep that in check.

Okay. And then the other thing you've been nice enough to share with us the pipeline on foreign, can you give us some feel on the pipeline for the larger orders in the US?

This is Ken. We definitely have seen an increase in size of departments that we are selling to with the introduction of the 750. And that's basically one of the reasons we designed that product, to have the features that we needed to get into these other departments. So we do see an upward trend, in getting to large departments which naturally results in to larger orders. I'm trying to think as far as large state orders and whatnot, here, recently there hadn't been a lot of activity from a lot of the states, but it kind of goes in spurs as their money become available. And so we do see some -- we have got several units in various states throughout the country on a test and evaluation basis that we hope will result in some large orders this year domestically as well. So we do feel like we are making progress, and should see some large orders domestically through 2010 -- and beyond.

And Jim, what I am seeing some of those things from where I am sitting is that, while usually the larger order that is we were able to chase were state contracts with the highway patrol and department such as that, now we are getting into the municipalities that are of size and have as many vehicles as some state departments. So it has definitely broadened our ability to get into much larger markets, and be able to pursue that on a day-to-day basis.

By the fact that you don't seem to have a number that you can share with us, this would imply that there's not a heck of a lot of large orders in the near term pipeline.

You know better than I, Ken.

Actually there are some. We don't like to throw out numbers of how many states or how many potential units. But there are some that we are working on that could actually break in the very near future.

And they are sizable too. And well in excess of a couple hundred units.

Okay. Thank you. Keep up the good work.

Thank you, Jim.

This concludes our question-and-answer session. I would turn the conference back over to Stan Ross for any closing remarks.

Well, first of all again, thanks everybody for their time today, their questions. And I can assure you that you have a team here that will work really hard for you all. We are going to definitely pay attention to the margins that are out there, and continue to develop the cutting edge products that are going out there, and keep us out in the forefront. And hopefully we are going to have an exciting 2010. I feel very comfortable with the top line. Therefore, we have got our work cut out to make sure that the margins get back in line to what we are accustomed to. If there's any further questions that we can answer, feel free to give us a call here at the office.

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