Digital Ally Inc (DGLY) 2010 Q2 法說會逐字稿

Hello and welcome to the Digital Ally, Incorporated, second-quarter 2010 conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions)

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. (Operator Instructions)

Please note this conference is being recorded. Now I would like to turn the conference over to Stan Ross, CEO. Mr. Ross?

Thank you very much; and thanks, everybody, for joining us today for this call. With me today is Tom Heckman, who is the Company's CFO. He will be going over the second-quarter results and be available during our Q&A portion of our call today.

But before we get started with the results I would like to point out and reiterate a few comments and points. First of all, I want to restate that the Company still feels good about our guidance we had made on the last quarterly call -- that the Company will have an all-time record year in revenue and operating income.

Now you may question or ask how we can still make that kind of statement after posting only $5.5 million for the quarter. But I will touch on a few of the high points and cover in more detail after Tom is through on why we are still excited about the guidance that we have given.

First of all, we have stated that our core business is running at about a rate of $6 million a quarter. Now that was the case in Q1 and would have been the case in Q2 if it weren't for the delay in some components that did not make it here in time for us to get out in Q2. That was mainly around the wireless feature of our DVM-750.

As stated in our press release we had approximately $1 million in back orders due to this issue. These components now have arrived and we have started filling those back orders. So therefore, we are still very comfortable that the guidance or the $6 million number that we use as a quarterly estimate is very solid.

Secondly, it is our policy not to ship product to foreign customers or distributors without prepayment or some form of letter of credit in place to ensure us against loss of failure of payment. That being said, we were unable to ship the products on the $3.5 million South American order we received in Q2. The delay in us receiving this prepayment was very explainable and gives us no concern that they are not going to be able to provide us with the prepayment and we're going to be able to process that order.

So if you look at where we are at, it is pretty simple. If you do the math, if we continue just to hit our $6 million a month far as just the core business, far as our target, that will put us at $24 million. If we fulfill the South American order, that will put us at $27.5 million.

Now in that press release that we announced concerning the South America order, we also stated that there may be an additional 1,000 units that may be ordered from that region. These orders, some of them would be in the form of reorders. Some of them would be from different agencies within that region. That being said alone would put us at over $32.5 million for the year.

So therefore we fairly clearly have our record time record year. So you can see why we are excited about Digital Ally's future, what the second half of 2010 is looking like, and even more excited about what 2011 will look like with the new products that we will also be covering here later on.

I'm going to turn the floor over to Tom so he can go over the Q2 results, but I want you to know that I do plan to address that 1,000-unit shortfall. For instance if for some reason South America could not come up with -- or in time the additional units that we stated in that press release, I want to make sure that you understand that there are many things that Digital Ally has going on throughout the world and domestically that I think will give you some comfort that that 1,000-unit shortfall will be covered.

So, with that, Tom, I'd turn the floor over to you.

Okay, thank you, Stan, and to welcome to everyone. I appreciate you joining us this morning. First of all, this morning we filed our Form 10-Q with the SEC. I encourage everyone to go to the SEC website and review the 10-Q for more detailed analysis of the quarter and year to date and other factors involving the Company.

First of all, the P&L. What I'm going to do now is look at some of the high points and low points of the quarter. Let's go to the P&L.

First of all, it was disappointing top-line results. $5.5 million in revenue was not our plan and not what we would like to see. But after what Stan mentioned about the foreign shipments, if you drill down into it, here is what is going on.

Domestically we are very steady. Had we shipped the backlog of wireless units that were on the books, we would have made our $6-million-plus run rate; no doubt about that. Where we are falling behind is our foreign sales.

We only had $116,000 in international sales for the first six months of 2010. That is well under our forecast. But in my mind and in looking at the sales pipeline, that is a delay; that is a timing issue; it is not a matter of business going away.

One thing we did do is insist upon upfront payment. Actually there was one contract that was on the table that we declined because the prepayment terms were not in there. And that customer has since come back and we're renegotiating the contract. So that I think will come into sales in the third quarter.

We do not want to leverage our balance sheet to the extent that we take on credit risk from an Accounts Receivable situation.

The wireless feature -- well, I will get into that a little bit later.

The gross margin was also disappointing at 50%, a little bit over 50%. Really what has happened here is our manufacturing costs, our fixed manufacturing costs -- which include things like material management, purchasing, warehousing, and testing -- it all goes on as sort of a fixed cost during the quarter. With the disappointing sales that we experienced for the quarter we just didn't have enough volume to absorb all that overhead.

The good point of that is, when we do hit our numbers on the top side, we should see quantum leaps in our gross margin from that standpoint.

Just as a reference, our direct labor hours per unit is around 3.5 hours per unit. Our overhead rate is (technical difficulty) 125% of direct labor. So you can see the amount of fixed overhead and overhead component that goes into a product like that and what would happen when you underrun on your sales.

We also had a couple of other things happen since we had end-of-life products for several of our components. We did talk about the wireless transfer modules that did come to end-of-life on one of the boards that went into it, so we were forced to seek a new solution for that. We went to a box PC type solution.

It wound up being a very good product for us and will solve issues, problems, and what have you and be a better product than the older one. But we did have to convert over to the box PC solution. And as Stan mentioned, we had a little bit of a delivery issue on that.

Secondly, we had CompactFlash cards coming to end-of-life with one of our manufacturers. So we had to go to a different type CompactFlash card on that.

As well as our camera, our 10X (technical difficulty). So we dealt with all three of those situations in the second quarter. And as a result of going to our new solutions in those we were forced to rework some of our existing finished goods, and that also depressed our gross margin.

We believe long term with the changes that we have made, in particular the testing part of our manufacturing process, we put in a lot of testing before it hits our work in process and even at the end of the process, so we catch problems before they get out there. We are seeing much improvement in our efficiency on the line and less fallout. In fact, we have dropped about seven headcount in our production line since the beginning of the year, and we are reducing our standard labor hours by about 25% per unit.

So you can see the efficiencies there. We just need to get the top line and the revenues up and we will see a good improvement in the gross margin.

We also have several other supply chain initiatives going on that we believe will show up towards the end of the third quarter but more pronounced in the fourth quarter. So I would anticipate an a significant improvement of gross margin in the fourth quarter from those initiatives.

SG&A is showing the effects of our cost containment measures. If you look at the details there, R&D has been improved both from a cost perspective and result perspective.

We have finished the FirstVu. The Laser Ally is out now. And the DVM-250 is going to be launched later this year, probably in the fourth quarter. So we're starting to get product and development out of our R&D as expected. And the good point is that the cost side of that is coming down. From a cost perspective we are about $350,000, $400,000 less on a year-to-date basis in R&D expense than we were last year this time.

Selling costs have increased during this year, primarily from the promotion and to support the launch of our new products. We also have increased our cost in the foreign tradeshow side. We do attend more foreign tradeshows this year than last year, and it is showing up in our expense. We hope it does and believe it will show up in increased foreign sales in the second half of 2010.

On our professional fees and expenses -- showed some good improvement during the quarter and year-to-date. We just have less litigation going on. Last year we had some of the L-3 matters going on in that. We just have less this year.

We have concluded one litigation case just recently without cost or very much cost. We also have -- got a default judgment on one of our cases against a supplier of ours. That supplier, unfortunately, has gone into bankruptcy; so it's a little difficult to gauge what the collection effort will be on that. But we're hopeful that between the bankruptcy estate and any available insurance that is out there that we will be able to recover some of that.

Stock-based compensation for the period has increased. But that is primarily due to a switch to using restricted stock as opposed to options and the vesting periods being a little bit shorter on the restricted stock. We expect this expense to improve dramatically during the second half of 2010.

Another matter that happened during the quarter -- we were at the end of our lease on a production facility over in Grain Valley. We were able to renegotiate or negotiate an extension of that lease at a much reduced rate, which we were happy with.

What we did, however, do is lease new space in the Overland Park on the Kansas side, primarily for our engineering resources. We are finding it easier to locate qualified engineers with the engineering space over here in Kansas as opposed to over in Grain Valley, Missouri. So we are looking for that to help us down the road.

Bottom line, no doubt about it, it was disappointing for the quarter. More concerning is we did have an EBITDA loss for this quarter, $440,000 for the quarter. That is our first EBITA loss since March 2009 quarter.

However, as we talked before, that is primarily a top-line issue and I think we have got the sales pipeline to fix that issue here in the third quarter -- third and fourth quarter.

Moving to the balance sheet, our balance sheet is much improved over last quarter and last year-end, primarily because we did collect the Turkey receivable. $3.2 million collected.

We wound up with $1.8 million in cash at the end of the quarter. $4 million of accounts receivable, which is half of what that balance was at 12/31/2009. Again that is primarily due to the collection of the Turkey receivable.

Inventory was up; $9.3 million of inventory on the books. Much of that is in finished goods. That is primarily because of the shortfall in revenue for the quarter. Again, we think that it's just timing only.

One thing we are seeing in inventory is there is somewhat of a pickup in the demand for PCB components worldwide. So we are running into longer and longer lead times with some of our critical components that go on our printed circuit boards.

So what we have done is we have gone out and secured safety stock for those long-lead items that are critical to our process. So we have kind of bought insurance, if you will, for the rest of the year anyway on those long-lead components.

Again, we have zero short-term debt; no long-term debt. We have not had any borrowing needs since May of 2007.

We have $14.6 million in working capital. Very strong working capital position. We have $17.5 million of equity; that is over $1 per share in book value, which is very nice.

We did announce an extension of our stock buyback during the quarter. However, our trading window had closed, so there was no purchases made. But that thing has been -- that program has been extended for another year. With that, I will send it back to Stan.

Thanks, Tom. Couple things I wanted to touch on, actually there's about three more that I would like to touch on before we open up for Q&A.

But one of the things is the additional 1,000-unit shortfall. That probably is the one that sets in the back of people's minds. Saying, okay, we see that you do have the order for South America; but what else do you have in the hopper?

So if you take South America out of the equation and we just use -- we say that that 1,000 is setting there, we are right now -- and what I'm going to touch on -- these are contracts that we actually are bidding on or have already negotiated and may even just be waiting for funding to occur.

I am going to try to keep this from the bigger picture perspective because I don't want to alert a lot of our competition to where some of these regions are. But just under state contracts domestically -- and these are contracts that are of size, that typically we don't try to, unless it is a new state or a renewed contract or something, we try not to just announce every time you get a 60-, 70-piece order. But under state contracts that we are aware of that are going to be awarded yet this year, there is almost 500 units that are out there that we have either bid on, we feel like we are in the final stretches of, or literally may be waiting for just the additional funding to come down to where we will be announcing those orders.

That being said, there's roughly 500 units in that regards. As many of you know we have a real good presence in Mexico and Central America. We have had some very good conversations down there. It appears that funding throughout that region has lightened up a little bit.

There are probably somewhere close to half a dozen, maybe 10 different agencies throughout that region that we are talking to. That number comes in closer to 2,000 units far as in that region that we are negotiating.

The Middle East, we had hired an international sales rep on our behalf. He's an employee of ours, to start handling the UK and the Middle East. And he has done really well in opening up a lot of doors. We have a lot of units over there that are being demoed, and we are bidding on currently somewhere around 400 to 500 units just throughout the Middle East.

Again, Asia, we have started getting into that market as well and we currently are in negotiations with a couple different agencies there for over 500.

So this is just real big numbers, but if you take even the South America out of the equation they are still well over 3,000 units that we have the potential of getting yet this year. This is still the 2010 window that we think that we're looking at.

So we are real excited about our guidance. We feel very confident that we are on the right track to do that, along with the margins improving greatly, and I think you will start seeing that in the third -- and very dramatically I believe in the fourth.

The other thing we want to comment on too is, this whole guidance that we have given is based upon our legacy products. What I mean by that is the DVM-500 series, the 750s, the Ultra. We didn't even get into the new products, the Laser Ally which allowed us to enter in the speed detection market. The FirstVu, the body camera. Not only as that product came out and seems to be having a tremendous amount of appeal to agencies, but the first and almost the second production run of that particular unit has already been sold out. And we still have yet to really have that product in front of a lot of agencies, a lot of the tradeshows. It is very new in the mix.

So while that is not a big number -- I think our first production run was only 250 and our second is only 500 units -- it starts to contribute.

Then the DVM-250, which is the incident recorder. I will just touch on a couple highlights on that and then I want to go back to the Laser Ally.

The DVM-250 I actually was able to attend a couple of the demonstrations of this product to a -- in particular a couple of fleet owners that have vehicles in excess of 500 vehicles that are out there, whether it be town cars, taxis, vans that are servicing health centers. And they were extremely excited about it, to the point that they felt like it was such that -- wanted to be introduced on a national level throughout their company, not just domestically.

So I am very excited about what may be coming out of this. Again, you are having people talk about opening orders that could be as high as 1,000 units to start off. So the incident recorder on the DVM-250 seems to have a lot of sex appeal out there.

Back to the Laser Ally, just last week we received -- and I believe it is a written form out there now -- there was a study, a third-party study done by seven of our competitors that also participate in speed detection in the form of laser detection. What this study was about was mainly towards laser jammers or radar jammers.

They had eight different units that were out there that they were testing at different ranges. Of all the products that were out there, Digital ally's Laser Ally was the only unit that could not be jammed by these jammers.

So when you go to a police department and you are able to sell apples-to-apples type of scenario, and your product cannot be jammed versus one that can, and it detects the vehicle that is trying to jam you -- which is, I believe, is a felony throughout the country-- that is a product that they are going to want to have. Because that is a very big ticket and it allows them to do their job without worrying about the product not being able to pick up the speeders.

So we definitely have a superior product again in that particular field, and we look to try to continue to enhance in that arena.

Anyways, we are very excited about what is going on. So much so that we have really picked up our activities in regards to conferences that we're starting to attend, broker dealer meetings that we're starting to have to spread the word about Digital Ally, to start to let them all know why we are going to have an all-time record year, why we are so confident about that all-time record year. And also get them excited about 2011 with the new products that we will be showing as well.

For instance, our most recent conference at Morgan Keegan we were lucky we had roughly five of our units that were there on demonstration, that were there for people to take a look at. So anyways, it is looking real exciting for the tail end of this, and I think we will go ahead and open up the floor for our Q&A session.

(Operator Instructions) Ned Borland, Hudson Securities.

Good morning, guys. I just want to talk about next year for a second. If we are to assume you had a little bit of contribution from FirstVu and Ultra, calculating the units you dprovided plus the revenue that you did in the quarter, are you seeing any kind of -- is there any kind of discounting of price on these DVM models that you are selling here?

No, not at all. Not at all. We are still very comfortable with holding our price where it has been at for the last 18 months. Again it's just a superior product in a lot of ways, so we have not had to discount our product.

Okay. Then what was the contribution for FirstVu in the quarter?

Minimal. What was (multiple speakers)?

Yes, for the FirstVu we had a roughly 200-unit production run and that was sold out. We are in the midst of getting another 500-unit production run done, which we will be shipping shortly. So roughly 200 units for the first six months would have been the contribution of the FirstVu.

Now Ultra, I don't have the specific numbers; but there was probably less than 200 shipped in the first six months. On the Ultra.

Ned, I can tell you the real very first production run was we got 50 units on which a few of them that we had to fill some orders with; but the others we tried to keep for tradeshows and for our reps. Then when the 200 came in, they were basically sold as soon as they hit the door.

So we just made sure and Q&A-ed everything and -- or not Q&A, but did the quality assurance and get it on out the door.

I think we probably still have a backlog as far as back orders of 250 units or more.

Jim Stone, PSK Advisors.

Good morning, gentlemen. Question, first of all, could you give us a breakout of roughly either orders or sales, new customers versus old?

Yes, Jim, it is still running right at 50-50 with reorders and new customers.

Okay.

This is a good quarter to state that, because there wasn't anything really big as far as an international. So it is running pretty consistent with what we had in the first quarter as well.

On the new, can you tell us, give us some feel where those guys are coming from? They didn't have anything? They coming from competitive? What is the situation?

Yes, there are a few -- there was a company called [Integron] that went out of business. Someone else has picked them up, but there has been a few of their customers that have approached us, that we have stepped in and started providing product for.

There's a few other companies that are out there that may be appearing to fall on hard times. Or there's vehicles that they have brought in that the older units that they have well not retrofit to the new cars, so we are picking up those customers.

The new guys that we're seeing is guys that are starting to get something funding busting loose. Whether it's still, believe it or not, from some of the stimulus or they are able to get additional grants to where they have been able to come up with some additional money.

Austin Hopper, AWH Capital.

Good morning. Thanks for taking my question. I just was trying to understand; I think you may have made it clear and I just don't really recollect or something. But the guidance you are talking about for this year, record revenues and operating income -- so your previous record was what? $32.6 million in revenues and operating income of $5.1 million; so we are saying that this year you will beat that?

Yes, that's correct.

Okay, great. Thank you.

[Martin Trembley], private investor.

Good morning, gentlemen. I have got two questions, one of them being the program to repurchase shares. If I recall, it was announced two or three months ago and [you found the same color key] as of today we have not repurchased any shares.

Now, as a shareholders, I look at the shares going from $2.20, $2.10, $2.05, $1.88 this morning, my question is -- how low do you expect the stock to go before you start buying those shares?

Because the way I look at it is if the Board of Directors and the management is not buying it, that would tell me that they expect the stock to go even lower before they start buying. I am very concerned about that. That is my question number one.

Martin, well, that's not quite accurate. The problem we have to -- we are only allowed to buy during a certain period of time. That being right after, for instance, a conference call like we're having today, to where our 10-Q has been filed, the numbers have been out there, we have basically informed the public with everything that we know or are aware of, and given them as clear picture as anyone.

So we have to treat the Company much like an insider. So we will not be able to really get in and do any type of repurchasing for probably you have to let things settle out today as far as the trading. Possibly could get in there as early as tomorrow.

But then that window will shut as soon as we get to the tail end of the quarter, because then we have some real clear insight into what third quarter looks like. Or instance, if a very large contract would happen to show up between now and let's say Friday, we would be prohibited to going in there and buying it back.

So we have a lot of restrictions that prevent us sometimes from getting in there. We are right beside you in regards to there seems to be some very opportunistic days to be in the market, but our hands are tied.

No, I appreciate that. Okay, that verifies that.

My other question is based on the new products and all the excitement in the market for your products, can we right now think that FY '11 will be even better than 2010?

Well, I'd tell you, the Board has not allowed us to give any kind of guidance for 2011. And to be honest, while we are starting to see some visibility in 2011 in regards to some of the orders and contracts that will be coming up for bid and due at those period of times, we are probably going to wait a little longer before we will get into that.

But I do think that the new products definitely appear to have a lot of interest in our industry, and so they will be a factor next year. So we like 2010 and with the new products you have to like 2011.

Joey Feste, KM Capital.

Stan, how you doing? A couple things. One, Homeland Security. Is Ashcroft still active in our Homeland Security dealings? Because ICOP just got a contract, and we know that -- we thought they were a dead carcass on the side of the road there for a while, post reverse split. So my first question is, how are we competing in the Homeland security?

I've got to tell you, Joey, that has been a little bit of a mystery to us as well. We are actually on and have sold into, received grant monies from -- as far as our customers -- from different departments from Homeland Security. We have done a tremendous amount of digging to see if there was a bid process that occurred in regards to that particular order that they were referring to. And a little bit stumped, as we do monitor that and we are an approved vendor with Homeland Security and those agencies.

Yes, John is very much willing to help on any matters that we have approached him with. That one was a little bit of a surprise. Just I don't have a good answer for you. So we will just have to see how that plays out for them.

Then now that we have gone through kind of the '08, '09 economic and budget slashing of some of these states and municipalities, do you think now that going forward we're going to have revenue consistency and operational consistency going forward into the last part of '10 and going into '11?

Joey, this is Tom. I think from an expense side, it is very predictable. We have implemented cost-containment measures that are working, and from the expense side it has become very predictable.

From the revenue side, however, the domestic revenues are steady and very predictable, but where we really have a foggy crystal ball, if you will, is in the international front. Both from when they are going to be awarded, how much they are going to be awarded, when we are going to get payment, so on and so forth. So there is just a lot of variables in the international orders that make it difficult to predict.

And when they do hit, the good thing is they are usually very large. Because there is generally centralized purchasing in the international nations and that that we deal with.

Joey, a couple things, too, just so that you know in regards to the payment issues and stuff. We have done quite a bit to even assist different agencies, foreign agencies, in regards to working with the Ex-Im Bank and other areas, and where we can assist them with their letters of credit and such. So that hopefully will speed up the process going forward as well.

David Jacobs, private investor.

Yes, good morning. This is David Jacobs. I wanted to ask a question. I think you said your inventory was $9.3 million. Is that correct?

That's correct.

From what your projections are, that is like a quarter and a half of sales, of future sales. What is the mix of this finished inventory? Was it counting on the South American order? Or what does it consist of?

David, a lot of it was based upon the South America order, so that is the big number. But --

There's several orders that were projected to be in hand in the second quarter that we built inventory to satisfy, and those did not materialize in the second quarter. We hope that they do in the third quarter and believe that they will. But that is primarily it.

We were anticipating those orders, and they are primarily in the DVM-750 area.

One other thing, too, David, to touch on -- again I don't know that it is a big dollar factor, but it was a factor. There are certain components that we are seeing out there that are getting to a point where they are six, eight, maybe as much as a year lead time. So we also stepped up to the plate to assure that we were not going to have any issues on that and bought some larger inventories to make sure that, as we are going into 2011, we are going to be able to have those key components on the shelf and continue to be building going forward.

And they are all up to date, right? You don't have to do too many updates to them?

I mean, I know you have had trouble finding components, we all do. They are ready to be -- are they really really finished? Are they close to being finished? Are you missing parts for them, I mean?

No, the safety stock we are talking about is primarily components that go on the PCB boards, the printed circuit boards. Resisters, transistors, modules, those sort of things. We have bought safety stock for that if our contract manufacturers find it difficult to get their own supply and quantity of those.

Of the $9 million, what is finished goods?

It is roughly $4 million.

Roughly half of it.

Yes.

Okay.

Now included in that, as well, we have demo inventory and T&E inventory out there that is included; and that is almost $1 million by itself. Those are units that our salesman have for demonstration purposes and also it includes customers that are demoing our units. We have got some customers that have got 25 units on demo.

Right.

So it's really a good thing to have them out there from that standpoint.

Okay. One other question on the [Speed] Ally; that sounds like a great product, especially when it can't be jammed. Are you in a position to manufacture it, though?

Because I know you had problems in the past with some of your startup products of manufacturing them, having bad boards and components and things like that.

Right. We're approaching this, just sort of easing into it to make sure that we are not going to have any issues. I think our first run was 10 systems. We went and sent our unit off to the IACP, which I apologize for not making that point.

We also did get the IACP approval as far as our unit maybe three weeks ago, something like that. So the first run was a small run, mainly using those for demos, internal testing, trade shows, and then obviously the IACP qualification.

The next run is a 50-unit order. So we will be ramping up to that. So we are easing into this.

We think that our subcontractors have done a good job. I think out of the 10 units we had one button that failed. And outside of that the product worked really well.

[Jeff Scott, Scott Asset Management].

I would like to follow up on the laser systems. You are still manufacturing with kind of trial components. Have your subcontractors been able to identify and test and prove all the individual components that will be used on a true production basis? And also the compatibility of those components?

Yes, we're in good shape, Jeff.

Yes. The units that we have out there are the units that we will be manufacturing and duplicating here on out. And they are working fine.

With the same suppliers, same specifications, same compatibility, everything else?

Correct, yes.

Okay, thank you.

And just as more information on that, the first 200 units of a speed detection device have to be individually tested by a highway patrol department. I think it is in the state of Florida. So that is why it takes a little while to bring this thing up to full production, because you have to produce them; they send them down to Florida; they test them and qualify them before you can go into full true field production.

Yes, this particular product there was a tremendous amount of internal testing that was done prior to us even thinking about taking it in front of the IACP, recognizing that we have got to duplicate that 200 times. So you better be at the point where you have got your final design, your final components, the compatibility issues resolved before you go in front of them. Because that is not where you want to stub your toe.

What is the selling price for that unit?

$2995.

And how does that compare --

Almost $3,000.

And how does that compare to a standard unit, non-laser?

As far as the competitors on non-laser? They are all over the board. They can be down to $1,000 and as high as -- with some of the features is probably close to $5,000. It is all over the board.

Okay, and compared to the other laser manufacturers?

We're right there at, I would say, at the high end with the Cadillacs of the industry. But again, we have the features that justify our unit.

Jim Stone, PSK Advisors.

Speaking of the ICOP, doesn't the government still have the procedures that after an award there is a conference to say why it was awarded, and there is also procedures for complaining against the award? Are these open to you in this product, or not?

Jim, we are trying to find out details. We sort of -- again right now we're finding out as sort of a mystery contract. We can't find where there was a bid process or where there is anything public surrounding that particular order.

So we are looking into it. We will utilize our resources to find out more about it and find out why we were not allowed to participate in on that bid.

Okay, and the next. In general the competition then, what are our Asian friends doing? Are they still the giants in the industry? Any luck in trying to penetrate those accounts? Or are we still kind of stuck with going after the folks who have been with very small vendors or are new to the field?

I'm not sure I understood your question.

Jim, if you are asking if we are penetrating the Asian market, we have. (multiple speakers)

No, I am asking if the Asians are still big in the field and still active.

We're not -- I mean if you are talking about them being in competition to us, we haven't seen that far as a finished goods product.

Okay, that was one question. Then the others, at one point we talked about it is very hard to penetrate accounts which have substantive competitive product. I am wondering if you see any change in that, or if that is still the rule.

No, that is still the rule. And I think where you're going with that is -- since we have talked about them, but when like an ICOP gets their foot in the door at a particular police agency, until they are exchanging out their cars or maybe there is something that they are not pleased with, it is very hard to break into that agency. Because they want all their officers understanding and being capable of working with the same set of electronics and not having to jump around and understanding three and four different models.

That being said, that would apply to us as well. And if you look at the number of agencies that are out there, 18,000; you look at the number of vehicles, over 450,000; so back of the envelope gives you about 25 vehicles per agency. We have well over 3,500 agencies and we have sold -- how many thousands of units, Tom? 20,000 maybe?

22,000.

22,000 into that market. So you could make the same argument that we may have as much as $200 million worth of potential orders through those agencies if they outfit all their vehicles, just as long as we provide a good product and good service through the existing customers.

So it is still hard. A lot of them have been out there before us. And again where we are fortunate is that the people recognizing the warranty, the two-year warranty that we have that the others may lay out there with a one-year. We have a solid-state system with no moving parts compared to the others that a lot of them have the hard drive or DVD burners.

And then you get to the fact that it is all integrated into the rearview mirror and it doesn't matter if it is an F-150 pickup, a Dodge Charger or a Fiat, they can utilize our product and utilize our product in their next set of vehicles -- which they are turning about every three years in a lot of departments.

So we have got some advantages and opportunities. Just not -- you have got to work at it.

Yes, and I would add that some of the state contracts that are awarded out there, you get on an approved list. And the proof in the pudding is who they are buying from.

Take for instance Texas. Texas has I think three or four approved vendors on their list. Texas is our number one state in terms of revenue. So we are getting the lion's share of the contract volume down there.

And there are several other states like that. So even if a contract is awarded to three or four different people it is who actually gets the sales in those states that wins the prize.

(Operator Instructions) [Gregory Graves], private individual.

Good morning, gentlemen. I have got actually two questions. The first one is regarding the South American order. The question is, have we started shipping that and will we complete shipping it in the third quarter?

Well, first of all, Greg, they anticipated that delivery time to be over a couple of months. So I would say the likelihood of shipping it all in the third quarter is not going to happen just because they don't want to have a bunch of products setting on the floor down there as they are doing the installations.

Secondly, we have been and are in the final stages of working out the details of their funding. Again not going into a lot of details their reasons for their delay, but it appears they are full speed ahead to having this funded. I would say there is a good shot this month.

Okay. The second one was, you made the comment in the press release that our domestic business has been relatively stable. It seemed to me about a year ago we were talking about part of the stimulus package offering about $2 billion to state and local governments for whatever they wanted to spend the money on. Have we been able to identify that we have gotten any orders as a result of that $2 billion?

Yes, we have. Again still a lot of that stimulus money is still trickling in. But we have.

We are are aware of agencies that have gotten some of the stimulus money and have ordered products from us. I am glad you brought that question up, because I also want to point out that last week -- actually when we were in New York at the Morgan Keegan conference -- the President announced a new bill that was being put forth and I believe passed that was directly related to first responders, far as firemen, police officers, and even had caveats in there for teachers. And so they were having a lot of -- and this was for states that were struggling.

They did not want to see that to be an area that they were making their cutbacks. So there is some more funds again that are coming available in our sector that should be very promising for Digital Ally.

But again, Gregory, I want to tell you, there really is a lot of money out there. If the departments -- and we're doing the best we can to show them how to get it. There is just a lot of grant money out there.

Thank you very much.

We show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Again I would like to thank everybody for participating in this call. As you can see, I think -- I hope you are comfortable that we are on top of what is going on. We are very excited about the finished 2010.

And I think the new product set that are being introduced are going to have a very nice assistance and impact on 2011. So we will do our best, if you do have any further questions that come up, feel free to call our corporate offices. And if we can answer them, we will do so.

So thanks again everyone for participating.

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