Digital Ally Inc (DGLY) 2011 Q2 法說會逐字稿

Hello and welcome to the Digital Ally Inc. second-quarter 2011 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, 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.

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

Thanks, Andrew. Thanks, everybody, for joining us today for the second-quarter 2011 conference call.

Today I have with me Tom Heckman, who is the company's CFO. Tom will be doing a recap of the results of our second quarter, along with elaborating a little bit on how the operations for the second quarter have went and also some of the changes that we anticipate from some of these results going forward. After that, I will make a few more additional comments and then we will open up the call for questions and answers. With that being said, I turn it over to you, Tom.

Thank you, Stan, and I appreciate everyone joining us today. Would want to remind you that we did file our Form 10-Q with the SEC this morning, and I would ask everybody to refer to that for a full discussion of our operations, liquidity and such. What I will address today are the notable items that I see in the financials and try to address some of the concerns and issues that we are addressing ourselves as a management group.

I guess overall from an income statement, the second quarter from a macro perspective was rather disappointing, primarily in two areas -- revenues and gross margins. Revenues declined 14% from the prior year, and was virtually steady with the first quarter 2011. It just did not show the improvement that we were expecting and hoping for.

Gross margins remained flat at 42% with the first quarter 2011 and were 8% less than the prior year. Giving those metrics, one would expect a huge increase in the loss year over year. However, because of the success of our cost-containment measures in SG&A and other areas, our actual operating losses were virtually the same year over year. So, there is some bright spot there. Our SG&A cost controls have been working and we hope will continue to work.

Digging further into revenues, revenues from our law enforcement channel are very challenged at this time, particularly in the domestic market. We are seeing pricing pressures on our higher-end products, notably the DVM-750. And sales have been rather sluggish on the DVM-750 model.

In reality, our 500+ model has been selling very steadily and in good quantities. So the issues in revenues primarily surround our DVM-750 and I think has to do with the price point of that item. And we are seeing people -- not people but law enforcement agencies really watch their dollars and reduce their purchasing.

We see that in the average order size. The average order size remained at $3500 from the first quarter to the second quarter, but last year, in the second quarter, we had a $5500 average order size, so you can see the drop. And I think that really shows the budgetary constraints we're facing in the law enforcement channel.

International markets actually appear to be improving. We're getting close, we hope, to closing some deals that have been in our pipeline for some time and have been stagnant. We have indications that those things may be coming through and we are hopeful that that will show up in the third and fourth quarter of 2011.

We ended June 30 quarter with roughly $1 million in backlog. That backlog included about a $450,000 reorder from our international customer in Turkey, the Gendarmerie.

That could not -- it was ready to ship at the end of the quarter but we did not have the customs clearance and the paperwork from the Gendarmerie to get that thing shipped. It did ship early in the third quarter, so that $450,000 is out the door.

The rest of it was primarily related -- and there's a number of items, but primarily related to the WTM issue that we have experienced in past quarters. And I'll elaborate more on that down in - when we talk about the gross margin pressures.

Looking forward, we need to push the commercial fleet market outside of law enforcement. We do not see a pickup in the law enforcement market for some time. It is sluggish right now. It's very difficult to project a pickup in that, given the current environment.

The DVM-250 appears to be a dominant product. We unveiled that earlier this year. We believe it will start to contribute meaningful revenues in the third and certainly in the fourth quarter.

FirstVu's are beginning to gain traction, both within and outside the law enforcement. We have a number of quotes out on some significant quantities of FirstVu's. So we believe that that product is beginning to catch on.

And as a result of the sluggish sales of the DVM-750 fee and the pricing pressures we are seeing on the upper end, we have recently announced the DVM-100 product, which has about an $1800, $1900 retail price, to our law enforcement channel. We hope that that revives the interest and gains some sales force at the lower retail price level.

From a margin perspective, as I mentioned, we were at 42% gross margin, which was flat with Q1. but 8% less than 2010. The biggest item impacting our gross margins are really the lower revenues that we are experiencing. We have a level of fixed overhead that we just can't cover at those levels of revenues. We've got to see revenue increases in order to see meaningful gross margin improvement.

We did have some transition costs from old to new suppliers, which we started late in 2010. We have closed out accounts and such with old suppliers, taking in some remaining quantities and excess quantities, and moved to new suppliers for the component parts.

And we are burning through the older inventory, in particular for the DVM-500Plus perspective. We are seeing rather brisk sales in the 500Plus. We've burnt through inventory -- existing inventory, putting component inventory of the DVM-500Plus and we're beginning to place orders and receive new product at lower average costs from our new suppliers. From the DVM-750 perspective, it will be some time before we burn through that inventory level, absent some of the bigger orders.

Now, as an aside, the international pipeline and some of the larger orders that are quoted and out in the proposal stage right now, do include the DVM-750, so there are some possibilities that the DVM-750 inventory will move rather quickly, but we do need some of these big orders to hit and come through the sales pipeline in order to get that done.

I mentioned earlier the WTM matter. WTM is obviously the wireless transfer module. We have had a series of issues with the WTM models that were supplied by outside vendors.

During the quarter, we engineered our own solution which has been introduced successfully. And most importantly, it takes a 60% reduction in our standard cost on that WTM module. We should see a significant improvement in margins just based on that WTM solution that we have engineered internally and are now taking to market.

That is -- the delay was -- that caused the backlog of the WTM units is, we engineered it, we put it out in production quantities. We are getting tooling done, and it is done at this point, so we're starting to see production quantities come in on the WTM to be able to ship the backlog and also address the new WTM demands that we are seeing. We are seeing our customers move more and more to the WTM solution rather than the SB card or CF card solution for transferring data from the mirrors.

Realistically, in order to get meaningful margin improvement in the future quarters, we have to have higher revenues from all sources. We need to couple that with a sales mix change to newer products with better margins.

And in particular, the DVM-250 may be and should be the answer to that. The DVM-250 has substantial margins in the 60% to 70% range. And with meaningful revenues for the DVM-250, we think that will have a very positive impact on our margin in future quarters.

At the same time, we are having our engineers look inward and do value reengineering of our bombs -- of our existing products, the DVM-500 and DVM-750. They're going to spend time and effort in taking costs out of those products from a bill of materials standpoint, and we expect positive results because of the quality of engineering resources that we have.

From an SG&A standpoint, that is a bright spot on our P&L. We continue to meet or exceed our $4 million annualized goal of cost savings from an SG&A burden side. However, having said that, we only experienced a $50,000 increase -- I'm sorry, decrease from Q1 2011 to Q2 2011.

The items that impacted that basically were related to the hiring and training of eight new salespeople to develop our commercial fleet channel. Commercial fleet channel is obviously directed towards the DVM-250. We entered the quarter with zero salesman -- solely attributed to that sales channel. We hired, trained, and have those eight people out on the road, and developing a market for that DVM -- I'm sorry, the 250.

I think that should tell you the optimism we have for that product. We already have eight salesmen dedicated to the commercial fleet channel. In total, we have 17 in the domestic law-enforcement channel, so we almost have 50% of the number of salesman already dedicated to that commercial fleet channel. We see some great opportunity there.

We are in process and have restructured certain of our domestic sales agents, in particular in the Western United States. We replaced and put new salesman in four different territories in the domestic market. We believe we're going to see some improvement in sales from that standpoint. We continue to address low performing sales agents and territories and expect future changes in that pattern. Now, in order to do that, we had some training, travel and other costs associated with bringing those new agents on and removing the previous agents.

Engineering costs remain stable, roughly $70,000 less than last year, but understand that engineering has really been a bright spot for us and we believe is a competitive advantage. In the same time as they kept engineering costs stable or $70,000 less than prior-year quarter, they did complete that WTM project, which we think is going to have meaningful impacts on our gross margin, and really solve the issue that we have experienced in prior quarters with regard to the WTM.

They continue to support the DVM-250 model. We are reaching a lot of different commercial fleet operators, whether it be in the ambulance market, the taxicab market, the limo market, overrode truck markets. Each of those markets has some specific needs, and our engineers are helping develop solutions and tailor that product to meet those needs.

They have also launched, are in process of launching the DVM-100. And I guess all in all, I would tell you that our engineering group is very productive and very efficient, and we are very happy that we are keeping steady costs there and getting that kind of production.

With all that said, we are going to do more. We're looking at all costs in SG&A, including board of director comp and officer comp, and we'll probably have something to talk about that later on.

We have new initiatives involving other SG&A areas that we are also going to formally probably announce here in the near future as well. So we're not sitting still with the SG&A cost containment measures that we have already put in place. We're looking at new ones, and we expect that to have meaningful impact on future quarters.

Overall, we are not satisfied with the current operating results. Revenues and margins are very much our primary concern of management and we're trying to address. SG&A costs are under control but we're still looking at it.

Our break-even analysis is coming down, but the big variable in that obviously is the margins. We need to see some improvement in margins to get to a break-even standpoint.

From the balance sheet perspective, our balance sheet remains very strong and it's getting stronger. We have adequate liquidity. We've got cash balances in the $650,000 range. Our accounts receivables are down $700,000 from the end of the year. We've converted that to cash.

And most notably, our inventory is down $2.8 million from the end of the year. If you look at the details behind that inventory reduction, it's quite impressive.

Our raw material and component parts have decreased from the end of the year from $4.2 million to $2.4 million, a full $1.8 million reduction. What that tells me is that our cost -- our purchasing changes have taken effect. We've shut off the spigot from our old vendors to our new vendors, and our -- it is working.

Finished goods, however, was at $6.5 million at the end of the year. It was reduced $800,000 to $5.7 million. That's equally distributed between the DVM-500 and DVM-750, and plus we have some of the Laser Ally and some of the other products. But primarily it's in the area of the DVM-500 and 750.

If you do the math, that's roughly $12 million to $15 million of retail products sitting on our shelf, already done, ready to fulfill sales orders. So assuming those big orders come in, we should be able to convert that to cash real quickly and hopefully improve our liquidity even better.

With that said, we also increased our reserve from $733,000 to $883,000 from the other year -- $150,000 increase. And that was to accommodate some of the suppliers that we terminated, and there were some termination costs involved there. We believe we are fully reserved, and our obsolescence risk is very minimal at the end of the quarter.

If you look -- our production level has been steady. We slashed our purchasing and we continue to reduce and convert inventory to cash. We expect that to continue and we will make that a primary focus of management.

Accounts payable have been reduced $1.8 million from the end of the year, going from $3.2 million to $1.4 million. Obviously, a lot of the cash we squeezed out of inventory and receivables, we turned around and paid our trade vendors, and we are very much in line on payment terms in that.

During the quarter, we also completed our subordinated note payable for $1.5 million. Proceeds were used to pay off the existing bank line of credit.

The important thing about the subordinated note -- it's obviously unsecured and allowances for future borrowings, either on senior or an unsecured basis. So it still allows us flexibility if we need it to go out and obtain new borrowings. It's not -- it's does not come due until May of 2012.

Our goal as a management team is to improve and maintain cash balances throughout the next couple of quarters to where we have enough cash sitting on our balance sheet that we could pay off that subordinated debt at any time. So, our goal is to reach at least $1.5 million in cash balances in order to have the flexibility to pay that debt off when and as needed.

Overall, working capital is very strong. We've got $8.9 million at the end of the quarter. Equity is still over $10 million; it's $10.5 million at the end of the quarter.

Our final thoughts, our number one goal of management is to regain profitability. We've got to improve revenues. We think the DVM-250 is going to be a very big component of our revenue increases, and also the international business hopefully comes back. We are seeing signs that that is going to happen.

We've got to improve our gross margins -- 42% gross margins are not accessible. In that regard, we are burning through the old inventory, and we hope that we will get good results from the value engineering that our engineers are doing to our current bombs. And we will continue to aggressively manage and cut SG&A costs in the future.

Obviously, liquidity is always on everyone's mind. We believe returning to profitability will obviously help that. We're going to continue to convert A/R and inventory to cash in the next quarter or two. And again, our goal is to make cash -- maintain cash balances in excess of the debt that we have on our books.

The DVM-250, by all measures, appears to be a dominant product. We are building that sales channel. We have a very good group of salesmen assembled there, and we are seeing results. In fact, we've got quotes currently out in around the $1 million neighborhood for the DVM-250. But more importantly, those customers that have been quoted -- the ultimate potential for those are in the 10's of millions of dollars. These are very large companies that we have walked into the door, gotten appointments, showed the product, they showed interest, they want quotes. So we are very, very optimistic on the future for that DVM-250 product.

Our law enforcement market is challenged. We are addressing lower-performing sales agents. And we have made changes particularly in the West, which we think will have positive results on our revenues.

We think the new products, including the DVM-100, the Laser Ally FirstVu, are starting to catch on, gain traction, and will also contribute some meaningful revenues.

And finally, the international markets seemed to show some life. And we think that the pipeline that we have had there for some time is moving closer to fruition.

With that, I'll give it back to Stan.

Thanks a lot, Tom. There's a lot of exciting things that we have in the pipeline, especially in regards to the revenue side of things.

We have seen some growth in the domestic law enforcement business. We feel like that trend can continue. While it's going to be challenging, we think it can continue by just being more efficient on some of our marketing efforts and doing a little more thorough job of covering our territories. So we're real excited about that.

The new products, obviously, are starting to take hold and will start to contribute in the second half of the year.

So again, it all comes into play for us. The revenue side is starting to look good. The SG&A cuts that we had made and continue to analyze and will analyze very closely over the next couple weeks and continue to make any changes that we can to improve that, we will, but it really boils down to some real simple numbers for us.

We are getting to that point where the picture is pretty clear. If you sort of look at where we are at right now, at $5 million, even though we had about $1 million in back order. But if you use our $5 million number and roughly the 42% gross profit margins, obviously, we're going to show a loss. And there's not a lot of things you can do.

I mean we can't -- without cutting into real meat in our R&D expense or SG&A, it just doesn't improve the numbers enough to make it -- us get to a profitability point. Even if the number was at $6 million for the quarter and we still were only at the 42% gross profit margin, we would have shown a loss, and that would probably carry through even at a $7 million number. So we know where the key is, and that is in the gross profit margin or the cost of goods associated it.

So that being said, in running our models and really analyzing this, if we can just increase the gross profit margin to a 50% -- and realize we used to when we first came out and we weren't dealing with some of the headaches with our WTM and some of the other products that have been a little bit of a challenge on the launch, we have hit numbers in excess of 60% gross profit margins.

So, but anyways, that being said, if we even get to a 50% gross profit margin and we hit the $6 million number that we feel is very attainable, then you're putting ourselves right back to that profit category.

So, the top line, I feel like it's coming together. That $6 million number that we have talked about, I feel like it's coming there. The interest in the international business, new products, just the quotes that we have out right now that we are very comfortable that we are getting some real good response, I think that top line is going to be there. And those new products that do have great margins will help us on our gross profit margin.

So, I think our focus, you will see very, very hard, not only with the assistance of the new WTM, but our new suppliers and our suppliers working with us and the pricing that we will beginning from them, but the internal engineering improvements that we will be making, the contribution from the new products -- should allow us -- and I'm very hopeful that you will see it in this quarter because we have burned through a lot of the older, more expensive inventory -- that the third quarter should look considerably different than what we have here in the second quarter. And hopefully that we are on track back to profitability and can finish the year real strong.

Again, I can't emphasize enough in regards to the new products and the products that we have in the pipeline. While our DVM-250 as far as the commercial unit is gaining a tremendous amount of traction, you have to realize that some of our reps have only been on board for a little over seven weeks, and the amount of business that they have been out there and turned over is mind-boggling.

Not only have we encountered some of the largest ambulance companies in the country that have liked our product, but you have, going as far as any type of fleet vehicles from trucking companies to the limos to the taxis, but actual insurance companies that I don't know if Tom touched on -- they recognize the fact that a product like this has greatly decreased the amount of accidents that occur when they know the big that big brother is watching. So, a lot of traction going on on this DVM-250. I've said it before, and I'll say it again. This truly could be the tail wagging the dog. This product is quite unique and is getting a lot of attention.

Outside of that, we do look to bring on additional agents for the DVM-250 to broadly cover the United States and also we'll be making additional evaluations on law enforcement.

So, while I'm not pleased where we're at, it is very clear and identifiable where our changes need to occur. And we are very focused on making that happen and have made the appropriate decisions and moves for those improvements to show up soon.

So, Andrew, I think I will go ahead and open the call up for Q&A.

(Operator Instructions). Andrew Gorenstein, Benchmark.

Hey, guys. Thanks for your time. In June, a shareholder filed a schedule 13D indicating that he was intending to explore some representation on the board and have some conversations with management to discuss the business and maximization of shareholder value. Can you guys comment on that or any updates to that?

Yes, I'd be glad to. Yes, we did meet with the individual. I don't know that his name was out there public -- it was Stephen Gans.

I had a quick call with him, and when we were in New York earlier this week, we were able to get together with him and have dinner and talk about some of his thoughts and interest in joining the board. And we sort of indicated the process that's needed to make that happen, and he is moving forward on that.

So we are not part of -- Tom nor I are part of the nominating committee, but we do know that Stephen is moving forward on wanting to be accepted to the board.

Thank you.

George Whiteside, SWS Financial.

Good morning. I was wondering if introducing the DVM-100 compromised your margins -- your gross margins? Or is that a value product that you can price to lift those margins?

George, that's a product that we -- basically we're listening to our clients and existing customers. And a lot of them were wanting the video recording capabilities but just did not need all the other features associated with the DVM-750. So we looked at redesigning -- dumbing it down a little bit to meet just what their bare-bones needs would be, and also bringing it in at a price target that would be very attractive to them as well.

The truth in the matter, that product -- and Tom can correct me, but I think it -- over -- again, at least against the 500 and 750, it has better margins than either one of those two.

Correct. So the 100 will do nothing but contribute to that gross profit improvement.

So you don't think that that value product will in fact cannibalize some of your business so that certain of the law-enforcement agencies might shift to the 100, when, under normal circumstances, they would perhaps get a fuller array of features.

I don't think so. I think there's certain departments that are going to want all the features and then there's others that will rather have less features and more units. I think they will spend as much money as they've got because they will have limited amounts. But if they've got $50,000 let's say, and buying -- going out there and buying 10 units that have all the whistles and bows and everything versus buying a lot more going the route of the 100, they may go that route of the 100. If that happens, they are still going to spend $50,000.

And if they do that -- go that route, we're going to get the improvement on margins as well. There are just certain departments that just do not need all the features that the 500 and 750 have.

Thanks. My second question is, there was -- in the release I believe -- there was a comment that you had been able to reduce your SG&A by $1 million in the second quarter. And would this suggest that you have achieved your original goal in terms of the level of reduction of SG&A?

Yes, what we stated going -- I guess in the latter part of last year, is that we're going to make the steps necessary to get us back to profitability.

And one of the things that we could do that was apparent real quickly was some reductions in SG&A. And that meant everything from officers' and directors' compensation, to looking at certain areas that we were expanding on that maybe now wasn't the time with the economy being the way it is.

So we set out for roughly $4 million in savings, and we are on track to do that far as the 2010 to 2011. And that's -- so that's -- I guess what I'm trying to again trying to emphasize is that's not our real problem. We've just got to get just the top line to improve a little bit and the gross margins to improve a little bit, and that's the real area of focus and needs to be. But we will still analyze. And I do anticipate additional SG&A cutbacks just to continue to improve everywhere we can.

All right. What I will do is get back in the queue and let someone else in.

Thanks a lot, George.

Welcome.

Geoffrey Scott, Scott Asset Management.

Good morning. Question for Tom -- what is the effective interest rate on the $1.5 million borrowing?

Well, the stated interest rate is around 8%.

I didn't ask what percent it was; I said when was the --

The effective rate is over 20% when you include the value of the warrant. Now the warrant that was issued was at a strike price of $150, so it was above market when it was issued and remains above market. But the value of that drove the effective interest rate way up.

What was the value of the warrant on the date that the -- on May 31st closing?

I would have to look for sure, but it was in the $200,000 range.

In the $200,000 range? Okay. The -- in mid April, there was a competition I guess at the -- maybe the Austin, Texas police force with four different -- equivalent of FirstVu being tested. What were the results of that competition and who got the order?

Geoffrey, I tell you -- unfortunately Ken is not with us today. He's out on the road. And I don't know the answer of that and I don't know if there has been a decision that has been made on that. We just do not know -- Tom nor I.

You really don't know, huh?

We did not.

I guess I'm surprised. Okay. I'll get back in the queue.

(laughter)

George Whiteside, SWS Financial.

All right. Let's see. I've got several here.

Pick your favorite, George.

Yes. I've got an issue here with being on the road and trying to operate off of iPhones. Okay. You are thoroughly familiar with that, I am sure.

I am.

So, following up on a comment that you made during this call a moment ago, you think that there is a possibility of being profitable in the third and fourth quarters.

We do. With what we are seeing in regards to bids that are out there, orders that we believe that we have been told that we have won and we believe financing could come down, and the improvements that we can make on the gross profit line because of the fact that we have eaten through quite a bit of the older, higher-priced inventory, we think we've got a real shot at it. Plus we're also actually going into this quarter with about $1 million back order. So we got a little bit of a jump start.

Excellent. And we hope that that develops.

(Operator Instructions). Geoffrey Scott, Scott Asset Management.

Thank you. We have been operating without an effective national sales manager for must be now six or seven months; are we still searching?

We are. We're still searching, doing interviews, and evaluating a little bit of some of the internal individuals that might be able to step up. But yes, the search is continuing.

Is this not a high priority?

It is a high priority. It is a high priority. We know that Ken has been with us since 2005 and he's indicated that it's at a point in time he would like to see some help in regards to the marketing side and eventually he will want to take a little lesser role, so it is a high priority, absolutely.

But, Stan, it was a high priority when it was announced back in the first quarter. At the annual meeting, it was again -- it was -- you said it was a high priority. We're now three months farther along and it's still a high priority. And the number one issue is revenue, right? And if you are losing $1 million a quarter, aren't we running out of time here?

No, it's a combination of both. You don't want to be bringing in the wrong guy just because -- and again, and you got to look at these guys that are looking at us. Here you've got a company that has lost money over the last couple of years. Some of the candidates, while they are good, they are not great. And one of the things that will allow us to get those great candidates is if we return back to profitability and they can see that the turn is happening. They would love to be part of it.

Some of them, you've got to admit they would be a little gun shy to be jumping on this if we can't turn this thing around. And so by just bringing on overhead and not having the right guy is not the answer.

At the same time, you've got to realize that the sandbox that we play in -- I mean look at the video market itself for law enforcement. There's only four companies that are halfway decent out there that competes with us -- LIDAR -- three or four that compete with us.

I mean, so you don't have a big audience to choose from. You almost have to bring someone in from the outside that does not understand or have a lot of knowledge of law enforcement, and if you are going to do that, make sure you got a guy that's versatile enough to also handle the commercial side of things too.

So, we've -- we are actively looking, but we've got to get the right guy, not just bring on overhead. And we're making some -- we're having a lot of hands-on involvement in this, for sure.

Okay. You're mentioning LIDAR for the first time. Where are we with that product?

It's starting to get a lot of traction. And the international side of things is starting to wake up quite a bit for us as well. I still feel very comfortable with that product being a significant game changer in regards to the LIDAR market. It is out there winning bids and people are showing a great interest in this product. It's more of the availability of capital to them, but still feel very optimistic. I still think it's the best one out on the market, hands down.

What was the revenue for the second quarter for that product?

I'm sorry, say that again?

What was the revenue for the second quarter for that product?

Roughly $300,000 for the quarter.

And what kind of production rates can you get to now?

Well, we can -- we're under contract that they can produce at least 1,000 units per year. So obviously there's room to improve that revenue and unit sales. Now, understand that that LIDAR product has all of these advanced features that no one else has, so it does have a higher price tag. And I think a little bit of the drag on the LIDAR sales is because it is a higher priced product for that market, specifically because it is so feature-rich, and we are running into some issues with that. But I think we're starting to see some international interest. In fact, there's some quotes out that we feel very good about that should occur here in the third or fourth quarter.

Okay. The price on it is, in round numbers, $3,000 a unit, right?

That's correct.

So you sold 100 units in the second quarter?

Yes, very close.

Right; and your production capacity is something on the order of 85 units a month?

Correct.

Right, which would be --

I mean that's the minimum order quantity or minimum commitment that they would provide, so we think we can (multiple speakers) go higher

We think we can ramp -- obviously we can ramp up and do bigger quantities if the market is there.

The 1,000 units is your minimum purchase requirement per annum?

That is correct.

Right. And you are selling now at a rate of 100 units a quarter.

That is correct.

So if that were not to step up very substantially, it would turn out to be a cash drain.

Yes, we would end up with quite a bit of inventory on hand, correct.

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

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

I'd like to thank everybody for their time today. We obviously know the task at hand that we have got to accomplish to get this company back to profitability. I'm very encouraged though that the right things are coming together and that you will see again some continued improvements and continued results from us that will be leaning towards the positive area.

We've got a small hurdle to overcome here to get this company back to profitability. We've done the tough cuts. We've done the tough -- got through the tough times and really look forward to a strong finish to the 2011 year, so thanks, everybody, for your time. If you do have any further questions, please contact us at our corporate offices. Thank you.

To access the digital replay of this conference, you may dial 1-877-344-7529, or 1-412-317-0088 beginning at 1 PM Eastern time today.

You will be prompted to enter a conference number, which will be 10002290. Again, 10002290. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.