Digital Ally Inc (DGLY) 2011 Q4 法說會逐字稿

Hello, and welcome to the Digital Ally Incorporated year-end conference call. All participants will be in a listen-only mode. There will be an opportunity to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time.

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 event is being recorded.

Now, I would like to turn the conference over to Stan Ross, CEO. Go ahead, please.

Thanks, Laura. Thanks, everybody, for joining us for today's call. With me I have Tom Heckman; he's the Company's CFO. Tom will be doing a quick recap of the numbers for everybody, and then I will come back on and do a little bit of forward-looking insight into what we look for 2012, how it should shape up, and some of the major changes that we continue to have made, and strides we have made to look for a very optimistic 2012.

Tom, I will let you have the floor.

Thank you, Stan, and welcome to everyone this morning. I would like to remind you all that we did file our Form 10-K earlier this morning. It is a document that everyone should refer to and look at, in terms of the full picture of what happened in 2011, and our financial status. I guess, overall, I would say that the year was disappointing from a top-side revenue perspective, as well as a bottom-line perspective. But if you peel that back, really the troubles we had in 2011 were around revenues. That really masked some of the improvements, or major improvements, I believe we made in the area of SG&A, inventory levels, receivables, and otherwise. But unfortunately, the revenue shortfall precipitated a lot of the disappointing results throughout the financial statements.

Revenues were down 22% year-over-year, but if you look into that even deeper, 44% of our total revenues were generated by three sales agents. That's an increase from 32% in 2010 from those agents. Those agents are not in the premier locations in the United States by any means, and really what that tells us is that we need to get out there and improve the other agents, the other 15, 16 agents out there, and improve their results in order to improve our top line. Clearly, our sales organization needs to be reorganized, and it is being reorganized, and I think Stan will spend quite a bit of time addressing that later on in the conference call.

Other notable items in terms of revenues, newer items that we introduced during 2011, including the DVM-100, the DVM-400, which are law-enforcement based, and the DVM-250 and the DVM-250 Plus, which are commercial fleet based, appear to be gaining traction in the marketplace. In particular, in the ambulance market for the DVM-250, we seem to have really taken over that market. Unfortunately, those items, the 100, 400, and 250, do sell at a lower average selling price than our law-enforcement products. Conversely, though, they have higher margins than our traditional law-enforcement products. So, although our top-line revenue line would be depressed because of the sales mix change over to that, it should help generate some better margins in the future, when we sell those products.

Also note that our repair and service revenues are improving. And I will note that our single largest customer worldwide has over 4,000 units that are now off of warranty. We have been in discussions with them in terms of a number of alternatives, including upgrading those systems, upgrading them to newer products, adding different features, doing extended warranties, providing spare parts. So, we believe that particular customer will be a source of a good level of revenues for us in 2012, because of the fact that they are off of warranty at this point.

Also, the Turkish National Police order, which happened two years ago, they are now off of warranty as well. So, we are beginning the discussions with him as to how they want to handle their out of warranty repair work and such. We believe the repair and service revenues will improve in 2012 and beyond, as our install base continues to come off of warranty.

Overall, our pipeline is very strong. Our sales pipeline is very strong at this point, particularly in the international area. Now, in the past, we've always been very guarded and not willing to go out on the line for these international orders, but there sure seems to be a lot of substantial international orders in the pipeline. Some of which we are very optimistic will be closed here sometime in 2012, but you can never bank on international orders in terms of a production plan or an operating plan. We are not banking on that, but we do believe some of those orders will be forthcoming.

Our gross margins declined slightly to 45% from 48% year-over-year. Unfortunately, we made a major initiative during 2011 to reduce our inventory levels. We reduced our inventory levels by over $3.3 million from 2010, or about 33%. Unfortunately, in order to do that, we had to drastically reduce production levels, and that had a conversely opposite affect on overhead rates. Some of the gross margin decay was because of the increased overhead rates, because of the reduction in production levels. That, we should see a turnaround in 2012, as we burnt off most of our inventory of DVM-500 Plus, and we are getting very close on the 750s as well to being able to burn down to a more sustainable level.

Earlier in the year, which we noted in our second and third quarters was the WTM issue, the wireless transfer module issue, we wound up having to replace a number of those, and that hit us in the gross margin area. As well as in the fourth quarter, we decided to go ahead -- voluntarily decided to go ahead and upgrade our printed circuit boards to version 2 on all of our DVM-750s in stock. The cost of that went directly against the gross margin.

You take those one-time issues out of there, our margins probably were at best flat or maybe even a little positive compared to the prior years. We believe that in 2012, we'll see a rebound in our gross margins, primarily as (inaudible - technical issue) back into more normalized production levels, and our sales mix will be more skewed towards the DVM-100, 400, 250, 250 Plus, which yields us very nice margins, higher than our traditional 500 and 750 products.

From an SG&A perspective, very good news there. Our overall SG&A expenses declined by $3.5 million or 22% year-over-year. That's the result of our cost containment and reduction effort that we implemented early in 2011, and really held steadfast to it during 2011. We should see continued improvement in 2012 as we get the full effect of all the headcount reductions and other reductions that were made in 2011. We will gain the full effect in 2012, as well as we are continuing to implement further cost containment measures in 2012, which we believe are appropriate.

One unusual item, if you will, that hit our P&L this year was a $131,000 loss on extinguishment of debt. That is an accounting entry that resulted from the modification -- the significant modification of our subordinated notes. That happened in November 2011. In essence, the net present value or the effective interest rate on that debt declined substantially from what it originally was due to the modification. And because of how much that declined, the accounting folks required us to go ahead and write off the deferred issuance costs that was still there at that time, and the discount, as if we were taking out a whole new note. Really, it was a non-cash item. It was actually beneficial to us because of the lengthening of the maturity of that subordinated note, and lessening of the effective rate of that note.

From a balance sheet perspective, we have been and continue to be very strong, have over $2.2 million of available cash at the end of the year. We have $10.5 million in net positive working capital. We have $12.2 million of current assets. $12.2 million versus only $1.7 million of current liabilities. So, that's very impressive. We are happy with the $10.5 million in net positive working capital.

Consistent with that, we did reduce inventory $3.3 million, and reduced AR $2 million, and we still maintained $10.5 million of positive working capital. The subordinated notes, which I just talked about, are long-term in nature. They do not mature until May of 2013, so well over a year out. And do not require current cash to service, other than the interest. It's interest-pay only every month. We also have $9.3 million of stockholders' equity. So, very strong balance sheet. We believe we have ample liquidity to put into place our operating plan for 2012.

In reality, the two things that we need liquidity for in 2012 is to continue to launch and service new products. The new products being the DVM-100, 400, 250, and 250 Plus. We need to build some inventory of those units because the demand seems to be there. We need some resources for that. As well as, we need resources to implement the reorganization of our sales organization that Stan will be talking about here in a little bit.

We believe our balance sheet gives us a strong platform to execute our business plan in 2012. We will develop the commercial sales channel, which is what we sell the 250 and 250 Plus through. It will allow us to reorganize our law-enforcement sales channel, and ultimately we believe that we will regain profitability. Thank you.

Thanks, Tom. So, the short of the story is, in regards to where we are looking at this, is that the top line is what needs to be fixed, and needs to be addressed right away. Since the beginning of the Company, we have always utilized independent reps, which was the right way to go when we started off, because it was able to help us dramatically in regards to cash flow for any kind of a start-up. Well, nowadays, things have changed a little bit in regards to the fact that we need to make sure that we are getting ample coverage in regards throughout the territories.

We had some situations where our independent reps, which we only had 12 of, that were actively out there working at the end of the year. Some of them were being expected to cover as many as 2,000 agencies. Territories were just too large for an independent rep to try to cover that, unless they had multiple sales reps in their organization. And that was not the case in a lot of the areas. What we did is we looked at basically the territories that were out there, we sized it up to where it was more proportionate for an individual to cover, and we went from 12 independent agents that were out there, to now where we will have 17 Company reps and still utilize two independent reps that have done a great job, and there is no need to try to change something that isn't broken in that regards.

Of the 17 Company reps that we're looking at bringing on -- I will throw this out there because most of you (inaudible - technical difficulty) but we've got right now, out of the 17, or call it 19 territories that we have divided this up to, we only have about five openings. One in the West that we will be dealing with in the Northwest, and two back east that we need to fill in. At that point in time, we will have pretty good coverage throughout the country. We have a package in place that's very attractive for an independent rep, but also it would be very attractive for the Company as well. Because it is very performance-based, but if they perform like they have in the past, they will make some good money, but also it will be in line with what the Company needs to be able to afford, and the guidelines associated with that.

We also stepped up our advertising campaign. You'll see a lot more printed advertising and promotional stuff that we will be doing. We are currently looking at well over 120-some trade shows that we'll be displaying our products, both on the commercial and law enforcement side. Realistically, from what I am seeing, and this is just early, early on, as you know we're very appreciative of all the efforts that Ken McCoy had done in establishing the marketing early on, and his assistance in the transition. But where we are at and what I am anticipating for the first quarter seems to be coming right in line with what our expectations were as a Company.

That being said, I am very optimistic about the 2012 numbers continuing to come in line as well. There's no real magic here. We are just basically getting to a situation to where our reps, now Company reps, can get out there and expose our products to law enforcement -- the agencies that are out there. What we've found is, so many of our independent reps may have a good month or a bad month, and what happens is, because they are independent and they are working on their cash flow, with this economy downturn they may have not adjusted quick enough.

So, their way to monitor or balance out their own financial issues sometimes means not to be traveling as much and taking all those expenses. Well, that creates a little bit of a problem, because if you're not out there trying to sell, you're not going to generate sales. We look at it from that perspective. Out of the reps that were out there, virtually everyone that we extended an offer to keep has accepted and is on board. I will say they also have -- if they hit their marks, there also are stock options that are available to them, which they are very pleased about, and they will become vested in the Company through the stock options as well, which we're glad to have them on board. And those that we did not extend offers to, we have quickly started filling the role or their territories with additional reps.

I am very optimistic that just because of pure coverage, that we are going to see some real improvement in regards to the top line, in regards to just the domestic law enforcement. I am very confident in that. I think, recognizing that we did a great job in cost containments last year, and bringing down the SG&A over $3.5 million, some of the other cuts that we still have and adjustments that we have made and may need to be made, we will address. But just because of the coverage side of things, and the new products that we will be coming out with, I think that we can look at a very optimistic 2012.

That being said, we will have to address now the international business. I know Tom was very cautious about that side of things, because we have been down this road before. But I will state that this seems to be the most activity I have seen from the international markets in the last two years. We have a lot of companies or distributors throughout the world contacting us -- some of them new, some of them existing.

The existing ones are coming to us wanting quotes on orders of maybe the new DVM-400 or some of the older products that they already have in. A good example is, we are very well established down in Mexico with well over 4,000 units that have been sold in that territory. They are very pleased with the product. Their budget restraints seem to be freeing up a little bit as well. The outlook is very positive.

The new products that I will not address over the phone right now, but we will be continuing to launch new products throughout the year. I would be surprised if we had anything less than four, but maybe as many as six new products that would be coming out, or features that would be significant yet this year. Steve Phillips and his engineering team have done just a great job, and have some real surprises for the industry that will be evident later this year.

The other thing is the financial stability we have. With our balance sheet and the cash positions that we have, and the cash flow that we are continuing to see, we don't see any real obstacles in regards to being able to continue to bring on the reps that we need to, which, again, we have about approximately five spots overall we need to fill. And we do have two regional sales managers that will help stay on top of, and police -- make sure we are getting the proper coverage. And also, if there are any additional big orders out there, they can assist in. And we also have an inside sales force that we have beefed up a little bit as well.

The top line was the issue -- just clearly that was the issue. That is now the task that we are addressing. Very positive about how that is playing out, and I think you guys will be very pleased when you start seeing the quarterly numbers being announced, and hopefully we can even give you a little more insight as going as far as maybe some guidance on our first-quarter call on what the remainder of the year is going to look like.

With that being said, Laura, I would like to go ahead and open up the floor for our Q&A session.

(Operator Instructions). Our first question is from [Martin Trembley]. Go ahead, please.

Two questions for now. Probably more later. Right now, we are at March 28, only three days left in the first quarter. What are the sales right now as of March 28, 2012 for Q1?

We won't go ahead and give out our first-quarter numbers as of yet but we do anticipate --

As of today, the last week of the first quarter.

I understand what you're asking for and with three days left, four days left, you can put two and two together. We will come out with our first-quarter numbers on time, and we will address all those accordingly.

Is there a reason why you would not disclose with the sales are for trending good in Q1 at this point in time three days left in the quarter? Any reason why you would not disclose that?

Martin, it is quite untraditional to do that on a year-end call to get into something in regards to the first quarter, especially we've got a situation where your three days away from having the close of the month. It's not traditional, by no means, and again as I indicated earlier in my statements, we feel like the trend is right in line with what our expectations were, as we make this transition from the independent sales reps to the new sales reps.

What are the expectations again?

They are in line with what Company's expectations are.

Which is what?

That hasn't been disclosed yet. We have not given any guidance as of yet.

Okay. My second question is a year from now, 14 months from now we will be in a position where we will have to pay $2.4 million note payable. Now, 2012, okay, we have a break but if we don't start making money, there is going to be no money again to be able to pay the note payable a year from now and be in the same boat as we were last year, trying to find another lender. Do you feel confident that a year from now we will be having the cash to be able to pay the note payable?

We do.

Okay.

And our next question comes from Jeff Anderson of Ancora Group. Go ahead, please.

I had one question but just off of what Martin was asking, when you say you will be confident that you'll have the cash to satisfy the note in 2013, can you be a little bit more specific? Do you mean cash from operations, or do you mean another line of credit to replace the existing one?

We believe that cash from operations will be able to handle that.

Jeff, this is Tom. At the end of the year, we had over $2.2 million of cash sitting on the balance sheet, available cash, so we had a pretty good start on having the funding there to retire the debt to begin with. And we believe that, given constraints in inventory and good practices in receivables, that we will get additional funding through working capital and ultimately, return to restoring profitability will generate some good cash flow for us.

Okay. Now I've got two more questions. On that note, the working capital issues, and I apologize for some of the questions because I unfortunately hopped on late. The inventory is down drastically year over year. I know that was a concerted effort to get inventories down despite headwinds on the top line. Where are you in terms of that inventory level? Is it where you want it to be, will there be an inventory rebuild in anticipation of increased sales?

We are at this inflection point. Sales were down, we've got budgetary constraints, you are trying to manage your working capital. You're trying to reduce costs, you're trying to change the face of your sales force. You are doing all kinds of things here and trying to rationalize that inventory. Where do we find ourselves in 2012 in terms of working capital and the challenges of the top line?

Yes, this is Tom. I will address the inventory issues. Obviously, we dropped $3.3 million in inventory year over year. It's going to be very difficult to even approach that in 2012, just because of the base is much lower, obviously. Now, the complexion of the inventory, though will change. We will carry more inventory of the DVM-100, 400, 250, 250 Plus, which are all new inventory. Those products were all introduced in 2011 and we need those because sales -- we are gaining traction in the marketplace with those products and we need to have those in house. Those are all built completely, they are box-built outside of the Company by third-party manufacturers. So, we buy those completed, we bring them and, we put them on the shelf, we fill orders and so forth.

Where we will make headways in reduced inventory is rationalizing and decreasing the amount of component level inventory we are maintaining for the DVM-750 in particular, and to a lesser degree, the DVM-500. We have built and brought in a lot of components a year or two ago in anticipation of a lot higher revenues, and it has just taken some time to work those off. So, if you're asking for an exact forecast on where inventory is going to end up at the end of the year, I can't give you that. I do know that it won't be much higher than it is now, at worst. And we are hoping and planning on reducing that level. Even from the $6.6 million we had at the end of the year.

Okay. I was asking really about the inventory, not to be exact of where it would be, but one of the sources of cash, the three things you mentioned in terms of satisfying the note next year. One was the existing cash on the balance sheet, which you've shown, and two is rationalizing your working capital. So that is taking money out, that would be either reducing selling inventory or collecting receivables or extending payables. Thirdly would be cash flow from operations.

I was just time to get a sense of those three, what ratios we would expect to see helping out on satisfying the note payable next year. Because it is all about, when you are in your transition period when you are trying to do your 180-degree turn, what you want to be doing is having some type of flexibility. I hate to be in a position next year where you've got your working capital as lean as it can be and the turnaround is taking a little bit longer, as they always do with any Company in the midst of a turnaround, and then you have the existing cash. So yes, you can satisfy the note, but then you're right back in a position where you need more money. That is where I am -- where I was heading in that direction, and that maybe more of a rhetorical question.

The last question I had was, and I don't if you mentioned this at all, and we've been paying attention to the margin loan on Stanton shares, and I see from the Form 4 that was out there, 91,600 shares was basically sold from out from under you. If you look at the volume that is out there since February 23 to now, one of the other blocks was 555,000 shares. So, per your footnotes in the Form 4, it looks like it's in out of your possession. They are considered sales or disposals.

Can you tell me what the status is of that block? Is it hanging out there? Are they looking to sell it to one perspective investor? Are they bleeding it out in the marketplace? That is clearly another technical overhang on the shares.

Right. I can address the smaller block of shares. Where I had those shares held at, that particular Company would went under, and a third party acquired it. And that had been well over a year ago. Truly do not know the timing of when that took place, but I think that may have occurred in excess of a year ago. We just don't know.

In regards to the larger block, I know that they have had communications with a single buyer. I know that they have indicated that maybe they would do something in the open market, and they may hold. I do not know what their intentions are and can't go into a lot of detail. It was part of a settlement agreement and that's about all I can really address at that point.

Right. Some of the concerns I guess shareholders would have, in terms of looking to -- if there are shareholders other looking to purchase the stock, clearly buying that block would certainly help the overhang, but in terms of --

I totally agree with you, Jeff.

In terms of the banks, if they're going to grab some of the Redstone stock from Viacom and not even give them a phone call and market sell orders and knock the stock down 10% or 15% in a day, the banks are not in a business of having tight limit orders out there. They're in the business of collecting what is left of the collateral of their loan and basically market orders. I guess most investors are out wondering what the heck is going on with that 550,000 shares. I don't know if there's any way we can get some clarity on that. Do we know who's got the sell order? Is there a trader's phone number out there that we can call? There may be people out there listening to the call who may want to bid on the piece. That helps everybody.

I agree with you, and have been more than willing to make introductions, but then it's out of my hands obviously, in regards to what they are doing and not doing. But I totally agree, and I do know that there have been parties expressing an interest in large blocks, and I will continue to make an introduction. But I honestly don't know if they own it. They may not have that position anymore.

And our next question is from Steve Shaw of Sidoti & Company.

Last call you guys made mention of a break-even point for revenue in the past after SG&A reductions. Is at $24 million or am I mistaken, or is that going to stay the same revenue point for this year?

Tom, you take this.

That is a moving target based on -- the biggest moving target of it is the gross margin. Assuming normal gross margin in that, we are much less than we went into 2011, as a breakeven. 2011, I'll remind you that we took $3.5 million, $4 million out of SG&A and we were trying to break even at roughly $5.5 million, $6 million a quarter in revenue. I would say today is much less than that, but then without pinpointing the margin, I can't tell you exactly where it is. It is in the $4 million, maybe as low as $4 million, and maybe as high as $5 million, at this point in terms of breakeven.

It's considerably down another 20% roughly.

And then lastly, are you still looking for a head of sales or are you going to continue to cover that position yourselves?

Right now, we will continue to cover that ourselves. At least during this transition, we know what we want to get done. We know what needs to get implemented, and I'm going to spearhead that personally and make sure it gets set up, and then we will look at bringing someone into stay on top of it on a more of a day-to-day.

Thanks, I appreciate it.

The next question is from [Greg Graves], a private investor.

Two questions regarding your fourth-quarter performance. In the third quarter, you mentioned that you had international orders of $1.2 million. Could you comment on what you did in the fourth quarter internationally?

Yes, and this is rough numbers, but we ended up a little bit less than -- a little over $2 million in revenues for the year from foreign sources. So, roughly $800,000 in revenue in the fourth quarter from international sources.

Okay. And the second question is regarding, also the fourth quarter. In the third quarter, you mentioned that the DVM-250, the 100, and the 400 contributed approximately 12% to revenue, in the third quarter. Could you comment on what it contributed in the fourth quarter?

I don't have that exact breakout, but I would think it was higher than that. This is not exact, but I would suggest it's around a 20% level.

Okay. Thank you very much.

The next question is from George Whiteside of SWS Financial.

My two questions were relate to the DVM-250. Dan, I believe you had made mention of the fact that the Company was a leader in selling to the ambulance market. I presume that you have had several large orders from maybe some of the larger ambulance companies in order to establish yourself in that position. Is that a reasonable assumption?

Yes, where we are at George is, the product has taken a real strong hold in the ambulance and emergency responders market. We probably have -- I would bet pushing 25 different pilot programs going out there in that sector, and with some of the largest in the country. And so where we are at is, they typically, what they have done in the past is they have gotten five or six units. They like it, then they outfit a region, which may be 50, 60 units, and then hopefully, they will continue to outfit their whole fleet through the United States, which could be well in excess of 1,500 units for that particular company.

So yes, it has been a very strong area for the DVM-250. The emergency response type of markets have been, and we've also started doing quite a bit of pilot programs for other sectors, whether it be utility companies, we have trash hauler, we have regular limos, taxis, very large pilot on a large taxi company we have going on right now. The ambulance company did come to us first and is the one we are continuing to massage and meet their needs. But the others are starting to get some traction too, George.

Good. You mentioned, or described it as pilot programs. Now, do those pilot programs generate revenue?

They do. Basically, it's a pilot for them. They bought the original five, they bought their next lot of 50, they are buying it, but they are still looking at it, easing into it. Especially those companies that have well over 1,500 vehicles out there. Just 50, they still consider that a pilot for them.

I see. Related to the DVM-250, if I understood, you were setting up a separate sales force and your comments earlier in terms of agents, et cetera. Could you describe what particularly relates to the DVM-250?

A lot of them are just regular commercial companies that are out there. While our law-enforcement guys are very well-connected and have dealt with not only the Chiefs and Captains of the police departments, in a lot of cases, you're dealing with the city fathers, those that are involved in the budgeting, and so anything to do with a state, a city, any type of municipality, the law-enforcement team is more qualified to go in there and make that introduction. They can go in and say look, I see that your city vehicles that are running around town, and you have to monitor those. We also sell to your police department. They've already got a great endorsement when they go in there and they are talking to the city manager in regards to the getting the DVM-250 into their vehicles.

Then, you go outside of that, you totally have a different audience when you're looking at the other commercial markets that are out there. A lot of first responders are independent companies that are out there. I won't mention any names, but a couple of them are even publicly held, as far as the ambulance companies. That operate on their own and have contracts with cities versus are part of the city.

I see. But is there a separation of law-enforcement sales personnel versus the ambulance market?

There is. Right now the DVM-250 team has four reps that are out there calling upon numerous companies throughout the country. We have an in-house sales support, and also you could say a national sales manager that's overlooking that particular theme. We are doing a lot of trade shows. As a matter of fact, we have a trade show we are attending today. We try to get into the fleet arena versus law-enforcement, and it is necessary to have the separation, and we are very comfortable with the growth that this has taken on.

And our next question is from Austin Hopper of AWH Capital.

Just wanted to clarify, did you say that international revenues were about $800,000 in the quarter?

Yes, they were a little over $2 million for the year, Austin, and if memory serves me right, they were at about $1.2 million going into the quarter.

I just pulled up your 10-Q and I think they were about $1.786 million year-to-date through the three quarters, so wouldn't it be more like $200,000?

I'm sure. He must've been looking at the June quarter. Yes, probably around $200,000, $250,000.

Okay. It sounds like you're in the process of turning over your sales reps and moving more towards in-house or internal reps and away from the third-party independent reps that you have been using. Can you remind us -- the independent reps you were using previously, do they only sell your products, or what did they sell?

Not in all cases. That was another area that made it a little challenging, that they did rep some other products. Now, I would say 80% of them only repped our products, but there were a few others that repped other products and also got involved in installations, and other avenues of the business that took away from them being out in the field and marketing our product. That's why we felt it was time to make the transition. We have such a strong new product line that we have introduced last year and continue to be prepared to come out with this year, that we've got to control our own infrastructure so that we can get the proper exposure for these new products.

So, you are describing a massive change over in your own sales force, and this is a big change for the Company. And Ken, I guess, is no longer with the Company. How did it come about? Why weren't we more on top of this all along? Did it just suddenly occur you that these people weren't really selling the product properly? How long of a process was this so that you could conclude that you needed to significantly turn over your sales force?

As you know, Ken obviously told us, announced his departure, and that he was going to be retiring at the end of the year. And we looked at different routes to go in regards to bringing in his successor. And then when we started looking at the territories a little bit, what basically happened is, we did a little bit of research in regards to the top ten states that have performed, and how well they did on an annual basis over the last four years. And what it basically told us is that you could have the average population of a state that was in our top ten was 8.6 million. It also told us that the average volume for sales was roughly $1.5 million, and the average agencies was a little over 400. So, when you sit there and look at a territory that has as many as 2,000 agents, and a population of 28 million, and it was just not balanced correctly. And there is no reason that if you double someone's territory, in regards to population and in a lot of cases, agency, that they can't do at least the $1.5 million that the other states have been doing as an independent.

So, we looked at the restructuring of the territories first, and then we looked at the players that we had, that we felt were confident and capable of doing a good job marketing our products and started to fill in those buckets with those players, and have set benchmarks out there, goals out there, and have the ability to sit there and monitor their level of commitment and work that they will be doing out in those territories. If you bust it up, we come up with 19 territories. The only reason there are 19 instead of 20 is because one of the independent reps has done a great job, and we are very happy with their numbers. So we are not doing anything in that region.

So therefore, you've got 19 territories, in which all will have much more balanced population, agencies, and the proper reps in there to go market the products. We had some, just so you know, we were a little frustrated, you sit there and look back to a certain territory and all the products have been sold in this particular region is, DVM-500s and 500 Pluses. And you when you understand why, it was just maybe the rep was comfortable in that product, and was not comfortable or couldn't quite grasp the 750 or some of the other products, the LIDAR, so they were one of him that we elected to not extend an offer to, and bring on someone that is more capable and more versed to all our products, instead of just understanding a few of them.

Is it fair to say from what you were just talking about, have the reps you have been using, until this change that you are making, were they more successful in smaller states or territories? Is that what you're saying?

No, I can't say that. There was one independent rep that had a huge territory. A lot of agents, and was one of the worst that we had. And so an offer wasn't extended to him.

Then you had others that had nice territories, and I will give you an example as far as an independent rep, he had a great November, and basically took December off. Well, we can't take December off. We are still working, we're doing what we need to do. But you get to a point where some people are very content with the amount of money they are making, and if they are an independent rep, that is their choice.

I would add, and I think I mentioned this earlier, the three top sales agents we had during 2011 were not in glamorous spots of the world. They were in smaller states and smaller areas. So it was a function of the agents themselves working that territory and doing what they should be doing.

Sorry about that everybody. We don't know what happened. We are now doing this call from our cell phones. We don't know what happened to the phone service. Hopefully you can hear us okay. Anyways, getting back to, we were addressing Tom had indicated that a large percentage of our sales was generated from basically three reps and they were not in territories that would not have been ideal markets by any means. It really got down to the quality of the sales reps versus the territory. And therefore, that was one of the main reasons for our changes. Laura, did we lose quite a few?

We are fine. We did lose the current questioner but we have Geoffrey Scott waiting in the queue from Scott Asset Management.

A couple of questions. You had some higher-cost inventory that you were trying to run off and to be replaced by newer and lower cost inventory. Where are you in that process? And how much specifically 750 inventory do you have?

Yes, Jeffrey, this is Tom. We are through the DVM-500 inventory, the run-off of that. In fact, we were getting through that in the third and fourth quarter. The 750, we have roughly 120 left on the shelf, and we did in fact upgrade those to version 2 PCB boards, so we actually put a little more money into them in the fourth quarter. But I would anticipate those running off here in the very near-term. And certainly, in the second quarter, first or second quarter of 2012, we should see the full impact of that burn off.

All right. Since we are basically through the first quarter, it should have been burned off during the January to March period, right?

That's correct.

Okay. You have not talked about LIDAR as a product line and any success in selling it. You also have minimum purchase requirements by contract. Can you talk about your sales revenue for that product line and what your current inventory is, and where you stand on that minimum purchase agreement?

Yes, Geoffrey, let me talk about the sales side of it. As I indicated earlier, one of the disappointments that I was seeing in regard to some of the independent sales reps is the lack of exposure that was getting out there in regards to this product. It was very troubling to sit there and know that there were certain territories that did not sell a single LIDAR over the last year, and to find out the reasoning for that is that the rep just whatever reason did not get their arms around that product. It's not a complicated product. It is by far still one of the best ones out there.

And within just the first few months of us taking this approach with our independent, or now bringing on company reps, we have seen a dramatic change in regards to the amount of interest in that product, both domestic and internationally. And territories -- this is probably the largest amount of T&Es that we have had out there, since we introduced the product. And I do believe that we are going to see a significant increase in sales this year on the LIDAR. In regards to our commitment and inventory, I will let Tom address that a little bit.

Yes. Actually, at the end of the year, we had $870,000 worth of inventory of the Laser Ally. We did reduce our purchase commitment for the second and third years of the commitment period by over 50%. What we did, we renegotiated the commitment, gave up our exclusivity here in the states and worldwide, for that reduction. I think what we have found is that we have done some accessories, if you will, to the Laser Ally. We have added a printer as an instance, we have added some tripods and some other bells and whistles that have really sparked some interest on the international basis. They use the radar or the LIDAR a little bit differently internationally, and they want pictures of the offending vehicle and that sort of thing. We have added a camera to the Laser Ally. I think with those changes, coupled with the reduction in the over all commitment over the last two years, we are going to work our way through this problem.

But you are no longer exclusive supplier?

Not for the Laser Ally, no.

Has the manufacturer gone out and found other people to sell it?

Not that we are aware of.

He has that right?

He has that right, and he could do it, and he may do it. I don't know. But at this point of the recession and the cycle, the business cycle, it may be very difficult to find another distributor of that, at the prices and -- given the traction we already have in the industry.

Right, and also some of the other methods in regards to some of the other companies go about doing their marketing, they would be bumping heads, because they just can not -- we did retain, and we will, have been guaranteed the lowest price, so it would be difficult for someone else to step in and be able to underbid us in any situation.

The accessories that you mentioned, whose intellectual property is that? Is that the manufacturers, or is that, for instance, the camera attachment, is that your intellectual property?

We put the specs out and the manufacturer actually did the intellectual property so I would imagine he has the rights to it. But it really helps us sell that Laser Ally product.

But if he were to go out and find another seller, that seller would be able to offer the same product, i.e. the LIDAR with the camera attachment.

Exactly.

So there's no competitive advantage that you have long-term in there, anymore.

More pricing than anything.

Last question. I was under the impression that you had hired a head of sales for the law-enforcement market. Was that not correct?

No, we did. And I think maybe our philosophy in regards to the direction that the Company needed to go in regards to the marketing, we couldn't quite see eye-to-eye, so it needed to be addressed earlier than later.

Okay, thank you.

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

Things everybody for joining us. We apologize for the problems in regards to the phone system. We do have a very exciting 2012 teed up here. Our costs are in line, and we will continue to monitor them closely and make any adjustments that we need to.

But at the top line, once it is fixed, that will fix the bottom line. It is greatly being looked at. We are very optimistic that we are doing the right things as we already seeing the benefits of bringing these reps on full-time, and I think you'll notice that in the near future, with us announcing orders and also the quarterly calls. Thank you all very much. We will talk to you again soon.

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